China Consumer

Ignoring the instructions

Home improvement giants ponder next move

Ignoring the instructions

Looking for a hat stand and a make-up mirror

The experience of assembling the average piece of flat pack furniture from your local home improvement chain usually promises to be a lengthy and frustrating one.

The international home improvement firms themselves are reporting something similar, as they try to broaden their operations in China.

Kingfisher, Europe’s biggest home improvement retailer, provides the best recent example. A decade ago it opened its first B&Q store in China, banking on the country’s growing level of home ownership. But it is now cutting its shop space by 40% over the coming two years as it overhauls its loss making operation. Last year, B&Q’s China business incurred over £52 million ($85.8 million) in losses, a huge jump from a £17 million deficit a year earlier.

And don’t expect this year to be much better: analysts have pencilled in a £40 million loss for the current year. The chain is now revamping remaining sites and reducing its workforce in an effort to return the business to profitability in 2011. Ignatius Tong, who heads the consumer goods and retail competence centre at strategy consultants Roland Berger in Shanghai, says foreign home improvement brands are finding it difficult to establish themselves in the mainland market. Why? Because the Chinese have difficulty grasping the concept of “do-it-yourself”.

“Part of the problem is that the B&Q model and the US Home Depot model, that of the branded chain, has not been translated properly in the Chinese market,” Tong told the China Daily. “It is very rare that a Chinese consumer will do it him or herself. You would use a contractor.”

IKEA, the Swedish furniture giant, also admitted times were difficult for the Chinese home improvement market.

“We see the customer is more cautious about spending money. We have more visitors to our stores but less spending on average,” says Linda Xu, public relations manager for the privately-held company. Despite entering the Chinese market over a decade ago, IKEA still only has seven stores in the country. It has plans to open two more stores, one in Shenyang and another in Shanghai, over the next two years.

To grow further, the Swedish retailer recently created a new subsidiary to manage commercial real estate investment and development on the mainland. An employee revealed to the China Chain Store Franchise Association (CCFA): “Besides new stores, IKEA hopes to develop new business models in China. The company wants to buy land in China so as to develop comprehensive shopping centres and IKEA shopping malls operated by IKEA itself.”

This, of course, is nothing new. IKEA already owns and manages 11 MEGA shopping malls in Russia. With IKEA furniture as the anchor tenant, each of the MEGA malls includes a hypermarket and a DIY store along with over a hundred other retailers.

Industry observers believe that IKEA will try to replicate a similar model in China. Last year, the company bought a 160,000 square-metre land parcel in Wuxi, a coastal city in the Jiangsu Province.

IKEA will also no doubt be keeping an eye on certain of its local rivals – some of which have been expanding aggressively and whose product ranges are cheaper and don’t involve self-assembly. For example, Shanghai-based Red Star Furniture Group, which received $200 million from private equity firm Warburg Pincus, is looking to have an initial public offering next year. Red Star now has 50 stores around the nation and is planning to open an additional 15 to 20 outlets this year.

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.