IKEAs Entry Into South America

IKEAs Entry Into South the StatesExecutive SummaryIkea seeks to tolerate expanding its retail presence around the populace done world gigantic franchising of the Ikea fancy. We propose an immediate workings out of Ikea into South America, specific individu everyy(prenominal)y a storefront in brazil-nut tree. Using a oddmentd carte advent we address the essential issues in such(prenominal) an expansion. We in addition commit brazil-nut tree is a logical basisdidate for longer term expansion on the manufacturing (sourcing) side of Ikea and provide certificationing analysis for such expansion.Although we guide limited get to to actual Financials, we believe the initial rankiture needful to be about $20 million. Sales estimates exceed $70million per year. Since cost should in addition be typical of new(prenominal) directs around the world, pass judgment earnings by and by tax ar 8% of sales.In addition to the need for access to capital, a well-located site for retail activity must(prenominal)(prenominal) be secured. This site would be at the edge of Rio de Janeiro or Sao Paulo near utmostway access. merchandise Strategy All marketing is based on the IKEA affair judgement We shall offer a wide range of home furnishing items of good determination and function, at prices so imprint, that the majority of people can afford to spoil them Although brazil-nut treeian customers be holdd to negotiating on price, we feel a rooted(p) price retail store provide do well since the prices be low, and the shopping experience is primarily self-service.Most of the over 6000 products provide continue to be produced in Asia and Europe. All products entrust continue to come through Ikeas diffusion channel. Since the majority of furniture comes in a flat package, the distribution method has been proven to be cost telling. The possible need for regional distribution center is a risk factor that would summation investment demand.The regulato ry environment in brazil allows foreign investment and the repatriation of profits. With compliance to people, Ikea has a strong culture. Ikea is a entertain driven follow that set hard work. About 400 Employees will be hired for the firstly Ikea brazil-nut tree store. Training is avail competent through Ikea University, which is uses traveling instructors and on berth training materials. Overall brazil nut looks like an attractive entry dismantle into the South American furniture market.BackgroundFounded in the late mid-forties by Ingvar Kamprad created the concept of IKEA, a furniture company that provided feel raffish furniture at prices e realone can afford. Although its business exercise at the clock time was much different then the mega stores today, this fundamental approach to furniture has remained the same. disdain its very risk-adverse nature, IKEA became the first furniture company to expand worldwidely. High book to value, steep transportation costs, and susceptibility to damage are all issues IKEA was able to overcome with its innovative approach of selling furniture collapsed flat boxes. This approach non only cast downed its shipping and inventory costs, but in addition creatively transferred the labor-intensive assembly costs to the customer. IKEAs innovate approach to adding the consumer to the value chain in effort to aliveness prices low and flavour high has won it very loyal fans everywhere it has reached.Packed to the brim, its stores attract customers from considerable distances who load up their cars to furnish entire rooms or homes in a single trip. Constantly introducing new innovative new products, its model rooms in its stores and catalogs have provided a creative way affirm its new products to complement its existing product line. The model rooms and catalogs school the customers how to piece together an entire room from the furniture to the dcor with all IKEA products. Fashionable and trendy it encourages c ustomers to live the IKEA life.FinancialsBackground Ikea is a privately own company with an extraordinarily opaque organization. Financial statements are not popularly available. The Ikea Group is ultimately owned by the Stitching Ingka Foundation, a anatomyly trust based in the Netherlands. The Ikea Group manufactures and sells products. Franchise stores are a part of the IKEA group, as chargen in figure 1. However, Inter Ikea Systems, a check company, owns Ikeas intellectual property.Franchises Inter IKEA Systems B.V. constantly seeks market expansion, and grants new franchises to markets/territories match to a detailed expansion plan (Company Web Site). Ikea has identified location as a primary success factor, since store sales volume is so dependent on location. Franchises are granted only to organizations and/or individuals that can secure a strong market position and market acumen in the given territory and have the financial strength and potential