Internationalization of the Ikea in the Egypt Markets - Statistics Project Example

Marketing Plan for IKEA Company in Egypt Executive summary In the multibillion furniture and retail global market, IKEA group is one of leaders in the world. In the global environment IKEA was able to distinguish itself from other furniture retailers by combining its unique principles of function, form and affordability. Having progressively taken over the European market, IKEA ventured into the American market. Although there was little success at first, IKEA improved its market position through market research and advertisements. The progress has now ranked IKEA as the fastest-growing furniture retailer with a major market share in the US. In Africa, IKEA has extended its presence by setting outlets in countries like South Africa. Egypt with a population of 81.5 million people (2008 estimate) provides a potential market for IKEA’s global expansion strategy. Considering Canada that hosts 11 IKEA stores records an annual 25 million visitors, Egypt with its cost-based competitive furniture market provided a ready market for IKEA. The company targeted the affluent middle class willing to spend up to $3,000 for household furnishing. Because the Egyptian furniture manufacturers and retailers depend on wood supplied to the industry from Eastern and Northern Europe, the presence of IKEA will greatly lower the cost of production and hence the price of furniture for the middle class earners. In addition to wood, all other materials for the manufacturing process are imported hence exposing the industry to changing international currency and prices (Ingvar Kamprad & IKEA, 1996). 1.1 IKEA History and Environment History Upon its inception in 1943, IKEA under the direct control of Kamprad purchased wallets, pens, jewelry and other personal items in bulk, and once retailed them in smaller quantities, at a profit; and it was not until 1948 that the company begun dealing with furniture. Although it is run by the family Kamprad, the founder Ingvar Kamprad established the company in Sweden in 1943. The name IKEA represents Ingvar Kamprad (founder’s names) and Elmtaryd  Agunnaryd (the firm he was born and name of his home country). With its headquarters in Helsingborg, Sweden IKEA has 238 stores in 34 countries. Low-priced product sales conducted via catalogue paved way for the first store that was set up in Älmhult (Sweden) due to the competition in the market. Consequently, competition in the market caused rivals to gang up against IKEA by encouraging distributors to quickly end contracts with the company. Despite excluding it from participating in trade fairs, the competitors eventually did not manage to face out IKEA and thus allowed it to start designing its own furniture. By adopting own designs (vertical integration) and competing in the furniture industry, IKEA experienced increasing product sales (Johansson & Thelander, 2009). Internal and external environment Considered the leader in the furniture sector and with the largest market share, IKEA is currently focused at increasing its global presence by localizations strategies in various countries. Despite its reputation as a prestigious and innovative company in the furniture industry, IKEA has to maintain its innovativeness and vigilance in order to remain top. Considering the recent statistics of sales by region whereby Europe’s 81%, North America’s 16% and Asia and Australia’s 3%, Africa will be expected to contribute, though insignificantly to the company’s turnover. For the fiscal year 2008-09, the company generated revenues of 23.1 billion Euro. Turnover according to country rankings places Germany on top, with the United States second. France is third, United Kingdom fourth and Sweden is least (Central Intelligence Agency. 2009). Among the best performing products that IKEA Egypt will offer the Egyptian consumer, is the Flat pack furniture; which in 1956 was accidentally invented by an employee who discovered that a bulky wooden table be portably fit into a car if its legs were detached. Consequently, the option of dismantling and later rearranging furniture using screws and nails was put to test. The results: A bookshelf named Billy: produced to cater for the customer’s book storage, while taking up little space. The bookshelf is portable as it is dismantled and rearrange by the customer following manuals provided by the company. A sofa called Klippan: like the bookshelf, it is also dismantled and rearranged by the customer. It provides comfort to the customer either in the living room or in the lounge. Carpets: although it is a new market for IKEA, other upholstery items produced cater for the customers’ preferences and tests. Thus, IKEA carpets serve to provide consumers with ultimate comfort. 