Economics and International Business Law

Prof. Roger Middleton

Presented BYPatricia Odette HERRERIAS

Celine SANTOS SILVAAna Rosalyn NORIEGASunil Dath BUDATI

Saran DIANEAsha GOPAL

Xiao LI

Commercial Strategic Planning for IKEA in Brazil

Introduction

•IKEA, found by Ingvar Kampard in 1943 in Sweden•World’s largest furniture retailer•IKEA owns and operates 351 stores in 43 countries•The world's five largest IKEA stores are:•Stockholm Kungens Kurva, Sweden: 55,200 m2 (594,000 sq ft)•Shanghai Baoshan, China: 55,032 m2 (592,360 sq ft)•Shanghai Pudong Beicai, China: 49,400 m2 (532,000 sq ft)•Wuxi, China: 49,117 m2 (528,690 sq ft)•Ningbo, China: 47,505 m2 (511,340 sq ft)

Objective

As a large European company, we would like to demonstrate that we could expand our market share in emerging economies like Brazil, India, Indonesia, to name a few.

Through out our presentation, we will show you how Brazil is a good example of an emerging market.

Contents

•Effects of current European and Global Economic situation – With furniture industry perspective

•Economic situation analysis for Brazil•Human Capital and Economic freedoms in Brazil

•Strategic Planning, economic advantages and disadvantages

•Actions the enterprise intends to take•Benefits of the strategy

Current European Economic Condition •European economic recovery began in 2013•Recovery spreading across countries and more stable

•A slow and fragile recovery came to a halt in the 2nd quarter of 2014

•GDP stagnated•Spanish, Dutch and Portuguese GDP grew by 0.2%, 0.5% and 0.6% respectively

•Growth held back by Germany, Italy and France – GDP saw decline

•Britain with its own currency is faring better than before

Europe and Furniture Industry

•Furniture is a huge business•Between 1995 – 2000, the industry grew by 36% globally•Industry divided into different product groups•Four wood product groups, namely office furniture, kitchen furniture, bedroom furniture, and dining/living and shop furniture as well as metal and plastic furniture and furniture parts•Represents between 2 and 4% of the production value of the overall manufacturing sector•Provides 1.5 million jobs in close to 150.000 enterprises, mainly micro and small sized

How is economic conditions affecting furniture business?•Uncertainty in market conditions scares people•Keeps them away from shopping•Furniture – basic need hence demand for cheaper yet quality products which lasts long

•Flea market trends a huge threat•The furniture business is evolving into niche specialties, such as eco-friendly, curated, and higher end pieces, as companies look to sell products with more attractive margins

•The impulse purchase pricing is not as strong as it used to be 

Economic Conditions in Europe and its effects on the Furniture industry

•People can’t afford bigger apartments •Fall in real estate and hence in the furniture industry too

•Consumers in their 30’s are the most important buyers of domestic furniture. As Europe’s population is ageing, this has had a negative effect on sales

•Trend towards ‘Multi-purpose cost-reducing’ furniture

IKEA and Europe

•IKEA, known for ready-to-assemble products•Present in 28 countries in Europe alone•Annual revenue of IKEA in 2013 - €28.5 billion•69% from Europe•351 stores in 43 Countries till 2013•Turn around over US$ 29.2 billion

Global Economic Conditions

•According to IMF, global economic condition is weaker than expected

•Modest pick up expected for 2015•But emerging economies like India and Indonesia are doing well

•Industrial Activities in South America suggests a pick up in regional growth

Global Economic Conditions

•Gross capital flows to the region of South America have increased, especially into domestic bond markets

•Growth in the middle east converging – Non oil growth decreased from 4.8% to 4.6%

•Economic conditions rely totally on oil price

Global Economy and Furniture Industry

•Factors like economic growth, deregulation, more disposable income and rising housing market have created many opportunities for growth in the industry in developing economies

•The home furnishings retail sector includes furniture, floor coverings and household textiles

•Furniture sales dominates the global home furnishing - 63.9% of the sector's value

Furniture Industry Globally

•The US is the largest market and importer of retail furniture •Represents approx 25% of global furniture consumption

•Furniture demand amounts to US$ 4.6 Billion in Middle East

•Declining property prices, rising unemployment - consumer spending declined

•Demand for furniture has declined significantly over the previous 2 years globally

