1. Introduction
This report focuses on exploring the market potential for IKEA in Argentina. Background on Argentina is presented, followed by establishing the prospect of IKEA’s predicted success and the legal framework the company requires to work through in order to avoid any legal issues. The market entry strategy is then discussed to wrap up the guidelines for IKEA’s introduction to the Argentinian market, as it is one of the largest nations not trading with IKEA, which is a very popular interior furniture supplier.
2. Why IKEA in Argentina?
Argentina, being the 8th largest country, is located in South America and makes up the majority of the southern part of the continent as the fourth largest country in America. It is a sovereign state and is divided into twenty-three provinces but one autonomous city that is the federal capital, Buenos Aries Argentina is rich in resources as a country and has huge potential. The population is ensured to be literate and well-educated. They excel in every field in their local community. Argentina is found to be very advanced digitally, with fast internet and masses using the smartphones as their media and television is rather monotonous catering only to the basic information and services. The consumer buying power is high even amongst the middle class as the income distribution has more equality than most Latin American countries. The infrastructure of Argentina does require enormous upgrades so that there are proper opportunities for exporters of various equipment and material to help improve the living standards and development of the country.
More than 500 U.S. based companies that operate in Argentina provide employment to thousands of citizens and hence support many more indirectly. These firms have an influence over the economy and society of Argentina (Export.gov, 2016).
Argentina is an active member of many of the world’s organizations and is responsible for its hand in controlling many global issues. Argentina has taken on and complies with many responsibilities in the World Trade Organization’s Agreement on Technical Barriers to Trade Code of Good Practice. Again, as an active member of MERCOSUR, Argentina along with Brazil, Paraguay and Uruguay develops and matches standards. These are developed in 16 technical committees and regional technical regulations are also generated by the MERCOSUR governments in Sub working groups. The main countries of Latin America mentioned above, generally adopt all the regulations themselves as well, albeit on varying speeds.
3. IKEA: European furniture in South America
IKEA is the company picked for this implementation in Argentina after discussing the facts and analyzing the economic situation in the country.
IKEA is a Swedish multi-national company. It came into establishment in the early twentieth century and now it is based in the Netherlands. It is a furniture retailer and aims to give its customers designed products at competitive prices all the while ensuring high quality and functionality while showing the respect for the environment. IKEA has promised to decrease the emission of air pollutants. In fact it has partnered with WWF and provided 150 shops with solar panels. At the same time, IKEA has also partnered with UNICEF so support charity foundations like Save the Children. (IKEA, 2012)
4. Argentina, its location and areas
Land Area of Argentina is 2780,400 km2 and water percentage is 1.57%. The population estimated is 43 million and 85 thousand. The currency used is Peso and the national language spoken is Spanish. (Anon., 2018)
The geography of Argentina is diverse but is divided into a few major regions; the Andes, the North, the Pampas and Patagonia. Argentina is bordered with Bolivia and Paraguay at north, Chile at the south and west and Brazil, Uruguay and the Atlantic Ocean borders it at the east. The Atlantic Ocean forms a coastline of 2900 miles. The four regions are grouped geographically since Argentina has the shape of an inverted triangle. Andean region is further divided into the Northwest and the Patagonian Andes. Patagonian Andes is connected to the Patagonia region which has a dry, cold, windy weather most of the times. Pampas are the central part consisting of plains and grasslands and this is also further divided into a western Dry Pampa and eastern Humid Pampa. The North has two divisions; the Gran Chaco and Mesopotamia (Calvert, et al., 2018).
5. Events that have shaped the Culture
After the end of the World War II, Juan Peron was elected as the president after which he increased the power of the president and made several other changes in the government for a decade. This was followed by military ruling and weaker governments for about two decades after which Juan Peron was back in Presidency only to die a year later. His wife then took up his seat but was again overthrown by US driven coupe and the military was in charge for another period. The Dirty War began after which the Falkland War occurs over the British Falkland Islands. In the 80s, the civilian rule returned after a new president was elected and the country began to see another rise to stability (Ducksters, 2018).
