With good reputation and high popularity, why does IKEA still close its urban small stores?
Key Points
- IKEA City Store: A small - scale store opened by IKEA in the city center, aiming to get closer to young consumers.
- Retail Transformation: IKEA's shift from large - scale warehouse stores to a more flexible retail model.
- Omnichannel Integration: IKEA's attempt to connect online and offline through digital means to capture customer data.
- Convergence Center: A complex integrating home furnishings, shopping, dining, and entertainment built by IKEA.
- Low - frequency Consumption: The low consumption frequency in the home furnishings retail industry affects the profitability of stores.
Abstract
IKEA China announced that it will close its Shanghai Jing'an City Center Store at the end of the year. This small - scale store, which had been in operation for three years, was once regarded as an experiment in IKEA's retail transformation. Despite being located in a bustling area with a considerable flow of people, the high operating costs and the structure dominated by small - sized products limited its profitability. This store closure is another failed attempt at IKEA's city center store model, following the closure of its city store in Manhattan, New York. Meanwhile, IKEA is continuously ramping up its Convergence Center model, integrating its classic blue - box store into a larger shopping mall and introducing business formats such as office buildings and apartments to explore a diversified development path. This strategic adjustment reflects IKEA's proactive response to the impact of e - commerce and changes in consumer habits.
Insights
This event reflects the challenges faced by traditional home furnishings retail enterprises in the face of the impact of e - commerce and consumption upgrading. IKEA tried to get closer to consumers by opening city stores, but the high operating costs and the low - frequency consumption characteristics of the industry made it difficult to turn a profit. IKEA's increased focus on the Convergence Center model is actually an extension into the commercial real estate field, aiming to enhance overall profitability through a combination of diverse business formats. This shows that a single retail model is no longer suitable for the current market environment, and enterprises need to continuously innovate and transform to remain competitive in the fierce market competition.
Views
01 "Obstacles in the City Store Model"
IKEA's closure of the Shanghai Jing'an City Store indicates that its city store model faces challenges in cost control and profitability and struggles to adapt to the high operating costs in the city center.
02 "Accelerated Digital Transformation"
IKEA hopes to reach more young customers through its city stores and capture customer data in a digital form to support its online sales and product selection strategies, reflecting its determination to accelerate digital transformation.
03 "Increased Focus on the Convergence Center Model"
IKEA's continuous investment in the Convergence Center model shows that it is extending into the commercial real estate field, aiming to enhance overall profitability through a combination of diverse business formats and achieve sustainable development.
In - depth Analysis
IKEA's Dream of "Going Urban" Shattered: Small - scale Stores Fail, Where is the Transformation Path for the Retail Giant?
Shanghai, August 7, 2023 — Swedish home furnishings giant IKEA recently announced that it will close its City Center Store in Shanghai's Jing'an District at the end of this year. This small - scale store, which had been in operation for three years, was once regarded as a crucial step in IKEA's retail transformation in the Chinese market. However, there was a huge gap between the ideal and reality. High operating costs and a product structure dominated by small - sized items ultimately led to the store's dismal exit.
The Dilemma of the "Blue Box"
For a long time, IKEA has been well - known for its iconic "blue box" — large - scale warehouse stores located in the suburbs. This model attracted countless consumers with its wide range of home furnishings on display and immersive showrooms. However, with the rise of e - commerce and changes in consumers' shopping habits, the traditional "blue box" model has gradually shown signs of fatigue. Since reaching the peak of sales growth in the 2015 fiscal year, IKEA China's growth has slowed down. The slow progress of its e - commerce strategy, price increases that have weakened its cost - effectiveness, and the waning appeal of offline immersive experiences have all taken a toll. Coupled with the downturn in the real estate industry and the impact of the pandemic, IKEA's sales and the number of store visitors have declined year after year.
The Attempt and Failure of "Going Urban"
To reverse the decline, IKEA proposed a series of transformation plans, including opening smaller stores closer to the city center globally. The Shanghai Jing'an City Store was a product of this strategy. Different from the traditional "blue box," the Jing'an City Store is located in a bustling area in the city center, with convenient transportation, sparing consumers the long journey. The store has a smaller area, providing a more relaxed shopping experience. In addition, the store also has a dining bar selling IKEA's classic food, attracting many customers. However, despite the initial popularity of the Jing'an City Store, it ultimately couldn't escape the fate of closure. The reason is that city stores face higher operating costs. Located in the core business district, high rents, property management fees, etc., make the return on investment of city stores less than ideal. Moreover, due to limited display space, the Jing'an City Store mainly showcases products with strong design sense but small size. This structure dominated by small - sized products can hardly support the high operating costs of the city store. The home furnishings retail industry itself has the characteristic of low - frequency consumption, and customers often look more than they buy, resulting in poor business conversion.
Where is the Transformation Path?
While closing the city store, IKEA is continuously ramping up its Convergence Center model. The Convergence Center can be understood as integrating IKEA's classic blue - box store into a larger shopping mall. After visiting IKEA, people can continue to consume at the nearby supermarket, cinema, and restaurant. IKEA's Convergence Shopping Center adheres to the model of purchasing land and building by itself. Although it is a heavy - asset model, the rent cost is more controllable. Other business formats in the shopping mall can complement each other. In addition, IKEA has also introduced business formats such as office building leasing and apartment sales outside the shopping mall to achieve diversified development. IKEA's transformation path actually represents the common challenges faced by traditional retail enterprises in the face of the impact of e - commerce and consumption upgrading. How to adapt to the new market environment and meet the ever - changing needs of consumers is a question that every enterprise needs to seriously consider.
Forward - looking Thinking
IKEA's closure of the city store does not mean the end of its transformation path. On the contrary, it may be a new beginning. By ramping up the Convergence Center model, IKEA is exploring a more sustainable development path. In the future, IKEA needs to further strengthen its digital transformation, improve the online shopping experience, and achieve online - offline integration. At the same time, IKEA should also pay attention to consumers' new needs and launch more products and services that meet market trends. In the fierce market competition, only by continuous innovation and transformation can an enterprise remain invincible. IKEA's transformation path is worthy of reference and reflection for all traditional retail enterprises.