1.2 Company mission and Marketing objectives The IKEA mission is “to create a better everyday life for the many people”. In the long term IKEA business seeks to positively impact the people and the environment. IKEA is also consistent with the principles of combining function, form and affordability in the products available for the consumer. IKEA manufactures high quality products that are affordable to the middle class as well as the high-end customers. We are concerned with the customers’ needs and preferences, always inculcating their wellbeing in the company’s strategy (Ingvar Kamprad & IKEA, 1996). 1.3 Objectives The objectives of IKEA Egypt are Offer our customers contemporary yet affordable furniture Localization of product design, to fit, and appeal to the local culture Become Egyptian furniture market leader within 3 years of entry 2.0 Company summary IKEA Egypt will manufacture and sell contemporary yet affordable home furnishing products to customers spread all over Egyptian suburbs. Our target customers are young adults and young families with average income who desire to have the quality and variety enjoyed by the high-end customers. 2.1 Company ownership As a subsidiary of the Inter IKEA Systems BV (IKEA), IKEA Egypt just like many other stores will operate under purview INGKA Holding composed primarily of Kamprad family (despite Kamprad’s exit 20 years ago) through a franchise agreement with Inter IKEA Systems. The family has maintained the innovation and cost-leadership that Kamprad had inculcated in the company. 2.2 Company locations IKEA Egypt will be located in the major city centers but mainly outside the towns due to land cost and traffic access, and most importantly to create a complete shopping experience for customers. 2.3 Start-up summary The IKEA Egypt start-up costs primarily consist of furniture manufacturing equipment and transport containers. In setting up the first of IKEA stores in Egypt, an initial investment of $50,000 and a further $130,000 on loan will be secured. Start-up Requirements Start-up Expenses Legal $1,000 Stationery etc. $200 Insurance $1,000 Rent $2,000 Expensed Equipment $60,000 Total Start-up Expenses $64,200 Start-up Assets Cash Required $5,800 Start-up Inventory $50,000 Other Current Assets $0 Long-term Assets $60,000 Total Assets $115,800 Total Requirements $180,000 Start-up Funding Start-up Expenses to Fund $64,200 Start-up Assets to Fund $115,800 Total Funding Required $180,000 Assets Non-cash Assets from Start-up $110,000 Cash Requirements from Start-up $5,800 Additional Cash Raised $0 Cash Balance on Starting Date $5,800 Total Assets $115,800 Liabilities and Capital Liabilities Current Borrowing $0 Long-term Liabilities $130,000 Accounts Payable (Outstanding Bills) $0 Other Current Liabilities (interest-free) $0 Total Liabilities $130,000 Capital Planned Investment Richard Putnam $50,000 Other $0 Additional Investment Requirement $0 Total Planned Investment $50,000 Loss at Start-up (Start-up Expenses) ($64,200) Total Capital ($14,200) Total Capital and Liabilities $115,800 Total Funding $180,000 3.0 Products and services 3.1 Pricing strategies As a low-cost producer, IKEA would adopt the cost-plus pricing strategy for the diverse products as it aims to provide middle class with the products enjoyed by the high-end customers. This strategy, allows for the company to fulfill its mission of “creating a better everyday life” for its customers, while generating returns for the stakeholders (Armstrong & Kotler, 2006). IKEA Egypt will offer household wood products for the living room, dining room, bedroom, and storage room: Upholstered furniture, tables and shelves Bookcases Beds and wardrobes Carpets and curtains Garden furniture Chairs and desks Kitchens and kitchen utensils Bathroom articles 4.0 SWOT Analysis Strengths IKEA ready-to-assemble packaging eases the transportation of products for customers and thus reduces transportation costs The company culture reflects the public image of cost-cutting strategies and leading by example Brand reputation – Egyptian customers have used and would wish to enjoy the global IKEA products The IKEA product design is unique, and has gained acceptance globally, as well as in Egypt. Weaknesses IKEA as a foreign company initially faced with opposition trying to woo Egyptian customer; considering their different cultural and ethnic orientation Culture of cost-cutting would negatively imply poor quality and lack of guarantees on the product safety While targeting the niches, not everyone will be attracted to the products Opportunities Tailoring of product design to the Egyptian preferences, will pave way for adding ‘bonus’ services to ensure customer is satisfied Among the working class and students, the budget shopper is on the rise The popularity of in-store restaurants increasing and thus providing a ready market New ventures into the carpet industry due to limited competition in the sector (Armstrong & Kotler, 2006) Threats Heightened competition from furniture retailers serving the high-end customers and the international market Discount retailers make it impossible to remain profitable as they price discriminate, thus lowering margins (Stranieri, 2008). 