as well as have ident ified well located sites for the retail activity.investment funds required Based on recent examples, such as the Ikea store opened in Israel in 2003, typical investment is $15M with a leased store.It is estimated that another $5M would be required for the building and infrastructure improvements. It is to a fault estimated that a new distribution center may be required for the region. If this is required, it is likely multiple stores will be needed to justify such an investment.Revenue With 190 stores, sales top 12.2B Euro. This means on fair(a) each store generates 67M euro ($78M/store). To validate this assumption, it should be noted that Germany accounts for 1/fifth of turnover with a pro destinyate 33 stores.Costs The Ikea store concept requires relatively little human resources, so costs are a function of other overhead such as lease, warehousing, utilities, taxes and advertising. It can be noted that manufacturing is primarily Poland and Asia, as Ikea grows in size, it shou ld consider Brazil as third major manufacturing center for topical anesthetic and worldwide use.Earnings later on tax earnings for the IKEA group were shared in the 1997 book, The History of Ikea. Figures in the book show Ikea posted a profit of $905 million or 8% of sales. Other sources have estimated after tax profits as high as 18%. This indicates the stores are equally profitable, but must be verified in front moving forward. Profits and royalties can be repatriated from Brazil.While not all of IKEA stores were profitable, most were. In order to go forward with this project we would want to verify the success factors and make certainly our pro- forma financial statements were similar to other successful stores.Planned Store disciplineSize 24,000 to 32,000 square metersProducts 6,000 to 10,000Room Settings 45 to 50Parking Spaces 800 to 2000 guest Loading Spaces 20 to 50Cash Lanes 16 to 30eatery Seating 400 to 700Co-Workers 380 to 500Land 24 to 30 dry landProductionBrazil ha s abundance of high quality wood and low labor prices. This is an important reason for IKEA-Brazil to produce the furniture in Brazil and distribute locally.Brazilian taste for furniture indicates that they appreciate wider moldings that the standard American moldings. This along with a few more than customizations might be inhering to market IKEA products in the Brazilian market.In the late 90s in that respect has been an increase in quantity (+2.5%) and a simultaneous increase in exports (+11%), which show the increasing competitiveness of the Brazilian industry on international markets. Factors at the root of this process are most certainly the use of ever more advanced technology acquired thanks to huge investments in capital goods (in 1996 US$ 220 million was invested in machinery, mainly from Italy, Germany and the United States) which has change magnitude the productive capacity of sector companies, and the effects of the process of opening up to international trade which intensify the significant comparative advantages of Brazil compared to other exporting countries excellent quality raw materials at low costs and flexible labor.DeliveryLatin Americas most important trade show happens at Brazil and this is the most sought after trade show. Brazil stands as the main sourcing expanse for furniture for the whole of Latin America. Brazil is the Brobdingnagianst country in South America and shares its border with a smoke of countries. Since the South-east of Brazil is the economic center of Brazil, cities Rio de Janeiro and So Paulo are favorable places to establish IKEA stores. Land transportation is becoming more effective in that about 85% of Brazils people and products are transported by road. Brazilian highways are of modern design and link all the state capitals by paved roads. Problems still arise in the rural and remote areas as water floods the roads making them impassable for days. Sometimes road turn of events after the floods is delayed inhibiting travel even more.IKEA-Brazil can offer high quality products at low prices with the efficient methods of distribution and close relationships with manufacturers. This will ensure that even during problematic situations like flooding, the majority of the sales are not affected due to transportation issues. The same principle employ everywhere else where the need for distribution is cut out by whirl flat-packaged items that are warehoused in the stores and picked up by the customers on site, will be the key. The customer is spared shipping, storage and assembly costs resulting in dramatically lower product prices.Issues with the labor work magnate childbed is cheap in Brazil compared to Europe and America. But with this cheap work force and swinging economy of the country comes a multitude of issues that are worth investigating. Half of the labor force in Brazil is employed in the informal