6. Why the European culture will be comfortable in Argentina.
The current culture of Argentina is a mix of the European ; that is the Italian, Polish, France, Germany along with the Arab traditions all mixed into the native Spanish culture. This is due to several immigration movements into the country during the 20th century (Scozzese, 2013).The result was a culture similar to Mediterranean populations, where family values were strong as they consider it a fundamental to have family quality time. The culture has religious and passive views along with a sexist attitude. American culture is widely seen to be imitated. Hispanic American reality was primarily incorporate in La Plata Basin due to immigration but the roots of Argentina are European based which link them to the values of the Old World (Sabato, 1976).
7. Infrastructure and society of Argentines
Argentina has a very high global ranking of literacy, the rates being similar to those of developed countries. The reason being the promise of the Argentine state to secular and free public education for all levels. But the country has not yet been fully developed and there are many general problems that need a lot of changes to them. The pollution issue is spread throughout as there are very less garbage bins and litter is thrown all over the streets. The transport system for the public was also very poor, with no scheduling and lack of working buses. The crime rates have also been high in the previous decade. After 2010, the public administration has improved due to a reform. The transport and pollution issue was also seen to get better as well increase in CCTV cameras to monitor the streets at night leading to a decreased crime rate. (Encyclopedia, n.d.)
8. Religion
The people of Argentina are granted a freedom of religion. According to a poll, 76% of the Argentines are Catholic, 11% Agnostics and Atheists, 9% Evangelical Protestants, 1.2% Jehovah’s Witness, 0.9% Mormons with the rest 1.2% following other religions including Islam, Judaism and Buddhism (Mallimaci, et al., 2008).
9. Political structure of the Country
The form of state is a Federal Republic and the executive is the same as any other; President being the head of state and commander in chief of the armed forces. The presidency term is four years and can also be elected again for one consecutive term. There is an appointed cabinet with a chief. The national legislature is Bicameral Congress with
- 257-member Chamber of deputies.
- 72-member Senate; three senators per state.
The government currently is Frente para la Victoria and the main opposition is Union civica radical and others (The Economist, 2015).
10. Legal Systems
The Federal judges are designated by a council of magistracy. The Supreme Court system runs both nationally and provincially although the national Supreme Court members require the authorization of two-thirds of the upper house (The Economist, 2015).
11. Ecological issues effected by IKEA in Argentina
Argentina is the one country in South America that has built itself a sophisticated body of environmental jurisprudence as it has dealt with mining cases to community water supplies to industrial pollution. Even though Argentina has some serious environmental challenges to face itself, its past experience make it an excellent candidate to be the leader in efforts to strengthen the environmental rights and awareness across the region.
The pollution in Argentina is high enough to increase the climate change in the area. Water contamination and clean drinking water has been a long time issue without any solution or fix up till now. Rubbish levels are seen to be increasing because the recycling projects cover very small areas. A survey conducted showed that people believe there should be an increase in the recycling projects all over the country and IKEA is the perfect large scale recycling medium here since it promotes saving natural resources. They also believed that the natural resources of the country were being exploited at a rate too fast. Argentine authorities have also seen to be irresponsible in ensuring that policies and laws were not only in place, but also being implemented (Chandler, 2014).
In 2017, a meeting was held to address the severe problems faced by people all across South America, for example the pollution and pressure on natural resources. The agreement is being negotiated but at a very slow speed which is the obstacle in implementing it (Orellana, 2017).
