The Goldilocks Zone (part 2)

IKEA vs. Home Depot

6.45 million new homes were built in China in 2019. Culturally, owning a home is a prerequisite to getting married and starting a family, and as a result 90% of households own their home; one of the highest ownership rates in the world.

Two brands, IKEA and Home Depot seemed perfectly poised to capitalise on this environment but where one succeeded, the other floundered. The difference is partly in the fundamentals; one focuses on furniture, the other hardware and materials. But there’s more to it than that.

Home depot: a head start but unable to win the race

Home Depot, is a US-based home-improvement store, stocking everything from paint to power tools, curtains to cleaning supplies. They entered the China market in 2006, acquiring local chain The Home Way which immediately gave them 12 outlets across 6 cities. However, after 6 years, they had failed to turn a profit and took the difficult decision to leave the market.

What went wrong? Or was it wrong before it even started?

As many people pointed out after Home Depot’s departure, the average Chinese person does not want to decorate their own home. For one, home decoration is a relatively new phenomenon in China and people didn’t grow up helping their dads build sheds and patios like the average American or European, so most people simply don’t have the skills. Added to which, most people buy new homes in a 毛胚 state i.e. an empty concrete shell, so decorating in China is a much more involved process than putting up some shelves. But more importantly, as the country has developed, people have moved away from manual labour and doing-it-yourself goes against the idea of upward mobility. “You Can Do It, We Can Help” doesn’t work if I am planning on having someone to do it for me.

IKEA: building aspiration

IKEA on the other hand has seen huge success in China, with 2018 revenues growing more than 9 percent to exceed 14 billion RMB. According to Statista, China accounts for 4.8% of IKEA’s global revenue.

So why has IKEA succeeded where Home Depot did not?

Firstly, IKEA recognised the distaste for DIY in China, while also understanding the “IKEA effect” (a cognitive bias whereby people place more value on a product they have contributed to) doesn’t require complete DIY and can be had through ‘soft’ decoration, while leaving the ‘hard’ decoration to the professionals. So instead, they focused on the Scandinavian design of their furniture. They emphasized the results of decorated rooms, while playing down the need to assemble it yourself; even offering to send workmen out to assemble the furniture for customers.

Secondly IKEA invested in building a brand. Their stores are a destination (with the restaurant becoming a place for older singles to meet), there are smaller downtown stores for more day-to-day engagement, and it has invested heavily in digital marketing. Through the emphasis on design and brand building, IKEA furniture has become aspirational to Chinese home owners.

Could Home Depot have learned from IKEA?

In the first post in the Goldilocks Zone series, we discussed how Subway took an oversimplified approach to China; transplanting what worked overseas; and Home Depot seems to have fallen for the same trap. So, taking some learning from IKEA, what might have worked better for Home Depot?

It should be noted that a major reason for the differing fortunes of these two brands comes down to the fundamentals of what they sell; one sells modern Scandinavian furniture, while the other focuses on hardware and materials. However, that is not all that Home Depot stocks; they also carry furniture and appliances. Focusing less on hardware and more on these end-consumer products seems to be an obvious opportunity, especially given their American origins would signify high quality.

Secondly, while the end-user is not usually involved in the selection of materials, they care greatly about the quality and the health impact of those materials; people tend to avoid oil-based paints and it’s common to let a newly decorated property air out for one or two months before moving in. So, again by leveraging their US heritage and offering guaranteed quality and health benefits over locally available materials, Home Depot could have got people involved in the selection of materials for their homes.

Finally, decorating one’s home is a highly emotive time. It’s full of imagination and fantasy and any brand helping to fulfil that dream misses a trick if it doesn’t use that to its advantage. To this end, Home Depot might have positioned itself as a provider of services or experiences; employing interior designers to help home owners plan and design their perfect home or room, and a team of skilled workers to make it a reality. They might have built digital engagement around people’s own designs for their homes or partnered with design magazines or home makeover programmes. What if they had bought and decorated some amazing properties around the country and invited KOLs to stay in them? Instead of “you can do it, we can help” it could have been “you can dream it, we can make it happen”.

This is of course all easier said than done, and we appreciate there were other aspects to Home Depot’s difficulties, but with the right approach to home decoration in China they may have seen some of the success that IKEA has.

Navigating the complexities of the China market is not easy for any brand, and Searchlight is perfectly positioned to help find the Goldilocks zone between complexity and simplicity. Reach out to us at enquiries@searchlightchina.com. We work with both local start-ups as well as international brands that would like to do better in this market.