Risky business March 14, 2010
Posted by allankeye in In the world, The business.Tags: central and eastern europe, expansion, fdi, franchising, ikea, partnership, romania, thailand
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This week it was announced that the Romanian IKEA franchisee – Maoro Trading, with Romanian billionaire Puiu Popoviciu as the lead investor – sold its IKEA franchise rights to the IKEA Group for a reported EUR 30 million.
According to Mr. Popoviciu it was a smooth transaction and “everything went very well”.
Of it course it was going to go smoothly and “very well”, considering that this was planned right from the very beginning.
In the past, there were only two kinds of IKEA stores, Blue or Red. Those that belonged to the Kamprad family via the IKEA Group or those that lived another life as a “franchisee” outside the IKEA Group. Most of these are owned and operated by external investors, but even here some have family ties (the store in Seattle, for example, or the IKANO properties in Singapore and Kuala Lumpur). Regardless, the pattern to hold a property for an extremely long time, if not forever.
Now a new approach is in practice for some territories: risk-sharing with external partners. Not every investor wants to be a long-term IKEA store operator, and the IKEA Group doesn’t have the resources/local knowledge to go into every market directly. So now we see expansion based on a strategic short-term partnership where a local investor sets up the brand, gets the store going and then sells it back to the IKEA Group.
And all this is planned from the beginning.
This is a big change for the IKEA world, which has until recently had a tendency to view the stores outside the IKEA Group as backwards cousins almost not worthy of carrying the name. Which, to be fair, was somewhat justifiable.
Nearly all of the IKEA stores in the Middle East have been rebuilt in the past few years, and with good reason. About the only thing the old IKEA store in Kuwait had in common with the rest of the IKEA world was the products. Valet parking, no self-serve warehouse, a restaurant with table service, a delicious (but off-brand) bakery in the entrance, incredibly inefficient logistics, a less-than-inspirational shopping experience … mind you, it was built in 1984. At that time, IKEA hadn’t even come to the US yet, let alone crystallised its approach towards global domination. Ingvar was nowhere near the Forbes richest-people lists.
Jump ahead about 25 years and IKEA is a much more muscular, savvy business with an increased global reach. Like a game of Risk when you finally have a fistful of armies, it is less willing to concede territories forever to others in the name of brand expansion.
This showed up in India, where the laws in foreign direct investment in the retail sector were up for revision in 2008. As the law stands, foreigners can hold a maximum 51% stake in single-brand Indian retail operations. IKEA, along with Carrefour, Tesco, Wal-Mart and other big foreign players were lobbying the government to have the law changed. They were so confident that the IKEA Group set up a retail head office in 2006.
Yet the economic crisis and a change in government scuttled the planned legislation change. Even the promised $1 billion investment wasn’t enough to change the tides. The IKEA Group withdrew from the market (for the time being), rather than allow an important market to go Red.
It will also be visible in Thailand, which will receive its first IKEA store in late 2011. It is 49% IKANO owned with local investors holding the remaining 51%. Thailand’s less-restrictive FDI regime means that once this country gets going, a transfer to the IKEA Group would not be out of the question.
The same “you build it, we buy it back” pre-agreement model is likely to get more use as the remaining territories in Central/Eastern Europe are penetrated and as they figure out the best way of getting into Latin America.
Which means the IKEA world is going to have to come up with another colour to describe these hybrid stores … blue + red = purple?
IKANO – can you? March 12, 2010
Posted by allankeye in In the world, The business.Tags: banking, expansion, green group, IKANO, ikea, Malaysia, private bank, Wal-Mart
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One of Ingvar’s most important insights is to find inefficiencies and fix them. Easy to say, much harder to do. But this was the thinking that led to flat-packs, palletised handling and many other innovations to improve distribution.
Banking is another essential business service that, for a large organisation, is most efficient when done in-house. IKANO, also known as the Green Group (IKEA Group being blue and Inter IKEA being red), started officially in 1995 to service IKEA stores and to be a bank for “the many people”.
Outside of Scandinavia, it operates only on a wholesale level and in partnership with others, but also owns/manages properties such as the IKANO Power Centre in Kuala Lumpur.
Now the family wants to have its own bank in Poland. There will likely be no opposition, considering the hero-like status that Ingvar enjoys there.
Quick history lesson: when he was boycotted by Swedish suppliers back in the Early Days, he went to Poland to source his products. He also taught them how to be capitalists and supported their industrialisation. He has said that Poland is “his second home”. In 1999 he was awarded the Commander’s Cross of Merit of the Polish Republic by the Polish president in Warsaw.
See, a bank would be appropriate. Because in the early 90s, after the fall of Communism, the Zloty collapsed. The furniture export industry was on the brink of destruction, and went as a group to Ingvar. He accepted up to 40% in higher costs, so they could remain in business.
And this is one of the key differences between IKEA and another large family-”owned” retailer, Wal-Mart. Despite their substantial efforts to change legislation, no one wants to let them enter the banking industry. Check cashing and money transfer is where it stops. Questions of scale aside (even if each IKEA store had an IKANO in it, it would still only be about 300 branches), the sense of trust and support just isn’t there. No doubt WM would have a smoother time if it had also gone easy on its suppliers in a tough time.
