The Ikea Franchise and The Secret of Its Global Success.

THE paragraphs below are arranged randomly; you will have to assemble the finished article yourself.

Just kidding. But if you shop at IKEA, you are no doubt familiar with the hassle and frustration of assembling its flat-pack furniture at home. Millions of customers endure it, for two reasons: IKEA’s products are stylish and they are very, very cheap.

"We hate waste," says Mikael Ohlsson, who took over as chief executive of IKEA Group in September 2009. He points proudly at a bright-red “Ektorp” sofa. Last year his designers found a way to pack the popular three-seater more compactly, doubling the amount of sofa they could cram into a given space. That shaved €100 ($135) from the price tag—and significantly reduced the carbon-dioxide emissions from transporting it.

Thrift is the core of IKEA’s corporate culture. Mr Ohlsson traces it back to the company’s origins in Smaland, a poor region in southern Sweden whose inhabitants, he says, are “stubborn, cost-conscious and ingenious at making a living with very little”. Ever since Ingvar Kamprad founded IKEA in 1943, the company has tried to allow “people with limited means to furnish their houses like rich people”.

IKEA presents itself as a green company with a social mission. Mr Ohlsson boasts of its charitable work and its aim to use only renewable energy. He says he wants his “co-workers” to be happy, honest and inclined to think for themselves. He is proud that 40% of the company’s 200 top managers are women.

Business is good (see chart). In the fiscal year 2010, IKEA’s sales grew by 7.7% to €23.1 billion and net profit increased by 6.1% to €2.7 billion. Conforama, Habitat and other rivals do not come close. IKEA’s strong brand and low prices helped it to weather the downturn, even though 80% of its sales are in crisis-hit Europe. In 2010 its sales rose by 8.2% in Spain and 11.3% in Italy. The firm is doing well in Bulgaria and Romania and planning to expand further in central and eastern Europe.

Thrifty Germans are IKEA’s best customers, accounting for 15% of sales. It has become part of German culture: in 2009 a Hamburg theatre staged an opera about it, “Wunder von Schweden” (“Miracle from Sweden”), a biography of the “furniture messiah” set to Swedish folk tunes.

Yet behind IKEA’s clean image is a firm that is very Swedish, secretive by instinct and, some say, rigidly hierarchical. All six members of the supervisory board are Swedish. (Mr Kamprad, at 84, is a senior adviser.) Over the years the company has been accused of using child labour in Asia and of buying feathers plucked from live geese. Journalists revealed that Mr Kamprad had backed a Swedish fascist group in his youth; he apologised in an open letter.

More recently, IKEA has had problems in Russia, where it has 12 stores. Having campaigned against corruption and even frozen its investments there for a while to protest against poor governance, last year IKEA was itself involved in a scandal. It had to sack two senior executives in Russia for allegedly turning a blind eye to bribes paid by a subcontractor to secure electricity supplies for its St Petersburg outlets.

When damaging news breaks, IKEA has an admirable habit of coming clean. But the firm’s ownership structure is opaque. Critics grumble that its set-up minimises tax and disclosure, handsomely rewards the Kamprad family and makes IKEA immune to a takeover. The parent for IKEA Group, which controls 284 stores in 26 countries, is Ingka Holding, a private Dutch-registered company. Ingka Holding, in turn, belongs entirely to Stichting Ingka Foundation, a Dutch-registered, tax-exempt, non-profit-making entity, which was given Mr Kamprad’s IKEA shares in 1982. A five-person executive committee, chaired by Mr Kamprad, runs the foundation.

The IKEA trademark and concept is owned by Inter IKEA Systems, another private Dutch company. Its parent company is Inter IKEA Holding, registered in Luxembourg. For years the owners of Inter IKEA Holding remained hidden from view and IKEA refused to identify them.

In January a Swedish documentary revealed that Interogo, a Liechtenstein foundation controlled by the Kamprad family, owns Inter IKEA Holding, which earns its money from the franchise agreements Inter IKEA Systems has with each IKEA store. These are lucrative: IKEA says that all franchisees pay 3% of sales as a royalty. The IKEA Group is the biggest franchisee; other franchisees run the remaining 35 stores, mainly in the Middle East and Asia. One store in the Netherlands is run directly by Inter IKEA Systems.

After the airing of the polemical documentary on Swedish TV, Mr Kamprad retorted that “tax efficiency” was a natural part of the company’s low-cost culture. Yet such diligent efforts to reduce the firm’s tax burden sit uncomfortably with IKEA’s socially conscious image. Mr Ohlsson is trying to defuse criticism of IKEA’s opacity by providing more information on its finances. Last year the firm published detailed figures on sales, profits, assets and liabilities for the first time ever.

Mr Ohlsson argues that IKEA is more competitive as a privately owned company. Instead of sweating to meet the quarterly targets the stockmarket demands, it can concentrate on long-term growth. Mr Ohlsson plans to double the pace of store openings in China, where IKEA already has 11 outlets. Undeterred by the firm’s headaches in Russia, he plans to open perhaps three more stores in the Moscow area in the next few years. Mr Ohlsson hopes to move into India when the retail market opens up there. He even sees room for expansion in Britain. An Englishman’s home is his castle, and castles need furniture.

Source:The economist, Feb 24 2011, Malma.

Tags: ikea franchise,ikea, furniture franchise,mikael ohlsson, ingvar kamprad,ingka holding, inter ikea systems, inter ikea holdings, interogo,


This Blog/News/Press Release/Information is posted by Sparkleminds, A End To End Franchise Solutions Company, Based at Bangalore, India.We offer customized services to businesses seeking expansion through the franchise route and over the last decade have helped numerous clients to scale up their businesses.We also work closely on international master franchise expansions.Visit us on www.sparkleminds.com and speak to us, and we are sure you will be more than glad to understand how we could grow your existing business multi-fold times.

