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Jun 17, 2022
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The Russian business of Ikea will be snapped up piece by piece

The hope that the Swedish company will keep its business in Russia has practically died. IKEA announced the sale of its four furniture factories, but left the retail business in doubt. However, experts are confident that after the sale of warehouse balances, the Swedish company will finally leave Russia. What is the future of Russian factories and IKEA retail stores?

The Swedish IKEA, which has suspended the work of its stores and Russian factories since the beginning of March, told what it was going to do next. First, the company decided to sell all four Russian factories in the Leningrad, Kirov, Moscow and Novgorod regions.

Secondly, sales in stores and online remain “on pause”. What exactly will happen to the retail business of the Swedes is not completely clear. But based on the company’s reports, it cannot be ruled out that the retail business may eventually be closed, just later. “Over the past few months, the situation with business processes and supply chains around the world has deteriorated greatly. In view of this, we do not see the possibility of resuming sales in the foreseeable future, ”the message says.

The complete withdrawal from retail is also hinted at by the fact that IKEA promises to hold a sale of its goods that remain in warehouses. First of all, employees of the company will be able to buy goods, and then the rest of the Russians. About when the sale will start – and in what format, the Swedes will inform later.

The paused retail business will require optimization, which will affect many employees, the company noted. To put it simply, we are talking about the dismissal – so far of a part – of employees. In Russia, IKEA has 14 stores in Mega shopping centers (the shopping centers themselves continue to operate), several IKEA City stores and design studios.

In addition, IKEA will reduce the number of employees in its own production. The First Furniture Factory has already announced its readiness to hire employees of these factories. The Ministry of Industry and Trade reported that all employees dismissed from the Swedish company will receive a seven-month salary.

What fate awaits IKEA furniture factories in Russia? Those wishing to purchase these plants already exist. Two companies have officially announced their interest in the assets. Firstly, it is a competitor – furniture retail chain Hoff. So far, this company has not received an offer from Ikea to acquire its assets, but it is ready to consider such an opportunity. However, they show interest not in factories, but in retail outlets of the company.

“It is important to understand that we had many points of intersection with IKEA: the regions of presence and even the same shopping centers, so Hoff is ready to consider the assets of the Swedish retailer in the event of an appropriate offer – this is part of our development strategy and the opening of new points,” – Hoff CEO Maxim Grishakov said, TASS reports. The company intends to increase its market share, and this can be done quickly just by buying outlets of an outgoing competitor. Hoff has already been able to boost sales thanks to the closure of the Swedish competitor’s stores.

The purchase of Ikea furniture factories in Russia turned out to be of interest to a non-core holding – AFK Sistema. This was announced to Vedomosti by the main owner of the corporation, Vladimir Yevtushenkov. According to him, Sistema is not yet negotiating with IKEA, but the deal could provide synergy with the timber holding Segezha Group, which is part of the AFK asset portfolio.

“The approximate cost of IKEA factories in Russia can be from 10 to 15 billion rubles. Most likely, they will be sold at a discount, that is, closer to the lower limit of the specified value range,” Alexander Bakhtin, investment strategist at BCS Mir Investments, evaluates the parameters of the transaction.

Ikea has established an efficient production chain from model development to retail sales. Therefore, the company’s assets are attractive to potential investors. The question is who is more interested in acquiring the assets of the Swedish concern: existing furniture factories or players not related to the industry,” says Anastasia Prikladova, Associate Professor of the Department of International Business and Customs at the Russian University of Economics. Plekhanov.

But experts have no doubts that there will be buyers for this furniture business. “Ikea had quite a lot of goods produced in our country among the goods sold. This is not typical for many international companies, where all goods were imported, and in Russia there was just distribution. In addition, IKEA is still not as exclusive and high-tech products as some automakers or electronics manufacturers. It is possible to establish, if not copying, then the production of similar types of goods that will replace the missing ones, ”says Vladimir Klimanov, director of the Center for Regional Policy of the Institute for Applied Economic Research of the RANEPA.

However, the new owner of the factories will face certain problems. The key difficulty is the need for additional investment to rebuild production lines, because it will be impossible to produce goods identical to IKEA branded products: it is necessary to change the design and other characteristics of products, says Bakhtin.

“In addition, in order to remain competitive, the new owner of production will have to maintain a high bar in terms of design, product quality and organization of business processes, and this will be very difficult,” the source said.

As for the retail business, its future at IKEA, apparently, has not been determined by itself. But the company’s messages about the future are rather pessimistic.

“Probably, after the sale of stock balances, the company will completely withdraw from the Russian segment of its business. In theory, it is possible to repeat the idea with McDonald’s, but so far we do not see the company’s desire to sell its retail business, they probably plan to simply leave the Russian Federation, selling only production factories, ”says Freedom Finance analysts.

If IKEA still announces the sale of its stores, then the retail furniture chain Hoff may become a potential buyer. Its business is different from IKEA’s more centralized business processes. Hoff cooperates with a whole series of disparate manufacturers of furniture and home goods and is engaged only in retail sales.

“As for the retail business of IKEA, I would not be surprised if some domestic or Chinese investors appear who redesign stores to suit their needs or want to enter this particular niche in the Russian market. But branding plays a key role here. In addition to the fact that IKEA is a combination of simplicity, convenience and relatively low prices due to mass production, it is a strong brand. A similar Russian product without appropriate branding may not be in demand,” says Vladimir Klimanov from RANEPA.

In theory, the new owner of the IKEA factories could sign supply contracts with the new owner of the IKEA retail stores. And products similar to “IKEA”, but modified, will be sold in the same stores (and possibly not only).

Then the IKEA sign in stores will be removed. In its place, the Hoff brand or a completely new brand could potentially appear in its place, if retail stores still go to a non-core buyer. Anastasia Prikladova believes that in any case a new brand will be created, regardless of whether an existing furniture company will be an investor. “At the same time, the values ​​and philosophy of IKEA are likely to be preserved, which will contribute to repeating the success of the Swedish company,” she is optimistic. The expert points out that the situation with McDonald’s is, in fact, very different. After all, here the new owner was a franchisee who had experience in managing and developing this network, that is, the business simply scaled up. Who will be the new owner of various IKEA assets is not yet clear.

It remains to be seen whether the new owners of IKEA assets will be able to copy and preserve what the company has become fond of both ordinary customers and professionals – designers and architects. “IKEA’s popularity is due to perhaps the best price-quality ratio on the market, a wide range covering various types of products and price segments. It can be said that IKEA uses the all-inclusive system, which greatly simplifies the process of arranging the space,” notes Anastasia Prikladova. “The company won the competition thanks to low competitive prices for products, as well as a designer approach to its implementation,” Freedom Finance notes.

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