5.0 Target market According to Armstrong & Kotler (2006), IKEA’s target market includes people seeking for functional furniture with classical designs yet affordable. The targeted individuals that are just starting out and desire comparably cheap but classic furniture include single men and women; young families; and college students. Due to the energy of the young people and children, the furniture should be sturdy and strong to withstand their activity and playfulness. In addition to an assortment of upholstered furniture, IKEA’s market will also include garden furniture, curtains and carpets, kitchen and bathroom accessories. IKEA manufactures modern furniture that takes into account the user’s tastes, while acknowledging the environmental designs. Because of the modern yet relatively cheap designs of their products, IKEA’s market focuses on the young people and young families. Geographically, IKEA as a global company has extended into many countries of the word. As such, the global market presents its diversity via the internet and catalogues, which can be accessed by any potential customer, the world over (Johansson & Thelander, 2009). 5.1 Market definition and segmentation The furniture design industry in Egypt though not well-known globally is working its way up the market. After a series of competition with other industries like the Chinese industry, the Egyptian dealers could not keep with the pricing strategies offered by their competitors. With the 81.5 million (2008 estimate) Egyptian population excluding an approximate 23% over the age of 40 and 36% below 15 years, the 41% composed of young adults, students and young families, provides a potential market for IKEA products. It was also estimated that 44.1% of the population lived in the urban areas with the capital city Cairo being host to an approximate 16% of the total population. It is estimated that the in three years time, the number of young adults and young families will make up half of the urban population in 2015. Additionally, an influx of students and young people from the urban areas into the capital city will contribute to the expansion of the market for IKEA’s products (Stranieri, 2008). 5.2 Target market segmentation strategy The target market will be segmented into three categories; young adults, students and young families. The groups still desiring to get classical designs and quality but at affordable prices, will become the largest visitors to the IKEA stores. IKEA will directly and indirectly benefit from the segmentation of the Egyptian market. The groups targeted depending on the characteristics unique to the members will be served with the relevant materials and drivers that will motivate a purchase. Although the strategy may be successful in prompting a purchase, it does not detail on how the purchase decision is made and what happens in the ‘black box’ (Ying, 2005). In the urban towns of Egypt, we will aggressively market our products to the residents: a) Students, b) Young adults, and c) Young working families Market Analysis Year 1 Year 2 Year 3 Year 4 Year 5 Potential Customers Growth CAGR Young Working Families 12% 3,000 3,360 3,763 4,215 4,721 12.00% Young Adults 10% 10,000 11,000 12,100 13,310 14,641 10.00% Students 10% 5,000 5,500 6,050 6,655 7,321 10.00% Total 10.34% 18,000 19,860 21,913 24,180 26,683 10.34% 6.0 Marketing plan strategy IKEA Egypt will focus on the average income furniture customers residing in the urban Egypt centers. 6.1 Competitive edge Structurally established like the many stores in other major cities, IKEA Egypt stores will be situated outside the major city centers. Unlike the other competing stores that cater for high-end consumers, the Egyptian stores will offer classical high quality and affordable products. Primarily, the ready-to-assemble (RTA) furniture gives IKEA an edge over other competitors. As a traditional practice, IKEA has often times succeeded by localization of its products upon entry into a new market. As such, IKEA will employ the classical design for its products in order to compete with the local furniture manufacturers, and thus differentiate it from any other multinational company (Ying, 2005). Additionally, IKEA has been known to pioneer in implementing sustainable approaches to consumer culture. This “democratic design” applied to the design and manufacturing is an integrated approach, aimed at meeting the demands of the consumers (Johansson & Thelander, 2009). 6.2 Sales strategy We will reach our potential customers through the catalogue, which has been a favorite print media since it was first published in 1951. Customers will be able to place orders once they have chosen the products, without physically calling at the store. The internet will also provide an alternative channel of showcasing the varieties of furniture; and for online customers, purchases will be made by placing orders, which will be mailed or delivered. 