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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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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

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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

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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

As of 2012, IKEA sales in the Middle East represented about 2% of IKEA’s sales globally (see Exhibit 3b for Inter IKEA sales by region). 35

IKEA’s Strategy in Saudi Arabia and the Region

Inter IKEA Systems had a tradition of abiding by local norms in the Middle East. For instance, IKEA's world-renowned meatballs were Halal in the UAE and Saudi Arabia (see Exhibit 5 for a picture of the meatballs in Sweden and in Saudi Arabia). In accordance with local customs, restaurants in the Saudi IKEA stores were split into two areas separated by a partition: one section for families and women, the other area for single men. Inter IKEA Systems also allocated rooms in its Saudi stores to be mosques, usually used for prayer several times a day. During prayer time, IKEA stores closed their doors for new customers for around 25 minutes, while allowing customers in the store to continue shopping, a practice prevalent among all other retail stores in Saudi Arabia.36 Unlike IKEA stores in several other countries around the world, there was no music in the IKEA stores in Saudi Arabia, in line with local customs.

On most occasions, Inter IKEA Systems kept the same model nomenclature in its Saudi stores as in its other stores globally. For example, it kept the Swedish product names Karlstad and Ektorp, instead of tailoring them to the local Arabic language. However, part of IKEA’s offering was also tailored to suit local demand. The company for instance developed special collections during the month of Ramadan (see Exhibit 6 for a picture of the Ramadan collection). Moreover, its wine glasses were simply called “glasses,” given alcohol was prohibited in the country. According to the IKEA range manager in Saudi Arabia, some product ranges were removed altogether from IKEA’s Saudi offerings since they were not aligned with Saudi preferences: Christmas-themed products for instance were taken out from the product range.37

In line with local traditions, Inter IKEA Systems in Saudi Arabia targeted the entire family with its advertisements. The company’s Saudi stores displayed women dressed in traditional local clothes and wearing a headscarf, while men in its online ads wore the traditional long white dress. Similar advertisement customizations were prevalent in other stores in the Middle East, such as in Dubai, Abu Dhabi, and Kuwait.38 In 2010, the marketing manager of the IKEA store in Jeddah commented on the difference between IKEA ads in Saudi Arabia and elsewhere. “We asked Inter IKEA Systems to replace the women with men in the catalog in order to be able to get the declaration from authorities to let the catalog enter the country,” he said. “In our Riyadh store we have received some complaints from some customers asking us to replace or remove the pictures of the women who are without a full traditional dress and headscarf so we replaced the ads with fully covered women,” he added.39

IKEA store employees in Saudi Arabia were of various nationalities: while some employees were Saudi citizens, several others were Yemenis, Dutch, British, Swedish, Jordanian, and Pakistani, among other nationalities. Moreover, most employees were men, with exceptions made for employees working in the children’s sections.40

Inter IKEA Systems’s localization ground strategy in Saudi Arabia had appeared to have succeeded in increasing the brand’s popularity and store footfall. In fact, the 2004 reopening of its Jeddah store

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witnessed a long waiting line of more than 8,000 customers some of whom camped overnight to claim their credit vouchers and buy IKEA products.41

Other Western companies also adapted their practices to Saudi Arabia, where Booz & Co estimated the local retail market at $84.8 billion in 2012.42 When U.S. coffee company Starbucks opened its coffee shops in Saudi Arabia in early 2011, it removed the long-haired woman from its logo, keeping solely her crown.43 British retailer Marks & Spencer hired exclusively female sales staff for its female lingerie store in Saudi Arabia.44 Spanish cloth brand Zara did not play music in its Saudi stores, and also blurred the images of female models on video screens in their stores to abide by Saudi customs.45

Saudi Society

Political Context

The Kingdom of Saudi Arabia was an independent monarchy. The king, also custodian of the Two Holy Mosques of Mecca and Medina, Islam’s holiest sites, was head of the state and governed the country through a council of ministers on which he served as president.