12. IKEA and the economic growth of the population
The current economic conditions are in a depleting state due to the predecessor presidents especially Cristina Fernandez who is responsible for gross economic management. In Latin America, Argentina has now become the second worst managed economy. Current president Macri is desperately trying to save the economy as well as the electricity crisis but earlier in 2018, he approached the International Monetary Fund for a fund which was actually due to a run on the Peso. The commodity export harvest and fiscal earnings are also believed to be lesser than expected, this year. In the recent years, the fiscal deficit has remained high and there has been a rise in public debt. International investors have responded positively to Marci’s plans but the final straw lies in the Argentines themselves who are growing impatient and acting impulsively, in correspondence to the lack of a boom in the economic growth.
The inflation rate is still 28%. The GDP has fallen from 3.2% to 2.7% recently and the target for 2019 is 17% and 13% for 2020 which means high interest rates will be around for longer than expected (Flannery, 2018).
13. Relations with neighbors
Argentina plans on growing regional partnerships such as MERCOSUR and UNASUR, while it is already an active member of the UN and many others. Argentina is also a member of the International Atomic Energy Agency. Currently, Argentina is on good terms with Brazil, Paraguay and Venezuela but there is slight tension with Uruguay. Argentina has very old ties with the UK and a close relationship with the States as well (GlobalSecurity.org, 2018).
14. National Standards
In Argentina, majority of the standards are voluntary and therefore there is a sole developer of national standards in Argentina, IRAM. In Argentina, both parties of a business deal, share the responsibility in coming to the conclusion of which product standard is applicable. Due to the traditions and practices that go way back in time, European standard products are chosen over the products that fit in the U.S. standards. To accommodate the increasing U.S. exports as well as the value of standards followed by the Argentines, an officer of standards is designated to work with the U.S. commercial service office in Sao Paulo. He is responsible for the South American Countries. As for the non-mandatory testing and product certification, Argentina does not have a legal mandate to conduct another test on non-regulated products which have already been approved in their original country. Certification for non-regulated sectors, in perspective of standards may or may not be required but this decision is made between the buyer and the seller themselves. In recent times though, product certification has been made mandatory and since there is a lack of independent laboratories in Argentina, the National Institute of Industrial Technology is the only agency that takes a part in standards development as well as carries out product testing and certification (Export.gov, 2016).
15. How IKEA can settle perfectly with the Foreign Investments
The policies towards foreign direct investments have been slightly changed in the recent times by the current president Macri since they are actively looking for foreign investors. There have been reforms to decrease economic distortions, raise capital market efficiencies and further develop the transparency of regulatory and administrative processes. The export taxes and import restrictions are reduced as well as tax burdens; all in an effort to streamlining business administrative process and custom controls so that there can be an increase in businesses’ access to finance. There have been new regulations in the main major industries such as gas, energy, communications and automobile ones, in an effort to bring more competition and investors to the table by offering incentives aimed at those sectors. A number of infrastructure development plans have also been recently announced along with Federal Digital Plan. In Argentina, foreign and domestic investors do not compete under different conditions although there are sectors that are restricted to foreign investors, such as ownership of productive lands, bodies of water as well as areas around the borders.
A national Investment and Trade Promotion Agency is present in the country, to provide information, consultation and other services to people interested in investing and trading, about economic, financial conditions, investment opportunities along with the laws and regulations of the country. This agency also links up potential services and trade delegations. Almost every province has an investment and promotion unit to appeal and provide for the best investments in their areas. The fact that there are no restrictions on full foreign equity ownership, is beneficial for foreign companies (Export.gov, 2017).
Out of the 43 million population of Argentina, a particular majority of it is young being the reason behind the increasing e-commerce sales. These sales are not only from the U.S. but also from abroad such as Brazil, China and UK. The World Federation of Direct Selling Associations surveyed the 2017 retail sales; this showed that household goods and durables came in second at 20% while cosmetics and personal care were with the highest sales at 72% (Banco Santander, S.A, 2018).
According to the consumption patterns, Argentines are seen to have the natural tendency to re-cycle objects; be it the middle class or the lower class. If examined through the Big Mac Index which was developed by The Economist; it can be seen that the purchasing power in Argentina is quite high.