What Should Small & Medium Sized Businesses Do For International Franchise Expansion.

Jeffery Adler, founder of Dlush, was running a funky chain of Southern California beverage joints when he got an interesting offer from a wealthy Kuwaiti family.

Jeffery Adler always knew he wanted to take his San Diego company global. He just didn't realize it would happen so soon.

In Southern California, Adler oversees three Dlush Beverage Joints, which serve fruit smoothies and café fare like pearl tea and powdered doughnuts in a setting Adler likens to MTV. Things changed a few years ago, after members of the Alghanim family, wealthy Kuwaitis who own many businesses in the Middle East, paid a visit to his flagship San Diego store while vacationing in the U.S. Later, the family contacted Adler about developing the Dlush concept in Kuwait and other areas in the Persian Gulf.

Adler found the proposal intriguing: It would give Dlush an immediate cash infusion of several hundred thousand dollars, long-term income (Dlush would receive a percentage of the new stores' gross revenue), and an immediate international presence. "There was a lot going for it," says Adler. So he accepted an invitation from the Alghanim family to travel to Kuwait to learn more about the proposition and the potential franchisee, Alghanim Sons Group, a large conglomerate that runs many restaurants and entertainment venues. After eight months of legal wrangling, Adler signed a 20-year agreement that allowed his new partners to develop an unlimited number of Dlush stores throughout six countries in the region.

There are now seven Persian Gulf Dlush stores, and Adler says he is happy with the deal. But it has proved more complex and more time-consuming than he first imagined.

An increasing number of businesses are grappling with the challenges of global expansion these days, as investors from the Middle East, Asia, and South America seek out U.S. brands and retail concepts to develop in their home markets. In a recent survey of franchise businesses by the International Franchise Association, or IFA, more than 75 percent of companies—the majority of them U.S. based—said they were planning to start or accelerate international projects over the next year.

Part of that shift can be explained by basic economic trends, says Scott Lehr, vice president of development for the IFA. As U.S. businesses cope with tight lending markets and a weak economy, many countries—including China, India, Brazil, and the United Arab Emirates—still have strong consumer demand for American products, as well as investors flush with capital. Lehr says other factors have also played a role in facilitating international deals, including Skype and other technologies that have made international communication easier and cheaper, as well as increased travel to the U.S. by foreign visitors.

When a lucrative overseas deal suddenly emerges, it's important that company owners not lose their heads, says William Edwards, CEO of Edwards Global Services, an advisory firm that helps franchise companies develop international expansion strategies. "You have to look at where it makes sense to go, not just where there's a deal," says Edwards. "Think of this as an investment, because you'll be spending resources in terms of time, support, and actual costs."

The first thing any company considering a foreign franchise agreement should do is secure the brand's trademarks, says Edwards. Otherwise, a potential suitor could soon turn into a troublesome copycat. Once an agreement is in place, business owners need to get heavily involved in helping the international franchisee accurately replicate the company's core concept. That includes helping the new franchise set up a supply chain as well as laying out guidelines about product quality, the retail experience, and the prices. "The biggest challenge we see for small franchise businesses is that they can end up losing control of their brand," Edwards says.

In Adler's case, there were a few minor inconsistencies. In an audit of the new locations, he discovered that the Middle East franchises had been using a different espresso blend than had the California stores. Some things were adjusted for cost, says Shady Badawi, director of operations for Dlush's Middle East franchises. But the new blend, from the Italian brand Illy, is popular in the Middle East, says Badawi. "We've just tweaked a few things," he says. Badawi previously ran franchises for larger companies like Pizza Hut, where he says things were more tightly controlled. He views the arrangement with Dlush as more of a collaboration. "It's small," he says, "so that gives us a lot more freedom."

Adler also worries a little that the fresh, youthful vibe he has worked to cultivate at Dlush's Southern California locations can't really be duplicated in the Middle East, where the culture is more conservative. "In Southern California, someone walks into the store, and the guy behind the counter can say, 'Hey, whassup?' " says Adler. "Not there. It really has to stay toned down." Badawi acknowledges some differences but says, "The brand has been well accepted here. It's young—it's fresh and trendy."

But Adler's main concern is that the Middle Eastern stores have taken a lot of his time—and shifted his focus away from building the Dlush brand in his backyard. When Adler meets with potential new investors, he says, they often find Dlush's international venture intriguing, but they ask, "What else could you have been doing in the U.S. with your time and attention?"

Still, Adler can't deny the benefits of the franchise arrangement, especially the solid revenue stream the Middle East stores have provided. Even as U.S. customers cut spending during the recession, the Middle East stores remained profitable. Plus, the Kuwait team developed a smaller kiosk version of the Dlush store that Adler hopes to eventually roll out to U.S. movie theaters, fitness centers, and college campuses. Adler says the experience forced him to think about how to tailor the Dlush concept for areas beyond the West Coast. But for now, he wants to focus on expanding the company in Southern California. "Our message now is to really start paying attention to home base," he says.

Source:Inc.com,Ryan Underwood,Feb 1, 2011


This Blog/News/Press Release/Information is posted by Sparkleminds, A End To End Franchise Solutions Company, Based at Bangalore, India.We offer customized services to businesses seeking expansion through the franchise route and over the last decade have helped numerous clients to scale up their businesses.We also work closely on international master franchise expansions.Visit us on www.sparkleminds.com and speak to us, and we are sure you will be more than glad to understand how we could grow your existing business multi-fold times.