Don’t get me wrong: it would surely be more efficient for WM, and would likely yield benefits for the customer. Even if I find it creepy to have most of one’s life run through a single entity (been there, have the t-shirt), and would not personally bank there, they should be free to do it. Appropriate ring-fencing is a given. Your savings better not be going to prop up a bad Christmas.
But politics matter, and those are formed by trust and experience. With their divisive history, they’re not going to get a big enough wave of popular support to turn this idea into reality.
Which brings us back to IKANO. The IKEA culture expressed in banking. Different from the norm. Born of a search for efficiencies.
Like the entrance into Poland in the 60s. Na zdrowie, Ingvar. Have a Zubrowka.
Potemkin village II March 11, 2010
Posted by allankeye in In the world, Under the veneer.Tags: corruption, expansion, ikea, Russia, strategic partnership
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Seems like Ingvar’s strategy is bearing fruit … the Russian Federal Anti-Monopoly Service has dropped a fine against IKEA that could have been up to $75 million.
The fine was dropped officially because the offending action occurred before it was explicitly prohibited. The action? Encouraging tenants in an IKEA-owned shopping centre to choose from a list of preferred insurers.
Not knowing the criteria, it’s difficult to say what the list really was. IKANO is in the insurance business, too, after all. But knowing the company ethics, it was possibly a list of “clean” insurers, and certainly a list of ones that actually pay claims. No developer wants uncovered damages.
More interesting than the actual case, however, is the timing.
The bear blinked.
Potemkin village? February 27, 2010
Posted by allankeye in In the world, Uncategorized, Under the veneer.Tags: corruption, expansion, ikea, Russia, strategic partnership
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So Papa Kamprad “cried like a baby” when he heard the news about some payoffs in Russia. Give the man a Golden Globe.
The Russian corruption affair has been all over the news. Everybody is writing about the firing of two executives for permitting a subcontractor to pay a bribe to get the electricity running (a deal involving kickbacks on diesel generators needed to avoid being beholden to corrupt utilities).
IMHO, this is a masterpiece of media manipulation. It is a way of making a point to Russian (business) leadership that IKEA is genuinely serious about not playing the corruption game.
Anders Dahlvig, former CEO of the IKEA Group, has been granted an audience with Vladimir Putin several times relating to IKEA investments in Russia, as has Ingvar himself. Let’s even ignore the beginnings of IKEA in Russia and jump to a more recent arc.
In February 2004, IKEA announces that it will invest a further $250 million in opening two shopping malls and up to 20 stores.
In June 2004 IKEA temporarily suspends investment.
In December 2004, Ingvar meets Putin to discuss the dispute after the Khimki store is embarrassingly forced to postpone its opening (with dignitaries already on site) because of being too close to a gas pipeline. Later clashes involved the store not being hurricane-proof. [article directly about the meeting here, subscription required]
The same day as the opening, IKEA (re)announces its $250 million investment.
In January 2006, IKEA ups the investment stakes (and thus honey pot) again to staggering 3.2 billion euro.
In September 2008, Anders Dahlvig meets Putin along with other important foreign investors in a confidence-boosting measure. [There's a picture of this floating around somewhere if I can find it]
In June 2009, they announce they will halt all investment because of corruption. A pretty big step for a market that had “basically unlimited growth potential” just a couple of years ago.
And now, in February 2010, we hear of two execs getting the boot for turning a blind eye.
My question is: who released this news to the public? Hmmm. It was a press release from IKEA itself.
Why would they do that? Corruption is commonly and easily swept under the rug. The hirings and firings of managers at similar levels rarely make it into the business pages. Besides, Per Kaufman had been there a long time and was probably due to move on anyhow.
So the only conclusion one can draw is that this is part of an ongoing high-stakes game between Kamprad and Russian kleptocracy. The drastic action creates a platform for him to express his views and demonstrate his/the company’s determination.
And determination is what you need when you’ve got a chunk of change on the line.
Ingvar stands to lose over $1 billion in that dispute with the power company.
Maybe he’s hoping that burning a Potemkin village will finally get someone’s attention.
A twist of a screw February 24, 2010
Posted by allankeye in Random thoughts, Uncategorized.Tags: allan keye, ikea
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In today’s world of consumerist glee, a handful of enterprises enjoy the privilege of customer devotion and unimaginable success. IKEA is one of them.
The internet is already awash in emotional reactions from millions of global citizens. I love IKEA. I hate IKEA. Bring IKEA to my city, so I can show how cool I am by camping out for the opening/avoiding it like the plague.
This emotion masks the reality of the business. Values-driven and clever, it synthesizes the energy of more than 100,000 souls to create something quite human.
Those who happily drink the Kool-Aid and submit to the idyll ignore the hard-nosed decisions that make the business viable. The anti-tax (and thus anti-democratic) reflex. The Walmartesque avoidance of organised labour. The Napoleonic use of inexpensive gestures and tokens instead of increased pay. The existential dilemma of sustainability within a consumption-driven business model.
Those who revile its existence ignore the utility of its offer and immense need that it fulfils. For the most part, it truly is hard to find a better product for the price. Despite the relatively low pay scale, the work is satisfying and rewarding. And as corporate entities go, at least IKEA usually tries to do the morally right thing.
In the end, it is enlightened self-interest in action.
This blog will explore the wheels that grease the machine. And Allan Keye puts it together.
