IKEA Breaks Ground on 2nd Store

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Swedish furniture giant IKEA has kicked off construction of a second megastore less than a year after its first outlet took Moscow by storm.

"People ask why we invest in this country, and the answer is IKEA believes in Russia," IKEA country manager Lennart Dahlgren said at a groundbreaking ceremony Friday.

The planned 31,000-square-meter superstore, scheduled to open Dec. 12, is located on a site on Kaluzhskoye Shosse in the southern outskirts of Moscow and just beyond the outer ring road.

Once open, it will create 500 jobs, while an adjacent shopping mall will employ an additional 4,500 workers, Dahlgren said.

The world’s largest furniture retailer plans to spend $45 million on the store, bringing its total investment in the country to about $150 million.

IKEA opened its first store, a 28,000-square-meter complex in the Moscow suburb of Khimki, last March and was greeted by a stampede of 35,000 customers on opening day.

Dahlgren said the store’s success has exceeded the company’s expectations. It serves about 5,000 visitors on weekdays and nearly five times as many on weekends and holidays.

IKEA rang up a total pretax income of $100 million, double the company’s expectations, as more than 4.5 million customers flocked to the store last year, he said.

But despite its popularity among Russians on the lookout for inexpensive household furnishings, IKEA will keep losing money here for at least a few more years due to high import tariffs, Dahlgren said.

"The customs tariffs we pay are at least 30 percent, and for certain items they are as high as 200 percent," he told reporters Friday. "They are the highest of any country where IKEA operates."

IKEA typically pays tariffs of 3 percent on imports in other countries.

The opening of the first IKEA store was delayed by more than a year over a tariff spat. The retailer finally reached a compromise with the government.

While the company is once again negotiating with the authorities over duties, it is also sealing deals with local suppliers that allow it to avoid the fees altogether.

IKEA currently has purchasing contracts with 30 Russian firms, whose products account for about 10 percent of sales at the Khimki store, Dahlgren said. The retailer would begin turning a profit if it could manage to raise the percentage of domestically produced furniture threefold, he added.

IKEA is also working toward launching its own local production lines. In April, the furniture retailer will begin building a factory in the town of Tikhvin in the Leningrad region for completion within a year.

Despite the hurdles, IKEA, which operates 157 stores in 29 countries for an estimated 2000 revenue of $10 billion, has ambitious growth plans in Russia. It plans to set up four more stores in Moscow and one or two in St. Petersburg in the next few years.

"Opening in Russia was important to me because I believe in decent capitalism as a spur to democratization," IKEA founder Ingvar Kamrad recently told Forbes magazine.

IKEA has not revealed how much the retailer plans to invest in Russia, but Dahlgren says it will sink about $50 million into each outlet.

Dahlgren said in a recent interview that IKEA’s long-term goal is to export much more furniture from Russia than it sells here. Exports last year doubled from 1998 to about $50 million, he said.

"We are in Russia not to sell, but first of all to buy products," he said.