Moving online

A popular place to hang out

Zhang Meng, a college student in Shanghai, used to spend her weekends walking around the IKEA store in Shanghai’s Yangpu district with her friends, she told JRJ.com, a financial news site. Sometimes the design major liked to roam the store for creative inspiration. But most of the time, she admitted, she didn’t spend any money there.

“I just like to stroll around,” Zhang explained.

She will soon have to find a new place to hang out. That’s because last week the Swedish furniture maker announced that the Yangpu outlet will be closing in early July. The news came as a surprise as it opened just two years and three months ago.

“The store has been bleeding cash since the first day it opened,” one insider told Winshang, a real estate news site.

Nearby residents say that the IKEA shop in Yangpu, which is part of the Pudong New Area (where the Shanghai’s largest airport and its international Expo site are located), was doomed from the outset.

Not only was it opened just before the Covid-19 outbreak, the shopping mall-housed venue is also far smaller than IKEA’s typical warehouse-scale outlets in China. Its flagship store in Shanghai’s Puxi, for instance, offers a much wider selection of merchandise.

Most of the shoppers at Yangpu are college students like Zhang due to its proximity to neighbouring universities. They are younger consumers, who in many cases have more limited spending power.

“Most of the consumers entering the IKEA Yangpu store aren’t the purpose-driven buying types but random purchasers of stuff like dried flowers and cheap candles that cost no more than Rmb10. It is difficult to generate the amount of revenue of a normal IKEA store.

On the other hand, IKEA is paying much higher rent given the location and square footage of the store. Sales per square foot are just too low,” a property analyst told TMT Post.

The news about the Yangpu closure soon became one of the highest trending topics on Sina Weibo. That said, a look at some of the comments might explain why the store has not been performing to expectations.

“IKEA has a store in Yangpu?” one asked, for instance.

“I have never heard of IKEA opening a store in Yangpu and I live there,” another wrote.

The furniture giant explained that the closure didn’t suggest that it was retreating from China, a market it entered in 1998.

“IKEA China is constantly reviewing, evaluating and optimising our retail strategy… This [the Yangpu store closing] is a very normal and common business practice in the retail industry,” a company representative told Time Weekly.

Still, the shop’s shuttering is worrying as it comes soon after a separate announcement back in April that IKEA was mothballing another outlet in Guiyang in Guizhou province. Observers reckon that closing two of its stores within the span of three months suggests that not all is well with the world’s largest furniture retailer’s China business.

But as IKEA was quick to point out, the moves also suggest that its online strategy has paid off. The company now operates a virtual storefront on Alibaba’s Tmall platform, covering as many as 300 cities around the country, it also sells online from its own website and WeChat mini-programme. According to TMT Post, IKEA China’s online sales rose 74% in 2021 compared to a year earlier.

The Swedish behemoth’s confidence in e-commerce may not be sustainable, some argue. Competition online is also extremely cutthroat. For instance, furniture start-up Wo Zai Jia has attracted a lot of middle-class consumers by offering European-style home decor at factory prices. “China’s e-commerce is developing too fast, and the international home furnishing giants like IKEA cannot make a quick and strategic response like domestic companies,” claims Time Weekly.

IKEA’s cost advantage has also been slowly eroding. Even though the company had resisted raising what it charges its customers in China – while prices in the rest of the world went up by an average of 9% – in late May it succumbed to the inflationary pressure and quietly passed some of the increase in costs to local consumers.

Shoppers have been irked by the rising prices. “When it first opened in China I really liked IKEA. The products felt exquisite and stylish. But now I feel like the quality has come down drastically. The shopping experience is also terrible. The only thing I would buy again is the Swedish meat balls,” one wrote on weibo.

© 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.