In 2008. Argentine regions and their household consumption patterns were drawn by the National Institute of Statistics and Census. The table below shows these patterns region wise:
Figure 1: Household consumption patterns (Scozzese, 2013)
At an average, the consumers are concerned with the price of goods and they do not prefer disposable products of any type. This means they are more faithful to older products and less inclined towards change. Smaller shops scattered around in an area are liked by the Argentines over the large supermarkets. They also have the perception that this is not only faster but also cheaper. The people are not attracted to unnecessary items neither are they advertised about around the media and billboards. Despite all this, newer trends are also noticed coming into being by the younger generation, due to the widespread of smartphones.
Argentina possesses great market potential as it does not have a big franchise, selling most home furnishings in one place with recognized and reputed product quality. Thus IKEA possesses a possible threat to those few reputed stores. In this aspect, IKEA can easily win over the challenge since it has an appeal to the younger generation with its colorful modern furniture, and more benefits such as occupying less space, multi-functional and partially recyclable furniture. Although struggling with the faithfulness of the older customers will be an initial issue.
16. Why IKEA is successful?
The IKEA group is controlled by INGKA Holding B.V. which is a Dutch company, run by a Dutch not-for-profit organization. IKEA has logistics hubs in Germany and Singapore. The resources for the production of IKEA furniture and the development of the products is done by another industry, Swedwood which is also owned by INGKA Holding B.V. Inter IKEA systems is located in Holland, is the owner of the IKEA concept, trademark and the network of franchises.
IKEA has already shown interest in opening stores in India, South Korea and Argentina. The business model of the company focuses on low prices and the following features:
- Save resources by producing new materials.
- Specified narrow range of products made by benefiting from the economies of scale and economies of learning.
- Savings in terms of labor and transport since the products come in flat packaging which have to be assembled by the customers themselves.
The company has 79% Sales in Europe and 15% in North America as of 2011. They state, that the prices of raw materials have been decreasing 2-3% every year for the last ten years. In 2009, sales were seen to decrease by 1.1% worldwide but the company still made 4.4% more due to the opening of new stores, fall in the price of raw materials and a general reduction in their expenditures (IKEA, 2012).
According to the data supplied by INDEC in 2008, there are approximately 9 million potential customers. Previous data shows that an average of 25 pieces of furniture will be found in each household and given the Argentines prefer to improve the appearance of their homes, since they like to meet at homes rather than public places- a very less number of furniture items were being sold for many years. As the furniture industry recovers, because of import restrictions specifically to wooden final goods and the rise of new generations; there is a good market for non-disposable, re-assembling furniture (Scozzese, 2013).
As far as logistics is concerned, IKEA RAW MATERIALS buys some of the raw materials before production from suppliers but the rest of them are distributed by the operating holding company. As for management of operations, IRM divides the materials and projects between the outsourced suppliers, where then all the articles are manufactured in correspondence to their relative project. IKEA agents are in charge of monitoring the output of the manufacturers, and checking the productions. The agents are also in charge of testing the quality of the products and inspecting the working environment of factories. Economic perceptive shows that the short distance between retailers, logistic centers and suppliers is a profitable feature. Transport costs are optimized and so are environmental impact.
17. Market Entry Strategy for Argentina
Out of the main types of marketing strategy, IKEA has repeatedly chosen the product strategy and a form of foreign direct investment (FDI). The most effective strategy for entering the argentine market, for IKEA to adopt is the implementation of the Greenfield FDI. This strategy has turned out to be successful when implemented in other markets by a strong corporate company like IKEA. This is because efficiency is the main goal of companies like these since they do not have to change and adapt their products and strategies to local properties. The obvious plan would be to implement the Greenfield FDI on account of demographic growth hence the first store would be opened in Buenos Aires as it is the main hub. Other advantages of the Greenfield Entry mode are the maximum control and the ability to gain the locals’ trust by employing them. It also has slow entry due to setup time. (SSaylordotorg, 2012)