Ikea in saudi arabia case

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Professor Karthik Ramanna, Research Associate Jérôme Lenhardt (Europe Research Center), and Senior Associate Marc Homsy prepared this case. This case was developed from published sources. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2016 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

K A R T H I K R A M A N N A

J É R Ô M E L E N H A R D T

M A R C H O M S Y

IKEA in Saudi Arabia (A)

On October 1, 2012, the Swedish newspaper Metro revealed on its front page that Inter IKEA Systems B.V. (hereafter Inter IKEA Systems) – one of Sweden’s most iconic companies and the world’s largest furniture retailer – had erased all images of women from its fall 2012 catalog for Saudi Arabia.1 The Metro article compared pages depicting women models from Inter IKEA System’s Swedish catalog to the equivalent pages in its Saudi catalog from which the women had been removed (see Exhibit 1a for a picture of the Metro front page and Exhibit 1b for further pictures of the differences between the Swedish and Saudi catalogs). The newspaper article immediately sparked additional media attention and criticism directed against the IKEA brand. In Sweden, government officials raised questions about how Inter IKEA Systems was living up to its own values and commitments to human rights and gender equality. Worldwide, news outlets and social media platforms like Twitter were abuzz, with some critics accusing Inter IKEA Systems of betraying the company’s Scandinavian values and yielding instead to pressure from the conservative Islamic state.2 (Saudi law and culture was generally considered very strict towards women, barring them, for instance, from driving and requiring them to have the consent of a male “guardian” to travel abroad or work.3)

Faced with the growing backlash, the company considered its potential responses. It could reissue its catalog with women included, but this approach risked running afoul of Saudi censors who could impose harsh penalties against organizations considered violating local laws.4 Three IKEA stores had been opened since 1983 in Saudi Arabia, through a local franchisee, Ghassan Alsulaiman Furniture Co.5 It was wary of putting this operation in jeopardy. Alternatively, Inter IKEA Systems could do nothing at all, hoping for the crisis to blow over. But the company was known internationally for its commitment to social and economic development and to human rights. It was even a signatory to a United Nations compact to this effect.6 So much of its brand identity was tied into its progressive social image, as marketing journalist Rob Gray explained, “This is the same company that in the 1990s ran one of the first TV commercials in the U.S. to feature a gay couple – and received bomb threats in response. Obliterating women in an act of censorship certainly didn’t look good to many IKEA customers in markets around the world more used to a liberal, inclusive stance from the brand.”7 Moreover, some consumers in its key home markets in Northern Europe and in the U.S. were even threatening a boycott.8

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This document is authorized for use only by Irene Suarez in 2020Sp: Global Strategic Management taught by TSUHSIANG HSU, Niagara University from Jan 2020 to May 2020.

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IKEA

The IKEA brand’s origins dated to 1943, when, at the age of 17, Ingvar Kamprad started his own company in Sweden selling fish, vegetable seeds, and magazines by bicycle. He called the company IKEA, which combined his initials with those of his family farm, Elmtaryd, and parish, Agunnaryd, located in southern Sweden. Four years later he started a mail-order catalog.9 In 1948, Kamprad added furniture and house wares to his mail-order products, and in 1951, opened a display store in nearby village of Älmhult to allow customers to preview products before buying. The first IKEA store outside Sweden opened in 1963 in Norway. Two years later the company opened its flagship store in Stockholm. In 1974, IKEA opened its first store in Germany. By the late 1970s, the company had expanded to Asia and Canada. IKEA opened its first store in the U.S. in 1985 and in Great Britain in 1987.10 In 1983, IKEA decided to create Inter IKEA Systems, the franchisor of the IKEA brand and concept, which licensed its intellectual capital to several different franchisees, and in return received an annual fee of 3% of their sales.11 The company maintained that franchising was established to secure longevity and independence for the IKEA brand and concept and to expand the business and maintain an entrepreneurial spirit. Some alleged that this somewhat obfuscating corporate structure was effected to lower the company’s tax obligations.12 By 2012, Inter IKEA Systems was the leading furniture retailer, manufacturer, and franchisor in the world – with a 5% global market share – and the only one with a global footprint. U.S.-based Ashley Furniture Industries Inc., its nearest competitor, had a 1.2% market share and was present only in the U.S. and Canada.13

Company Values

From the start, Kamprad sought “to create a better everyday life for the many people” by selling affordable, quality furniture to mass-market consumers around the world.14 He believed his company would succeed if it operated according to a particular set of values, “The true IKEA spirit is still built on our enthusiasm, from our constant striving for renewal, from our cost consciousness, from our readiness to take responsibility and help, from our humbleness in approaching our task and on the simplicity of our way of doing things.”15

