There's nothing flat about Ikea's growth in China

While the economy is losing steam and consumer confidence is ebbing, Ikea still expects double-digit growth next year

IT’S ALWAYS an illuminating experience, walking through the crowded aisles of Swedish home furnishing giant Ikea in Beijing, and seeing how Chinese people have embraced the lifestyle option of flat-pack furniture.

On a midweek visit recently, at least 10 people were fast asleep in the beds in the display, but this soporific scene should not suggest that sales were sluggish. On the contrary, the aisles were packed, the canteen was full of punters lining up for meatballs and their Chinese chicken dishes, and the children’s furniture section was overrun by yelling tots brandishing hammers and soft toys.

All of this frantic economic activity came as the headline HSBC/Markit flash purchasing managers’ index suggested that hopes for economic recovery in China had once more been thwarted. The August PMI fell from July’s final reading of 49.3 to 47.8, dragging the index back to the bottom of the band between 47 and 50 in which it has been stuck since late last year.

Growing evidence that China has a battle on its hands to keep the economy on track has led some economists to push back their expectations for second-half growth, and to call into question the government’s full-year target of 7.5 per cent.

There were words of warning last week about the economic outlook in the People’s Daily, the Communist Party’s main mouthpiece.

“For some uncertain factors that might bring new shocks to the economy, we should be prepared in the short term – but keep making long-term plans,” said an editorial.

Even without the flash PMI, Ikea China is aware of the challenges it faces in the coming year, and it is following the advice of the People’s Daily by focusing on the long term.

While the economy is losing steam and consumer confidence is ebbing, Ikea still expects double-digit growth next year, and this will be driven by its plans to open new stores.

Ikea is aiming to open at least three shops every year in China, which it expects to be its biggest market within two decades. The company has been in China for 14 years and has 11 shops in Shanghai, Beijing, Guangzhou, Chengdu, Shenzhen, Nanjing, Dalian, Shenyang, Tianjin and Wuxi. The next stage will focus on the second-tier cities.

The Beijing outlet, complete with sleeping shoppers, ranked near the top of Ikea’s 337 shops around the world. And Ikea China visitor numbers rose 21 per cent to more than 45 million in fiscal 2012, the highest in the world.

“This indicates that we need to build more stores in China to fuel our future business,” Colin Renwick, Ikea China’s deputy retail manager, told the China Daily.

“We are impressed by the enthusiasm of Chinese customers through the 40 per cent year-on-year surge in our Ikea Family membership to more than seven million, as well as by the fans of our Ikea Weibo (Chinese version of Twitter) more than doubling to 350,000 over last year,” said Renwick.

It’s only a couple of years ago that shopping at Ikea was a luxury experience, with the prices higher than in other regional centres.

The company has cut the prices of most of its products in China by more than 50 per cent since it first entered the market, said Renwick, and will continue to do so. It’s become a much cheaper option for Chinese consumers, although the crowds are still very much middle-class Chinese.

The markets remember fondly how China rescued its economy from a prolonged global recession in 2008-09 by rolling out a four trillion yuan (€500 billion) investment stimulus, and talk is again in the markets that Beijing is planning a government spending scheme to lift the economy, which is mired in its worst downturn in three years and forecast to see growth ease to a 13-year low of eight per cent this year. However, analysts believe any spend will be steadier and not as large.

“We remain confident that the steady increase in local government investment, supported by the central government and financed with bank credit, will help stabilise overall FAI [fixed asset investment] and support GDP growth in the coming months,” said UBS economist Wang Tao.

“We just don’t think there are big stimulus plans, and do not expect the recovery to be quick or strong.”