IKEA Expansion into Brazil

Published: 2021-07-10 07:45:05
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Category: Latin America

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IKEA is a multinational, Swedish-founded retailer that sells easy and ready to assemble furniture, home decorations and kitchen appliances. Since 2008, it has been known as the world’s largest furniture retailer. It is headquartered in Leiden, Netherlands and has more than 400 locations worldwide including Australia, Belgium, Canada, China, Italy, Japan, the United States, and more. According to the Brazilian Association of Furniture Manufacturers, the Brazilian market for furniture is valued at a little more than US$10 billion in 2007. The market is primarily broken down into residential, office and institutional categories by size, respectively. The greatest potential for growth is estimated to be in the office segment including hospitals and office buildings which require comfortable and high-end furniture. It appears that IKEA has low barriers to entry in a market that is dominated by small, family-owned businesses, making for potential success for expanding into Brazil.
Prior to plans for expansion, it is necessary to understand the political, social and technological context of any country for expansion (Armstrong et al., 2015). The country of Brazil has the second largest economy behind the United States and the ninth largest worldwide (Stone et al., 1992). Currently, Brazil is experiencing a recession in which its GDP has contracted by nearly 4 percent since 2016 and is slow on the rebound. In terms of its political environment, its current president is Michel Temer, who came into office following the impeachment of former president Dilma Rousseff.
Hoping to stabilize the economy and curb social security spending, Temer is creating initiatives with Congress to increase foreign relationships and investments as well as market flexibility. Although still marked by political uncertainty, Brazil has taken steps to welcome and encourage the presence of multinational business, just like IKEA. The United States has been a continual exporter to Brazil, making for an excellent trading relationship. Brazil is a federal republic as it is run by one who is also the Head of State and the Head of Government. Each of its 26 states has its own elected governor and legislature, which is under the National Congress. Businessmen control a majority of the seats in Congress, which has brought it great criticism from citizens. It has a multiparty system which allows for the formation of various factions as free associations of people. IKEA stands to benefit from the healthy relationship between the United States and Brazil, which consists of a long history of exchanging innovation and science and technology. Its two-way trade totaled $88.2 billion in 2016 and its exchanges, despite recessions for both economies, has remained strong. However, IKEA is a Swedish-founded company that has great presence in the United States. Leveraging its operations and success within the United States will likely serve it more in the Brazilian market than its Swedish and Dutch roots. Success in business culture relies on strong personal relationships and for businesses like IKEA, it is best to work through a representative or distributor with some ties to Brazil and the market to develop new business. Thankfully, the U.S. Commercial Service already encourages companies that visit Brazil to meet with one-on-one partners for potential business.
IKEA’s strengths are that it offers products at affordable and low prices, which do not detract from the exemplary and well-known simple design of its products. It is a global brand that has strengths and success within other markets overseas, especially that of its home countries Sweden and the Netherlands. Its products are ‘one design fits all’ and have served in a multitude of places including that of offices, homes and other locations. IKEA has a competitive advantage in terms of price, design and size compared to other retailers within the Brazilian furniture market. However, low prices for furniture are not always preferable and there is a reasonable association that low-price also means low quality. In addition, despite the trade relationship between the U.S. and Brazil, high transportation costs of exports and getting into Brazil can create financial complications, especially because of the necessary currency exchange that plays a role in price setting. IKEA’s products have also been regarded as difficult to assemble, despite its seamless and simple design. Brazil’s market is, however, emerging and IKEA can play to the actions of Temer to put the economy on the rebound to aid in its financial security goals. While economic growth is slow, good investment in a profitable business can put it on the right track. Finally, its threats include other global furnishing retailers and the possible reluctance of Brazil, a country rooted in deep personal relationships, to welcome a large outsider into a market driven by small businesses. It can represent fears of globalization and since the economy is in a recession, it can put other retailers out of business (Schmidheiny, 1992).

References
Armstrong, G., Kotler, P., Harker, M., & Brennan, R. (2015). Marketing: an introduction. Pearson Education.
Schmidheiny, S. (1992). Changing course: A global business perspective on development and the environment (Vol. 1). MIT press.
Stone, A., Levy, B., & Paredes, R. (1992). Public institutions and private transactions: The legal and regulatory environment for business transactions in Brazil and Chile (Vol. 891). World Bank Publications.

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