Ikea’s real challenge in India lies online

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The Ikea Hyderabad store. Given how well its supply chain is organized in India, we may well see Ikea online moving faster than the roll out of the physical stores. Photo: Bloomberg

The Ikea Hyderabad store. Given how well its supply chain is organized in India, we may well see Ikea online moving faster than the roll out of the physical stores. Photo: Bloomberg

Ikea’s first store in India may be drawing the crowds, but for success in the long term, the innovative Swedish giant will need a robust online presence on platforms like Amazon, Walmart-Flipkart or Alibaba.

The world’s largest furniture retailer is targeting some six to seven million visitors in its first year and, with well over 25,000 thronging the store every day since the launch at Hitec City in Hyderabad, that number doesn’t appear improbable even if some of the novelty will eventually wear off. Considering that it has already spent ₹ 800 crore on setting up the store, whether those numbers will be enough for it to recoup its investments will depend upon how much of the curiosity converts into actual purchases. Given the deliberately low price points, volumes, not margins, will drive its success.

It’s a tried and tested formula for Ikea, one it has successfully implemented across geographies with only minor tweaks to account for local tastes and sensitivities. In many ways though, this is the Ikea of the past, a formidable retailing machine which 75 years after it was set up, still doesn’t have a real competitor. Until now, that is. Forced by stagnating sales at its 400 stores across the world, Ikea is in the process of trying to change. Key among those changes is an experiment with smaller showrooms, less than a tenth the size of its usual gigantic stores, which are equipped with high-end touch screens so that customers can get a sense of various products, including how they will appear in their homes and then order online and have the furniture delivered at home later. Sounds familiar? It is the new world of online retailing in which Ikea isn’t quite a leader yet.

In the US, retailers like Wayfair and Houzz, the closest competitors to Ikea, are using newer technologies like augmented reality and artificial intelligence to drive furniture sales on the web. And those are not even the biggest boys in the business. That honour lies with the troika of Amazon, Alibaba and a Flipkart-fortified Walmart.

As in the rest of the world, retailing is being redefined by these three giants with purely offline companies unable to match up.

Online retail sales in India are expected to grow by 31% this year to scale $32.70 billion, according to a report by marketing research firm eMarketer. What’s more, homegrown online furniture retailers, such as Trendsutra Platform Services Pvt. Ltd—which owns the Pepperfry brand—as well as Urban Ladder Home Décor Solutions Pvt. Ltd, have cut their losses over the last one year even as sales are growing at nearly 30%.

Ikea’s Hyderabad store and subsequently the ones planned in Navi Mumbai, Bengaluru and Gurugram may thus just be brand building exercises for the company, serving as showrooms for its wares

The real business of returns on the $2 billion it plans to invest in India will come from online sales, where it has lagged so far in most markets. Conscious of the gap, the company has been making efforts to woo online customers even suggesting it may tie up with third party platforms to sell its products online. But it is not an easy juggle since nearly 90% of its sales still come from offline stores.

Indian consumers, particularly millennials, have now got used to the idea of researching, comparing and scanning reviews and product ratings before they make a purchase decision. Delivery at home is another advantage that stems from online shopping. While there is some virtue in the touch and feel of a physical store, particularly one as well-designed as Ikea’s, the sheer convenience and plethora of options that online offers make it the natural choice of younger customers.

A brick and mortar store is also much more complex to construct, as Ikea which was forced to delay the launch of the Hyderabad store by nearly a month, found out to its chagrin. Indeed, given how well its supply chain is organized in India, we may well see Ikea online moving faster than the roll out of the physical stores.

Sundeep Khanna is a consulting editor at Mint and oversees the newsroom’s corporate coverage. The Corporate Outsider looks at current issues and trends in the corporate sector every week.

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