sector. Even though the government employs minimum wage, this is hardly followed an d the wages are compensated a great deal with respect to the fluctuations in the economy. In Brazil, 50 percentage of the workforce is outdoors formal collective bargaining structures. Thus the labor laws in Brazil might make it expensive to employ workforce.Quality GoalsInternational companies are already sourcing out of Brazil for the past many historic period. Crossmart Brazil has just about three decades of experience sourcing product for European catalogs out of 40 Brazilian plants. Crossmart relies on seven inspectors who constantly visit plants to check moisture content, finishes and overall quality. It is estimated that the company currently does $20 million a year in French mail orders alone. In the southeastern take centers of Brazil, we find products with a good qualitative level thanks to the use of modern production processes and suitable machinery. The effects of technological innovation and design created by virtually important trade fairs in these regions are also worth mentioning.With this kind of a history, the IKEA plant in Brazil should be able to master the quality standards that they have been able to measure up to internationally. Their products are not over-engineered to give a greater finish than the customer requires. Nevertheless quality is taken very seriously and the whole supply chain participates. The Ikea interpretation of quality is that the product must first be available in the store and secondly it must match up to the customers expectations it must be complete, free from defects and easy to assemble. Returns to stores are analyzed and each product is conservatively monitored.Legal and RegulatoryIt is important to note that Brazil is very affectionate to foreign investors domestic investors and foreign investors are treated equally. The largest restriction is that you must obtain a permanent visa in order to invest in Brazil as a foreigner however, earnings may be repatriated after waiting for foreign currency to become available. The Ministry of Labor must approve this visa application. The minimum investment required is $200,000 (US) or the equivalent. The National Immigration Council can make exceptions if the new venture will create at least ten new jobs, or is of sociable interest. Once the visa is granted it will be valid for devil years. At the conclusion of the initial two-year period the Ministry of Labor will perform an evaluation of the business to determine the feasibility of the venture before granting a definite extension.Internal StandardsForeign investors are encouraged to father discussions with state development agencies within the country. These agencies are available for government motivator broadcasts. In addition to contacting local agencies it is important to note that a wide range of credit and financing options are available to investors through both(prenominal) foreign and domestic banks operating in Brazil. Finally, foreign investors are expected to import t he funds for all major fixed capital requirements. pagan and Environmental ConditionsPersonal contact is more important in business than other forms of communications (i.e. telephone or mail). This is largely because the working relationships in Brazil are built on trust.The most common form of doing business in Brazil is through incorporated subsidiaries branches are very difficult to operate. Joint ventures do not require a local Brazilian partner, however, it is still encouraged.It is essential to establish a network of connections with the public sector in Brazil. The culture in Brazil relies heavily on favors and who you k outright. These connections are important, but it is important to remember that these connections can, and will, change.Lastly, be prepared to talk terms on prices Do not expect sales to occur quickly, and keep your best price till last.PeopleIKEA has a company doctrine to create a better life for its customers, as well as its co-workers. This has significant ly influenced the companys workplace environment. IKEA ask roundd the Family Champion award and is recognized as a great place to work here in America. IKEA empowers their coworkers and prise their personal lives. This has had a tremendous influence on job productivity, festering and development, which ultimately benefits the customer. The IKEA workplace entangles many benefits and family friendly initiatives to provide co-workers needs. In 2002, IKEA sawing machine a 26% decrease in sales staff turnover. In addition, women represent more than 48% in management positions and are 47% of the companys top earners.This provides a proper fit for both IKEA and the Brazilian workforce. Brazil is a nation in which the richest 20 percent of the people receive 64 percent of the national income. It is a nation in which 40 percent of the people live on the equivalent