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. Last Updated: 07/27/2016

IKEA Supercenter Delayed by Customs Feud

The opening of IKEA's enormous $100 million shopping complex in a northern suburb of Moscow is up in the air as the Swedish furniture retailer battles with the government for lower customs tariffs on furniture imports.

Completely funded by IKEA, the 100,000-square-meter shopping center in the town of Khimki was to have been the first of five supercenters that the giant planned to build in Moscow over five years.

IKEA itself planned to be the anchor tenant at the Khimki center in a $35 million 30,000-square-meter furniture store scheduled to open in October 1999. Another four buildings at the center were to have been built and leased after the opening of the IKEA furniture store. A total of 100,000 customers were expected to visit the center daily.

Company officials have repeatedly said the commitment would be kept despite Russia's financial crunch.

But now those ambitious plans appear to have been thrown into doubt with IKEA postponing for an indefinite time the opening date of its furniture store.

"I won't fix a date just now - there have been so many dates discussed already," said Lennart Dahlgren, general director of IKEA in Russia.

Dahlgren said that in the past four months IKEA had been involved in intense negotiations with various government departments as it tried to persuade them to lower customs tariffs on furniture that the company would be importing for its store.

Unless the government agreed to reduced tariffs, the IKEA store would not be able to start its operation, Dahlgren said. IKEA has 160 stores around the world that sell furniture at discount prices.

"If we were a luxury furniture store, we would just add this cost [customs tariffs] to our prices," he said. "But in IKEA we decide on prices beforehand, so that they would not be higher in Russia than in other countries."

Dahlgren said IKEA expected the government to make a decision in the next few weeks. He would not say which customs tariffs were being discussed or by how much the company wanted the fees to be slashed.

A customs spokeswoman said that customs duties currently stood at 30 percent of declared value for whole pieces of furniture and that a combined duty based both on value and weight was used for unassembled furniture. The spokeswoman, who asked to remain anonymous, said the latter duty was used to foil importers who tried to bring in expensive furniture unassembled.

Michael Sassarini, a retail analyst at Fleming UCB, said the weight-related tariff was no doubt at issue in the IKEA dispute since the Swedish company mostly sells unassembled furniture.

"Customs duties that have to do more with physical weight than value would preclude it from operating the way it does in every market in the world," he said.

An official at Stiles & Riabokobylko real estate agency, which handles leasing for the IKEA center, would not comment on the center's opening date, but she did say that all leases were still at the negotiating stages.

Sassarini of Fleming UCB said the lack of signed leases for the center was just a signof caution on the part of would-be tenants, who would likely start signing up once they saw that the customs problem was cleared up.

"The key [in such centers] is to have one major tenant," he said. "They [IKEA] have this advantage here."

Sassarini said that provided IKEA's customs problems were resolved, the company's chances of success on the Russia market would be quite high.

"It is a good market for them, not just in size but in terms of the right pricing point," he said. "There is an obvious gap between expensive Italian furniture and local stuff, which is often pretty good but is not merchandized in a proper way."

The construction of the $100 million Khimki complex should be completed by mid-summer, after which IKEA would need at least another six months to fit out the store - one of its largest in the world, Sassarini said.

This would appear to put the opening date off until at least next year.

In the meantime, IKEA is holding back on buying equipment for the Khimki center and recruiting the some 500 employees it would need.

"We want the government's promises [of lower tariffs] confirmed as an official document before we go ahead with these investments," Dahlgren said.

IKEA decided to go into retailing in Russia in the fall of 1997. Prior to that, the company's main activity in Russia had been exporting furniture built at local plants. IKEA currently exports about $25 million a year, and that trade has not been affected by the customs tariff dispute, Dahlgren said.

Domestically produced furniture will make up about 10 percent of the stock at the Khimki store, a proportion the company hopes to raise to 40 percent over the next three to four years.