In 2000, IKEA Group, the largest franchisee of Inter IKEA Systems, developed its code of conduct— the IKEA Way on Purchasing Products, Materials and Services (IWAY)— to specify minimum acceptable standards for working conditions and environmental standards at its manufacturing suppliers.16 In 2004 IKEA Group became a participant in the United Nations (UN) Global Compact, an initiative for companies to follow standards and best practices globally, by taking the responsibility of universally upholding human right standards (see Exhibit 2a for the Compact principles and their location in IKEA Group’s 2012 Sustainability report). IKEA Group also signed the UN Guiding Principles on Business and Human Rights launched in 2011 (see Exhibit 2b for a selection of the general and founding principles) and the Children’s Rights and Business Principles launched by UNICEF, Save the Children, and the UN Global Compact in 2012.17

The same year, IKEA Group outlined the company values in its “People and Planet Positive” strategy, which focused on three areas: (1) a more sustainable life at home for consumers; (2) resource and energy independence for the company; and (3) a better life for people and the communities touched by IKEA Group, by producing a positive effect on people’s daily lives, through supporting and respecting human rights where the company had influence through its business.18 In addition, the owner of IKEA Group, the Stitching INGKA Foundation, funded the IKEA Foundation, a charity registered in the Netherlands, which donated money to organizations focused on protecting children from child labor and empowering girls and women.19 In February 2012, the IKEA Foundation donated

For the exclusive use of I. Suarez, 2020.

This document is authorized for use only by Irene Suarez in 2020Sp: Global Strategic Management taught by TSUHSIANG HSU, Niagara University from Jan 2020 to May 2020.

IKEA in Saudi Arabia (A) 116-015

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EUR 700,000 to the Half the Sky movement, a global group of NGOs using stories, videos, and social media to support women rights in developing countries.20

Operations and Financial Results

By 2012, Inter IKEA Systems franchised 338 IKEA stores in 40 countries, the large majority of them (298 in 26 countries) to IKEA Group and the rest to eleven local franchisees worldwide.21 Between September 2011 and August 2012, eleven new IKEA stores had opened and seven IKEA stores had been relocated worldwide (see Exhibit 3a for the number and location of IKEA stores by August 2012 and Exhibit 3b for the breakdown of sales per region by August 2012). IKEA Group also operated and managed several company-owned furniture factories and was responsible for all new product design and development and for supply chain management.

The IKEA Group employed 139,000 workers and recorded 690 million store visits in the year 2012. From September 2011 to August 2012, it recorded sales of EUR 27.6 billion (up 9.5% from 2010-2011), representing 94% of all IKEA franchisees’ retail sales,22 and profits of EUR 3.2 billion (up 8% from 2010- 2011). (See Exhibit 4 for key financial data about IKEA Group from September 2010 to August 2012.) IKEA Group’s sales were dominated by Europe (70%), followed by North America (16%), Asia and Australia (8%), and Russia (6%). Germany was IKEA Group’s main market, with 14% of sales, 23 while Sweden was IKEA Group’s sixth largest market, with 5% of global sales.24

By August 2012, the IKEA brand offered a range of 9,500 home furnishing solutions and products, showcased in their IKEA catalog. The company printed 212 million catalogs in 29 languages and 62 editions.25 From year to year, the catalog was updated based on feedback from the previous year. Inter IKEA Systems indicated that the catalog needed to be relevant in all of IKEA’s markets and at the same time reflect what the brand stood for. Inter IKEA Systems had the overall responsibility for the content of the IKEA catalog.26 The company reported that the catalog’s content varied only slightly between markets, mostly due to differences in the local product range and service offerings. Some products differed due to local size, function, comfort and cultural preferences. For instance, the mattress product range featured larger-sized beds in the U.S., whereas in Russia, multi-generational living in small spaces led to a wider range of sofa beds.27

IKEA in Saudi Arabia and in the Middle East

IKEA’s History and Operations in Saudi Arabia and the Region

Of the eleven non-IKEA Group companies that owned and operated IKEA stores worldwide in 2012, four were in the Middle East region: One franchisee was responsible for the United Arab Emirates (UAE) market, one for Kuwait, one for Israel, and one for Saudi Arabia, Ghassan Alsulaiman Furniture Co.28

The first IKEA store in Saudi Arabia opened in 1983 in Jeddah. Saudi Arabia was the first country in the Middle East in which IKEA sold its products.29 IKEA stores then opened in Kuwait (1984), Dubai (1991), and Israel (2001).30 According to observers, IKEA chose its new locations generally based on certain criteria such as population density, market growth potential, and brand awareness.31 However, IKEA’s first store in Saudi Arabia was established in 1983 as a pilot project to test the market, long before the brand had any recognition within the local community.32

In 1990, a second IKEA Saudi store opened in Riyadh. In 2004 IKEA closed down the two existing stores and opened two IKEA “concept stores” in the same cities, each measuring about 28,000 square

For the exclusive use of I. Suarez, 2020.

This document is authorized for use only by Irene Suarez in 2020Sp: Global Strategic Management taught by TSUHSIANG HSU, Niagara University from Jan 2020 to May 2020.

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meters and employing 290 employees. The third IKEA store in Saudi Arabia opened in November 2008 on the east coast of the city of Dhahran (22,000 square meters and 245 employees).33 All three stores featured an array of design and home improvement solutions, all of which helped to cement the company’s position as market leaders, with sales increasing at a double-digit rate for each year between 2007 and 2011.34