of $2 US a day and over 20 percent live on the equivalent of $1 US a day. In whitethorn 2003 unemployment was up to 12.8%-i t highest level in 14 months. For those that did work, the average wages in May 2003 fell to $290 US, 15% lower than a year earlier. However, the Brazilian workforce is renewing. The job market is very attractive to the ages of 25 to 39 years old. Brazilian women are making up a larger portion of the workforce. In 1970, only 18.5 percent of Brazilian women worked outside the home. This has since rose to 51 percent of the Brazilian workforce. The number of High School graduates has also travel from 35 percent in 1994 to 43 percent currently.A.T. Kearneys 2004 Top 12 Ranking for Offshore location attractiveness includes BrazilIndiaChinaMalaysiaCzech RepublicSingaporePhilippinesBrazilCanadaChilePolandHungaryNew ZealandThe A.T. Kearney Offshore Location Attractiveness Index analyzed the top 25 off-shoring destinations against 39 measurements in three major categories cost, people skills and availability, and business environment. The study team assign weights reflecting the drivers o f off-shoring decisions based on A.T. Kearney research and engagement experience. Because cost advantages have been the primary impetus behind off shoring, financial factors constitute 40 percent of the total index weight. People skills and availability and business environment each received a 30 percent weighting. Cost advantages and a large workforce Brazils strong points.IKEA has responded to national needs and cultural sensitivity issues. This has been a challenge for IKEA, but IKEA is meeting these challenges by finding a balance between country level autonomy and centralized intervention. To maintain service, quality and logistic standards, franchisees are audited for performance. The headquarters provides extensive training and operational support to the workers of all kind. The new organization has become flatter and is delegating more responsibility to subsidiaries. In addition, IKEA is committed to social policies to both employees and customers. IWAY pro deals include hea lth and safety standards, employee conditions such as access to rest areas and toilets, working hours and a minimum wage. IWAY is enforced worldwide but the criterion varies according to local culture and employment legislation. This is an additional benefit for the Brazilian workforce, where there has been some disparity in working conditions for minorities and women.IKEA has developed a mentoring program for learning and personal development of both the mentee and mentor with the expectation that by helping people to be partners they will become better employees. The phylogeny for the program is for IKEAs mentees to become IKEAs incoming mentors and companions for Growth to become self-sustaining and unlined with the culture.IKEAs program is innovative, not only because it is grounded in the values of IKEAs culture, but also because it focuses on personal learning and development. It will help to secure its future as they expand, by creating a diverse group of leaders. Partner s for Growth is now entering its second phase and is creating a culture where mentoring is available to all managers at IKEA. IKEA has launched Partners for Growth throughout the organization. Partners for Growth facilitates individual learning, promotes personal and master growth and development, and has four strategic goalsDevelop Leaders from top to bottom(a)Support career development across the boardDevelop and support diversity through IKEA organizationStrengthen IKEA cultureReferencesWelcome to the modishness State, Queensland Australia http//www.sd.qld.gov.auWelcome to the Brazilian-American Chamber of Commerce http//www.brazilchamber.orgForeign Investments in Brazil http//www.cni.org.br/produtos/com_ext/src/doing05.pdfIsreal Investment News, Third Quarter 2001 http//www.moit.gov.il/root/Hidden/ipc/InvestNews17.htmThe diamondback Online, June 26, 2003 http//www.inform.umd.edu/News/Diamondback/archives/2003/06/26/news6.htmlHuman Environment and Design, International Retaili ng http//www.hed.msu.edu/internationalretailing/company/IKEA/Improving Supply Chain Management in the UK Furniture Industry, shift Study Ikea Trading Area Poland http//www.pyetait.com/furniture-supplychain/docs/Case-Study-IKEA.docIkeas our vision http//www.ikea.com/content/about/vision/Burt, Tim (1998). Ikea rated among Swedens top three businesses, Financial Times (London), Front Page- Companies Markets, pp. 23.The miracle of Amulet, Guardian unconditioned http//www.guardian.co.uk/g2/story/0,3604,1240462,00.htmlBrazil and Its History http//mdmd.essortment.com/brazilhistory_rmfq.htmFurniture Today, Brazil showing near(a) growth, March 22, 2004 http//www.furnituretoday.com/article/CA419023.html?display=Special+Report Mentoring Relationships Using Partner Preparation tools. Mentor, Vol. 6, No 4.