6.2.1 Sales forecast The chart below presents the sales for the projected three years Sales Forecast Year 1 Year 2 Year 3 Sales Furniture $964,000 $1,000,000 $1,050,000 Other $0 $0 $0 Total Sales $964,000 $1,000,000 $1,050,000 Direct Cost of Sales Year 1 Year 2 Year 3 Furniture $432,000 $430,000 $450,000 Other $0 $0 $0 Subtotal Direct Cost of Sales $432,000 $430,000 $450,000 7.0 Financials IKEA Egypt financials are as follows: 7.1 Break-even Analysis The below chart and table represents our monthly break-even point sales Break-even Analysis Monthly Revenue Break-even $69,767 Assumptions: Average Percent Variable Cost 45% Estimated Monthly Fixed Cost $38,502 7.2 Projected Income statement Pro Forma Income statement Year 1 Year 2 Year 3 Sales $964,000 $1,000,000 $1,050,000 Direct Cost of Sales $432,000 $430,000 $450,000 Other Production Expenses $0 $0 $0 Total Cost of Sales $432,000 $430,000 $450,000 Gross Margin $532,000 $570,000 $600,000 Gross Margin % 55.19% 57.00% 57.14% Expenses Payroll $300,000 $326,500 $356,000 Sales and Marketing and Other Expenses $60,000 $60,000 $60,000 Depreciation $11,424 $11,424 $11,424 Leased Equipment $0 $0 $0 Utilities $9,600 $9,600 $9,600 Insurance $12,000 $12,000 $12,000 Rent $24,000 $24,000 $24,000 Payroll Taxes $45,000 $48,975 $53,400 Other $0 $0 $0 Total Operating Expenses $462,024 $492,499 $526,424 Profit Before Interest and Taxes $69,976 $77,501 $73,576 EBITDA $81,400 $88,925 $85,000 Interest Expense $11,917 $10,001 $8,002 Taxes Incurred $17,418 $20,250 $19,672 Net Profit $40,641 $47,250 $45,902 Net Profit/Sales 4.22% 4.72% 4.37% 7.3 Projected cash flow statement Pro Forma Cash Flow Year 1 Year 2 Year 3 Cash Received Cash from Operations Cash Sales $723,000 $750,000 $787,500 Cash from Receivables $198,158 $248,400 $260,278 Subtotal Cash from Operations $921,158 $998,400 $1,047,778 Additional Cash Received Sales Tax, VAT, HST/GST Received $0 $0 $0 New Current Borrowing $0 $0 $0 New Other Liabilities (interest-free) $0 $0 $0 New Long-term Liabilities $0 $0 $0 Sales of Other Current Assets $0 $0 $0 Sales of Long-term Assets $0 $0 $0 New Investment Received $0 $0 $0 Subtotal Cash Received $921,158 $998,400 $1,047,778 Expenditures Year 1 Year 2 Year 3 Expenditures from Operations Cash Spending $300,000 $326,500 $356,000 Bill Payments $539,935 $637,773 $637,056 Subtotal Spent on Operations $839,935 $964,273 $993,056 Additional Cash Spent Sales Tax, VAT, HST/GST Paid Out $0 $0 $0 Principal Repayment of Current Borrowing $0 $0 $0 Other Liabilities Principal Repayment $0 $0 $0 Long-term Liabilities Principal Repayment $19,992 $19,992 $19,992 Purchase Other Current Assets $0 $0 $0 Purchase Long-term Assets $0 $0 $0 Dividends $0 $0 $0 Subtotal Cash Spent $859,927 $984,265 $1,013,048 Net Cash Flow $61,231 $14,136 $34,730 Cash Balance $67,031 $81,167 $115,897 7.4 Projected balance sheet Pro Forma Balance Sheet Year 1 Year 2 Year 3 Assets Current Assets Cash $67,031 $81,167 $115,897 Accounts Receivable $42,842 $44,442 $46,664 Inventory $51,700 $51,461 $53,854 Other Current Assets $0 $0 $0 Total Current Assets $161,573 $177,069 $216,415 Long-term Assets Long-term Assets $60,000 $60,000 $60,000 Accumulated Depreciation $11,424 $22,848 $34,272 Total Long-term Assets $48,576 $37,152 $25,728 Total Assets $210,149 $214,221 $242,143 Liabilities and Capital Year 1 Year 2 Year 3 Current Liabilities Accounts Payable $73,700 $50,514 $52,526 Current Borrowing $0 $0 $0 Other Current Liabilities $0 $0 $0 Subtotal Current Liabilities $73,700 $50,514 $52,526 Long-term Liabilities $110,008 $90,016 $70,024 Total Liabilities $183,708 $140,530 $122,550 Paid-in Capital $50,000 $50,000 $50,000 Retained Earnings ($64,200) ($23,559) $23,691 Earnings $40,641 $47,250 $45,902 Total Capital $26,441 $73,691 $119,593 Total Liabilities and Capital $210,149 $214,221 $242,143 Net Worth $26,441 $73,691 $119,593 8.0 Controls The marketing plan will be achieved in 3 years time but will be reviewed on annual basis to determine its progress. Considering the measures such as break-even analysis, the implementation process will be analyzed and reported to the country representative based in the company headquarters. Appendix Sales Forecast Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Sales Furniture 0% $50,000 $60,000 $70,000 $75,000 $85,000 $90,000 $100,000 $85,000 $90,000 $85,000 $79,000 $95,000 Other 0% $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Total Sales $50,000 $60,000 $70,000 $75,000 $85,000 $90,000 $100,000 $85,000 $90,000 $85,000 $79,000 $95,000 Direct Cost of Sales Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 Month 10 Month 11 Month 12 Furniture $20,000 $22,000 $31,000 $34,000 $40,000 $42,000 $45,000 $38,000 $41,000 $37,000 $35,000 $47,000 Other $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 Subtotal Direct Cost of Sales $20,000 $22,000 $31,000 $34,000 $40,000 $42,000 $45,000 $38,000 $41,000 $37,000 $35,000 $47,000 Bibliography “Ingvar Kamprad and IKEA". (1996). Harvard Business School Publishing, Boston, MA, 02163. Armstrong, G. & Kotler, P. (2006). Marketing: An Introduction, Prentice Hall, New York. Business Week. 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