Korean furniture makers brace for the oncoming IKEA wave

Posted on : 2014-06-25 16:09 KST Modified on : 2019-10-19 20:29 KST
With furniture giant setting up shop in Korea later this year, domestic industry seeking ways to compete
 June 18. (by Choi Ik-lim
June 18. (by Choi Ik-lim

By Choi Ik-lim, staff reporter

Late last month, things were looking up for domestic furniture companies like Hanssem and Hyundai Livart. From late last year, flat stock prices were soaring over an expected new housing market recovery and booming demand for remodeling. Earlier this month, the numbers began falling back to earth fast, with an unexpected rival looming on the horizon.

On June 2, stock prices for the companies tumbled by between 2% and 8% from the day before. Analysts agreed on the reason for the drop: a “pop-up store” opened in Seoul’s Yeongdeungpo Times Square shopping center on May 30 by the Swedish furniture makers IKEA.

The pop-up store is a temporary shopping booth open until Aug. 22, set up to advertise the opening of IKEA’s flagship South Korea store in Gwangmyeong, Gyeonggi Province, later this year. IKEA is a world-famous home furnishing company that sells various lifestyle items at low prices. Its centerpiece is its “do-it-yourself” furniture, where customers purchase then assemble the components themselves.

IKEA‘s guiding philosophy involves breaking down the wall between customer and producer by having the customer do the assembling, instilling a sense of pride in the unique furniture. Its gimmick is summed up in the slogan “selling inconvenience.” It also means the company can offer lower prices to consumers. Even without a South Korean store, word of mouth has been spreading among younger customers for years now. IKEA currently operates 303 stores in 26 countries, with 1,046 partner businesses in 52 countries.

In terms of sheer size, the Gwangmyeong store will reportedly be the largest in the world when it opens later this year. IKEA envisions building a total of five massive outlets in South Korea by 2020, with bases near Goyang, Gyeonggi Province, and Seoul’s Godeok neighborhood.

With IKEA’s arrival imminent, stock market analysts have recently come out with a number of reports predicting market trends and the response by its domestic competitors. Most of the reports agree that the “IKEA wave” heralds major changes not just for furniture makers, but for the entire retail market from kitchenware, toiletries, clothing, and sundries.

Some analysts say the news is not necessarily bad, since it would have the effect of separating the wheat from the chaff in terms of local furniture brands.

With South Korean customers increasingly preferring lower costs and more “rational” items over high prices, some analysts say IKEA’s arrival could breathe some fresh air into the domestic furniture industry.

“There’s going to be a limited business risk for domestic brands in terms of providing the optimal services for the South Korean market, with a nationwide sales network and services that include kitchen and interior construction,” said Byun Sung-jin, an analyst at Mirae Asset Securities.

“On the other hand, IKEA’s arrival could grow the domestic furniture market pie by spawning a trend of low-cost, DIY furniture,” Byun added.

The main question now is how smaller furniture companies and daily essential producers, which make up over 95% of the industry, will survive the IKEA onslaught. Industry statistics show small firms and merchants accounting for over 60% of business in the greater Seoul area, and more than 95% overall. Many complain that the arrival of IKEA stores in Goyang and Godeok would pose an existential threat to a number of small Seoul-area furniture businesses.

“We have over 1,000 member companies, mid-level manufacturers and retailers, who have been calling on the government to take action to help protect them, but all the government does is talk about how the legal system doesn’t allow it,” said Yang Hae-chae, chairman of the Korea Federation of Furniture Industry Cooperatives (KFFIC). “They’re starting to get very upset about it.”

In particular, the KFFIC is noting that customs law allows IKEA to avoid tariffs when it imports finished or half-finished furniture. The federation says the government could help local manufacturers by extending the same customs-free treatment on primary materials. Current customs law requires manufacturers to pay an 8% tariff on hardwood imports.

Another suggestion from smaller businesses is the establishment “furniture specialist centers,” with the government providing support on design development and improved distribution. Their complaint is that the mom-and-pop industry model prevents them from attempting the kind of foreign procurement methods used by big businesses.

Meanwhile, some analysts are urging domestic furniture makers to turn the crisis into an opportunity by bucking the trend and developing their own methods to boost competitiveness. In Japan, a number of companies have managed to beat back the IKEA wave through industry-level overseas procurement or mergers and acquisitions. IKEA first arrived in Japan in the 1970s, only to withdraw. When it came back in the 2006, the country’s largest home furnishing company, Nitori, responded in 2008 by selling some 3,000 products at similar or cheaper prices. Overseas procurement and large savings in production costs helped it gain the competitive edge it needed. It was the so-called “catfish effect” in action - a competitor forcing local businesses into a competitiveness battle that produced a market heavyweight.

Already, some South Korean brands, including Hanssem, have started a push of larger outlet sizes. Daily essential retailers like Daiso Korea, Shinsegae International, and Muji Korea have begun offering discounts as they brace for the IKEA wave’s arrival.

 

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