Following the Iraqi invasion of Kuwait in 1990 and the resulting uncertainties in the Arabian Peninsula, the Basic Law of Saudi Arabiaa was issued by a royal decree in 1992. It reaffirmed the kingdom’s status as an Islamic Monarchy and formalized its system of government:

The Kingdom of Saudi Arabia is a sovereign Arab Islamic State. Its religion is Islam. Its constitution is Almighty God’s Book, The Holy Qur’an [Holy Book in Islam], and the Sunna (Traditions) of the Prophet (Peace Be Upon Him).46

This “constitution” left some room for interpretation, leading to variations in implementation from one king to another. Late King Fahd, king of Saudi Arabia from June 1982 until his death in 2005, commented on criticism he received from Western media upon the issuance of the Basic laws. He stated that there is no harm in benefiting from knowledge emerging from Western democracies, but he added that Western values as a whole were not suitable for Saudis.47

Part of the reforms of King Abdullah bin Abdul Aziz (hereafter King Abdullah), who ascended the throne in 2005, was to establish the new Law of Judiciary, giving the judicial system more independence and establishing the Supreme Judicial Council to oversee the judicial system.48 Still, Sharia law remained the overarching basis for the legal system, and arbitral award, local or international, was not enforceable if it was non-compliant with Sharia law and public policy.49

Sharia law was derived from the Qur’an, considered by Muslims to be a revelation from God, and the Hadith, which included reports and narratives of the life of Prophet Muhammad. Sharia law prescribed both religious and secular duties.50 Sharia judicial proceedings had significant differences from other legal traditions. For instance, in Sharia courts, judges’ verdicts did not set binding precedents.51 The law was mostly unwritten, leaving judges with significant discretionary power, which they often exercised in favor of tribal traditions.52

Adoption and application of Sharia law varied from one Muslim-majority country to another.53 For instance, Turkey had a secular system where Sharia law played no role in the nation’s legal framework.54 Other countries such as Kuwait adopted a mixed legal system with some reliance on

a The Basic Law of Saudi Arabia formalized several aspects of the constitutional framework of the country.

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Sharia.55 Saudi Arabia’s legal framework was based entirely on Sharia and was interpreted according to a strict form of Islam known as the way of the Salaf (righteous predecessors) or Wahhabism.

Women in Saudi Arabia

Saudi Arabia was a signatory country (with reservationsb) to the UN Convention on the Elimination of all Forms of Discrimination Against Women (CEDAW).56 At the same time, Saudi Arabia in 2012 ranked 131st out of 135 countries on the Global Gender Gap Index. The kingdom ranked better on some of the sub-indices of that index than on others: while it ranked 55th in terms of gender equality in health and survival and 91st for gender equality in educational attainment, it ranked 133rd in both equality in political empowerment and on economic participation and opportunity57 (see Exhibit 7 for the Gender Gap reports for Saudi Arabia from 2006 to 2012).

The Commission for the Promotion of Virtue and Prevention of Vice (Mutaween), sometimes called the “religious police,” was a special committee of around 3,500 Saudi men that handled the enforcement of the kingdom’s strict moral code, including the ban on women driving, the public dress- code requirements for women, and the separation of the sexes in public spaces.58

Enforcement of restrictions on women varied by region, due to variations in local traditions dating to before the advent of Islam. For instance, the west coast city of Jeddah was relatively permissive due to its historical interaction with other regional civilizations, while Riyadh and the surrounding central region, which had been isolated from the outside world for much of Arabian history, had stricter traditions.59

King Abdullah was seen as a reformer and pro-woman, at least in a relative sense. Since he became king in 2005, the kingdom's Global Gender Gap Index improved from 0.52 to 0.57 (on a scale of zero to one, with one being the best score for gender equality), considered the 13th most improved country globally on that index in 2012. In a first for the country, in 2009, King Abdullah named a woman to the council of ministers, appointing Noor Al-Fayez as deputy minister for women’s education.60 In September 2011, the king announced the right for women to vote in the 2015 municipal elections.61

