The ‘Ikea effect’

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The ‘Ikea effect’

A year ago, the world’s largest furniture retailer Ikea opened its first Korean store in Gwangmyeong, Gyeonggi. The arrival of the giant put the domestic furniture industry in panic. Companies feared that Ikea would ultimately drive them out of business with product variety and low prices. Some even staged demonstrations.

However, the prediction turned out to be wrong. In the third quarter of 2015, Hanssem, biggest Korean furniture company, had 32.3 billion won ($27.4 million) in operational revenue, a 25.2 percent increase from the same period last year. Concurrently, Hyundai Livart’s operational revenue increased by 30.9 percent to 9.3 billion won. Fursys and Enex enjoyed 38.3 percent and 20.4 percent increases, respectively.

According to Moon Mi-seong, a senior researcher at Gyeonggi Research Institute, Ikea’s impact on small and medium-sized furniture companies was not as serious, and its arrival actually contributed to the expansion of the consumer market.

Ikea’s arrival brought about the catfish effect in Korea. When a catfish is introduced to a tank of sardines, the sardines become more active and develop stamina while trying to avoid the predator. The arrival of a new, strong competitor helped Korean companies become more motivated and competitive.

To counter Ikea, the Korean furniture industry opened more superstores and expanded distribution channels, such as authorized retailers, shopping channels and online shopping malls. They differentiated by providing full service, whereas Ikea require consumers to assemble products themselves.

There are other cases when foreign companies’ entry into Korea created tension. In 2009, Apple’s iPhone enhanced the competitiveness of Samsung and LG smartphones, and the arrival of foreign automobiles helped Hyundai-Kia Motors rise from 10th place to fifth in global sales. The arrival of foreign companies in Korea also add more jobs.

However, Korea is still considered a hard place to do business for foreign companies. Lam Research, the second-largest semiconductor processing equipment company, had considered building a distribution center at Incheon International Airport Logistics Park but finally chose Taiwan in June. The decision was based on Korea’s discriminatory tax policy of imposing value-added tax on foreign companies when products are brought into the warehouse. Last year, foreign investment in Korea amounted to $10 billion, merely 0.7 percent of GDP.

The government and industry should not fear foreign giants entering the Korean market. The government needs to improve the regulations that isolate the Korean market, and companies need to be ready to counter with enhanced competitiveness like the furniture companies.

The author is a business news writer of the JoongAng Ilbo.

JoongAng Ilbo, Dec. 17, Page 37

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