IKEA Expands in China as Tesco Shutters Retail Shops

IKEA is excited about China’s growth potential

The opportunities and risks of China’s retail market were illustrated again this week as Tesco announced the closing of four outlets in China on the same day that IKEA announced an aggressive expansion plan in the country.

In an announcement Thursday following its latest quarterly report, Sweden’s home furniture goliath indicated that it plans to accelerate its growth in China by opening at least three stores annually. In an interview cited in the China Daily, Colin Renwick, Ikea China’s deputy retail manager said,

“We are speeding up our expansion after gaining a deep understanding of the Chinese market through the successful experience of our Beijing and Shanghai stores. Now we are going to more second-tier cities to meet the increasing demand and enthusiasm from people living there.”

Ironically, it is these tantalising but treacherous second-tier cities where Tesco is facing its toughest times. The company, which is the world’s third-largest retailer by sales revenue, confirmed on Thursday that it would close its stores in Bengbu, Anhui province, Tieling, Liaoning province, and Taizhou and Changshu, both in Jiangsu province.

All of the locations where Tesco is shutting down could be classified as either second-tier or third-tier cities in China. Earlier, Tesco had announced that it would open 16 new stores in China during its financial year from March 2012 to February 2013. However, by mid-August, only two new outlets had been opened.

And Tesco is not the only retailer scaling back its expansion plans. According to a recent report in the Financial Times, Wal-Mart, the world’s largest retail store operator, is “slowing down expansion in China, Mexico and Brazil, cutting the new space it will open this year by about 30 percent.”

However, where these retail giants have struggled, IKEA has apparently prospered. Since first setting up on the mainland 14 years ago, the company has opened 11 stores in Shanghai, Beijing, Guangzhou, Chengdu, Shenzhen, Nanjing, Dalian, Shenyang, Tianjin and Wuxi.

According to IKEA’s current plan it will have 17 stores across the country by the end of 2014. The new stores will be opening in Ningbo, Shanghai (the third IKEA outlet in the city), following the opening of a new outlet in Ningbo, a third store in Shanghai and a second store in Beijing. Ikea will also start the construction of stores in Chongqing and Wuhan later this year, according to Renwick.

During its latest financial report last week, Ikea reported revenue of more than 5.4 billion yuan ($850 million) in China during its 2012 fiscal year. This revenue represents a 21 percent increase over the company’s China results in 2011 and significantly outpaces its global growth.