In June 2012, although the decision was strongly opposed by hard-liner clerics, the kingdom announced that it would allow women to compete in the Olympics, while stating that the Saudi female competitors would be dressed to “preserve their dignity.”62

Women in Saudi Media

The Saudi Ministry of Culture and Information oversaw the kingdom’s media policy (including advertising). Saudi citizens were provided freedom of expression consistent with Islamic values. This included spreading ethical virtues and Islamic teachings.63

Prior to 1979, women regularly appeared in Saudi television and newspaper ads. On November 20th 1979, a group of 500 Islamic-extremist insurgents calling for the overthrow of the king and the royal family seized the Grand Mosque of Mecca. Two weeks later the Saudi Army ended the siege, captured the insurgents and released the hostages. In the aftermath of the insurgency, King Khaled, Saudi Arabia’s king at the time, followed an approach of appeasement of hardliners, choosing to give more power to religious conservatives. Photographs of women in newspapers were banned, then women in

b One reservation was that Saudi Arabia would not follow terms of the convention that contradicted Islamic Law.

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television. Gender segregation became more prevalent and the religious police became more assertive.64

Later on, in the wake of hardliner criticism of the kingdom’s support for U.S. military operations in the region, the Saudi Law of Printing and Publication issued by a Royal Decree in 2003 required all printed material to go through the Ministry of Culture and Information before being published. The stated purpose was to ensure that the material was free from content insulting to Islam or the interest of the state. In case the material violated the laws, the Ministry could, depending on the violation, levy a range of penalties. These included, requiring the material be withdrawn from circulation, a financial penalty, and shutting down the offending business.65

Direct censorship was prevalent in Saudi Arabia: “offending” articles imported into the country were excised or blackened, or pages were glued together. Offenses ranged from news critical of the administration to pictures in fashion magazines of bare legs and couples kissing or embracing66 (see Exhibit 8 for an example).

Doing Business in Saudi Arabia

As part of the country’s economic reform process, the Saudi Arabian General Investment Authority was established in 2000 with the objective of promoting investment in the kingdom and encouraging a robust business environment.67 In 2012, Saudi Arabia ranked 22nd on Ease of Doing Business out of 185 countries according to the World Bank. As a comparison, the United Arab Emirates ranked 26th, Qatar 40th and Kuwait 82nd.68 At the same time, businesses in Saudi Arabia faced problems they would usually not otherwise face in other countries in the Middle East. According to some businessmen working in the kingdom, Saudi laws and regulations were not well-documented, and efforts to try to find relevant laws sometimes proved challenging. Moreover the subjective nature of the judicial system as well as the occasional crackdowns on media outlets and bloggers added ambiguity and caused fear among the business community.69

One entrepreneur recalled an instance when his company, which operated children’s play areas in malls, was choosing new mascots. When his designers suggested animations of a boy and a girl, a heated debate broke out among his managers, with some thinking the mascots would bring scrutiny from the religious police given that the characters would appear together in ads. The entrepreneur eventually decided to use animated animals as mascots, after failing to receive guidance from the relevant authorities.70

Discussions with business managers operating in Saudi Arabia revealed that just as the censorship rules governing businesses were unclear so too were the possible penalties. Some businesses found in violation of censorship rules were fined while others were forced to shut down entirely. In the event of being shut down, a business’ ability to reopen depended in part on the owner’s relationships with the establishment.71 Moreover, standards of vigilance by government and religious authorities varied across different media channels. What was usually acceptable on the Internet was not necessarily permissible in print magazines.72

Foreign executives in the country reported that multinational corporations were generally expected to adhere to the same rules as local companies. In fact, several multinational companies operating in the country had adopted strategies that embraced the conservative local culture. For instance, Tide, a U.S.-based detergent brand, owned by Proctor and Gamble, had launched a product specially formulated to clean Saudi women’s black robes (Abayas). To market the product, Tide had chosen the slogan “Proud of my black Abaya,” which was seen by some as a double entendre: in addition to

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