News that Ikea is rolling out an online shopping platform in China – its first in the Asia-Pacific region – could be a sign that Western retailers are at last reacting to rising costs and shifts in consumer shopping behaviour. But what has taken them so long?
Despite operating online models successfully in the UK and other parts of Northern Europe, it has taken Ikea seven years to get to a similar point in China. With stores in major cities including Shanghai and Beijing, Ikea has followed a similar strategy to many other Western retailers; investing in bricks and mortar outlets in China’s thriving tier 1 and 2 cities.
However, consumer demand has been growing right across China and while rising costs remain an issue, Western retailers urgently need a strategy to develop this market potential.
Online malls are probably the only, viable way for Western and Chinese retailers to reach consumers right across this vast continent – particularly bearing in mind that China has hundreds of tier 3 and more than 1,000 tier 4 cities. There is also the problem of a lack of internationally-skilled management in these cities, due to a lack of exposure to international businesses.
For Western retailers, there is the added challenge that China is just one part of their large, global network of territories and senior management teams are typically based elsewhere, so may not be aware of how quickly consumer shopping behaviour is changing.
Developing an independent strategy for expanding a business model in China is not easy for Western retailers, however. Tesco and B&Q are among those that decided to withdraw from China just a few years after investing in rolling out stores.
Rising labour costs and increases in commercial rents are putting pressure on margins and while some Chinese retailers have addressed this by pursuing a 24-hour, micro-store strategy, this is difficult for Western retailers to replicate.
Walmart China’s decision to restructure its business and sell its e-commerce grocery site, YHD.com, to the country’s biggest online retailer, JD.com, in July 2016 could be interpreted as a further sign that Western retailers are struggling to keep pace with rapid market changes.
Under Walmart’s ownership, YHD.com’s share of China’s online marketplace slipped from 1st to 6th position, according to official data, requiring significant investment to boost its performance. This is the most likely reason for Walmart’s decision to dispose of the business.
Despite the inherent challenges, there is still an excellent opportunity for Western retailers in China. Ikea’s decision to trial and roll-out an online mall is a bold move and demonstrates that the brand is serious about developing an independent strategy. Depending on its success, others are likely to follow.
Of course, there are a number of considerations for Western retailers planning to launch online malls in China. They would probably need to cooperate with Alibaba or Tencent, both of which have dominant positions and control China’s online payment market.
They would also need to establish local distribution centres in each sub-area, close to the targeted tier 3 and 4 cities. Offering low-cost or free delivery is also important in China as many local retailers already offer this. Therefore, establishing competitive agreements with delivery service providers in China is essential.
The business environment for Western retailers in China is changing very quickly and they must choose to accept dwindling profits or invest in online expansion. Building on the popularity of its stores, Ikea is taking the plunge and launching an online mall to attract consumers that have so far been out of reach. In this case, allowing time to develop a strong brand presence before making their move could be just the right strategy.
Dominic Jephcott is Chief Executive Officer of Vendigital, a firm of supply chain and procurement specialists. He is based in Hong Kong.
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