SWOT Analysis of Economic Situation of Brazil

•1990's : privatization of the economy

•2000’s : Lula and the Plano Familia

•Today, it is the world's 6th largest economy

STRENGHTS • YYYYY YYYYYYYYYY• YYYYYY YY YYY YYYYYY YYYYY• YYYYYYYY YY YYYYYYYYY YYYYYY• YYYYYY YY YYY YYY YYYYYY• Decline of inflation rate• : 10São Paulo YY YYYYYYY YYYY YY YYY YYYYY

WEAKNESSES • YYYYY• Inequality• YYYY YY YYYYYYY YYYYY• YYYY YYYYYYYYYY YYY YYYYY YYYYY• YYYY YYYYYYYYYYYYYY

OPPORTUNITIES • Resources availability• YYYYYYYYYYY YYYYYYYYY YYYYYYYY• YYY YYYYYY YYYYYYYYYYY 

THREATS • YYYY YYYYYYYY YYYYY• YYYYYYYYYY YYY YYYY YYYYYY YYYYYYYY• YYYYYYYYYY YYYYY YYYY YYYYYYYYY• Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y• YYYYYYYYYYYY YYYYYYYYY YYY YYYYYYYYYY• YYYYYY YY YYYYYYY YYYY• YYYYYY YYYYYYY • YYYYYYYYYYY

 

Economic Situation Human Capital

What does it mean?

Human Capital

EDUCATION

PROPER ENVIRONMENT

WORKFORCE & EMPLOYMENT

HEALTH & WELLNESS

BRAZIL – Education PillarHC has become a constant limitation of economic growth in Brazil.

Basically it has

held back due to weak

performance in

education.

Last WEF’s report about HC index, Brazil position

is 57/122 ranking.

In 1960, average of schooling completed was only 1.8% *However, this has improved fast. In 2010: 7.2 Schooking

year * Source : OECD

BRAZIL - GDP

Spending has grown

rapidly in the past decade

Brazil’s GDP: 2000 = 3.5% 2010 = 6%

Due to this increase, the education level of population is likely to continue grow

* Source : OECD

BRAZIL – HC Past, Present & Future

•Brazil’s past track-record of improving the quality of its labor suggest that country should be able to further improve the quality of human capital

•Improving the skills of secondary students is likely to have a strong impact on productivity

•Reducing high level of inefficiency and the difference in quality between private education and public education

Human Capital As An Asset of A Country

•“The key for the future of any country and any institution lies in the skills and talent of its people,” said Klaus Schwab, Founder and Executive and Chairman of the World Economic Forum

•“In the future, human capital will be the most important kind of capital. Investing in people is not just a nice to have; it is imperative for growth, prosperity and progress”

BRAZIL - Economic Freedom

BRAZIL – ECONOMIC FREEDOM INDEX

Actions To Take

•Corruption- lobbying as soon as possible•Currency rate fluctuations- hedging the exchange rate by using fixed currency swaps

•High production costs- reduction of transportation and logistics costs

•Global warming- it’s a C.S.R company, aforestion programs

Actions To Take

•Bargaining power from suppliers •Reasons being: * Raw materials make large portion of product costs, is crucial for production process. * When it becomes costly to switch suppliers•Actions- making good substitute products •Dealing with many suppliers at a time and maintaining good relationships

Strategic Plans for IKEA

•Potential ground work with local suppliers and government officials should begin

•Being aware of buyer behavior- launching the schemes for purchasing

•Displacement of existing furniture is difficult – exchange offers to boost up the sales

•Including the special catalogs for the young people

•Working along with the governments for the housing plans

Strategic Plans for IKEA

•Large and simple retail stores in suburban areas

•Making partnership and working closely with architects, hospitals, hotels, schools and construction companies

•Better forecast to maintain the stock and reducing the burden for the suppliers

•Merging with main rival’s Lee and Carter’s - will reduce the competition with potential Brazilian furniture companies

Expected Benefits of Our Strategy

•Reach and exceed sales expectations

•Being the leader in the market of furniture for the middle class, who has reached 40 millions of people during the last 10 years

•Starting point to expand to nearest countries in South America

Recommendations

•IKEA needs to be aware of Risks that cannot be edge such as the political and safety situation

•IKEA should be aware of the household debt level and decreasing of purchase power, high inflation, and tight monetary policy due to the upcoming election

Economic Outlook for Brazil

Recommendations Cont..

•Increasing effectiveness of the employees by analyzing their behavior in comparison to Sweden habits

To Sum Up

•The expansion of Ikea to Brazil seems to be an efficient business strategic move•However regarding the decreased of the country economy, this investment should be seen as a long term investment •IKEA should not expect to reach its potential sales during the first years

Any Questions?