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. Last Updated: 07/27/2016

IKEA to Use Russia as a Network Hub

Swedish furniture retailer IKEA's plan to build a giant $40 million warehouse near Moscow is part of its strategy to use the nation as a production center for its worldwide network, IKEA Russia chief Lennart Dahlgren said Friday.

"We know that Russia is the biggest supplier in the world of every kind of raw material that we need for IKEA products -- different kinds of wood, the oil for plastic, the aluminum, the china and textiles," Dahlgren said by telephone.

"There are enormous factories from the Soviet times that could produce enormous volumes -- and that is exactly what IKEA needs. We are trying to make Russia one of the main suppliers for IKEA globally," he said, adding that the company doubles its sales about every four years.

In two months the company plans to start production at its first Russian factory, near St. Petersburg in the Leningrad region, which cost about $15 million and will employ 250 people, Dahlgren said.

"In the meantime, we are looking for other possibilities to produce in Russia," he added.

Imports account for about 90 percent of the value of the 6,500 to 7,000 items IKEA sells in Russia. These had been arriving from a warehouse in Poland, which will continue to operate, but from next year the Svetlorgorsk warehouse will be the central distribution point for all IKEA's Russian stores, Dahlgren said.

"If you look at global supply, we are buying less than 1 percent from here, but if you look at what we are selling here, Russian goods account for about 10 percent of the value," he said. "We plan to increase this level to 30 percent.

"The volumes that we need in Russia are so big that it is interesting for any big-volume Russian factory to supply our Russian stores alone. We hope that we will create an incentive for Russian manufacturers to deliver to the rest of the world," he added.

One-third of all furniture exported from Russia is for IKEA, Dahlgren said, citing the Russian Furniture Association. The association was not available for comment Friday.

Dahlgren said punitive import tariffs are a disincentive to Russian furniture makers to produce internationally competitive goods.

"Importing the normal IKEA shelf costs about 70 percent or 80 percent in customs duties, which is crazy," he said.

Tariffs on furniture are levied according to weight.

IKEA products have a low value per kilogram compared to, for example, expensive Italian furniture, he said. "We have to pay much more in terms of value," he added.

While the government is sympathetic to IKEA's case for lowering customs duties and offering customers lower prices, local furniture makers are against removing the protection this provides, Dahlgren said

"Because of the very high costs of imports, Russian companies can have high prices," he said. "The Russian industry is not very interested in exports because the local market is so big. Export takes more effort and creates more problems," said Dahlgren.

Vladimir Gorodetsky, director of Individualno Proizvodstvo Mebelya, which assembles Stanley wardrobe products in Moscow, hailed IKEA's move to produce more locally.

"The more producers there are on the market, the better," he said Friday, adding that high tariffs are keeping the industry from developing.

"The prices should be optimized. If tariffs were lower, demand would be significantly higher," Gorodetsky said.

Dahlgren said IKEA would build the warehouse on a 40-hectare site at Svetlorgorsk, 35 kilometers from the Moscow Ring Road. He said it would cover about 100,000 square meters at first, but plans are already being drafted to double the size.

Construction is to start this year and the project is to be completed next year, he said.

No contract for the site has been signed, but the plans have been developed in consultation with the Moscow region government.

"They know what we want and we know what they can do," he said. "The time has come for [a written agreement] and it should not be any problem."

Dahlgren said IKEA's investments are long-term and, taking advantage of the Land Code, it will first lease the site, then build the warehouse and then buy the land.

Russia's first IKEA store opened in Khimki in March 2000 and had sales of $100 million, making it one of the chain's top 10 stores worldwide in its first year.

A second store opened in December in southwest Moscow and sales from both stores are already at twice the level they were a year ago, Dahlgren said, declining to release any other figures.

IKEA plans to open a third Moscow store on Kutuzovsky Prospekt next year and plans for a fourth and fifth store are advanced, he said.

Mark Stiles, a partner at Stiles & Riabokobylko, which is an associate of Healey & Baker, said IKEA's plans for the warehouse will encourage other firms to enter the market.

"IKEA is a pioneer that is opening the door for retailers around the world to operate and do very good business in Russia," Stiles said Friday.

"Other major retailers in Europe and America are starting to take note of IKEA's success and making serious plans to try and capture some of this market," Stiles said.

Rouben Alchoujian, associate director of Jones Lang LaSalle, said that once it is built, IKEA's warehouse would be the largest in the region and probably the largest in Russia.

Svetlogorsk is a good location for serving the Khimki store and it should be easy to sell the warehouse if the company ever decides that it wants to dispose of it, he said.