Online Home Furnishing, Design and Remodeling The Proposed “Dream Home Central” E-Commerce Site - Management Essay Example

I - Online Home Furnishing, Design and Remodeling The Proposed “Dream Home Central” E-Commerce Site introduction.          Introduction: The Market Opportunity
A.      Overview
This proposal aims to bring the benefits of convenience and economies of scale that ecommerce will afford the furniture and home furnishing market.  The proponent aims for speed to market by applying “best practices” of ecommerce in other consumer goods industries and efforts by the industry itself to adapt a viable ecommerce business model.  Secondly, the proposal looks to broaden market penetration at once by partnering with perhaps the best-known mass-market furniture brand today.  Thirdly, this ecommerce operation will provide an online design and lifestyle service that will stand out from all other applications extant at least since 2001.

B.      The Furniture, Fixtures and Furnishings Industry
The furniture and home fixture industry may not have the cachet of designer clothing or the sheer magic of sports cars.  However, industry volume is immense, fueled both by housing starts and the replacement market.  No household is complete without furniture, appliances and fixtures.  This is a class of expenditure that largely goes unnoticed because it is so utilitarian, nearly as basic as food and utilities.

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Focusing, first of all, on the large American market of 303.5 million people as of November 2007 and an aggregate household count of 126.3 million in July 2006 (U.S. Census Bureau, 2007), one realizes that the potential is vast.

The massive size of this market is shown by the fact that, at last count, there were no less than 350,828 manufacturers that produced $ 3.916 trillion worth of household, office and institutional furniture, including kitchen cabinets and related products (U.S. Census Bureau, 2002).  Even granting that neither production volume nor prices increased in the intervening five years, that is equivalent to annual expenditures of $31,000 (at factory prices) or the entire year’s income for a lower middle-income family.

C.      IKEA
I propose to implement this online-design ecommerce solution as a franchisee of IKEA because:

1.      This Swede company headquartered in the Netherlands is already an established name in furniture.  To my target market, the IKEA brand equates with trustworthy products.  This is the first hurdle that every online and ecommerce site must overcome.

2.      IKEA has the broad product range that makes complete package buys possible.  That is, it is possible to completely furnish an office, living room, kitchen, den or bedroom from a single vendor.

3.      The IKEA retail system accommodates phone and mail ordering but not a full-fledged online ecommerce mode.

4.      Retail prices are fixed for at least 12 months at a time.  This reduces maintenance costs for the ecommerce web site in point of having to take down product pages from time to time just to update item and set prices.

Perhaps nothing better illustrates the tenacity of IKEA than the fact that it is already 44 years in the business and still focused on one cohesive product category: knock-down, do-it-yourself (DIY) furniture.  Ingvar Kamprad boldly commenced the business in 1943, when the Allies were still rolling back Hitler’s armies on the peripheries of Europe and the Mediterranean.  Today, IKEA has company stores (typically constructed along the “warehouse” or “discount store” look) or franchisees in 24 European countries, the U.S.A., Canada, key East Asian markets, Israel, Kuwait, Saudi Arabia, and the United Arab Emirates.

The company believes in providing “…well-designed, functional furniture at price so low that as many people as possible will be able to afford them, creating a better everyday life for many people”.  Or more briefly stated in corporate advertising, “Affordable Solutions for Better Living” (Inter IKEA Systems, 2007).

IKEA reported turnover of €20.685 billion for the fiscal year ending August 31, 2007 from both mail order and 260 stores worldwide.  The company does not break down retail and mail order but the scale of mail order is shown by the fact that the catalogue has “hundreds of pages”, is published in 20 languages, distributed in 30 countries and has had a print run of 160 million copies.

In six decades of operation, owner Kamprad likes to joke, IKEA has made every mistake possible.  But IKEA is in fact a conservative company.  For instance, the company is on track to open five stores each year in the U.S.A. (its second largest market after Germany) up to 2014 whereas Wal-Mart inaugurates ten times that number just in 2004 (USA Today, 2004).

Nonetheless, marketing management at has advanced to the point where, for example, the American stores now carry three classes of products that are priced for well-off families, first-time home buyers, and bargain-conscious home refurbishers.

Sales turnover aside, IKEA reveals that daily store traffic comes up to 1 million shoppers, average repurchase frequency is 3.5 times a year, six in ten are women, their average age is 42 years and typical transaction is $500.

D.      The World of Ecommerce
The main impetus for the robust growth in the ecommerce industry is greater Internet penetration.  As early as 2002, Jupiter Media had forecasted that two-thirds of the entire U.S. population would have Internet access in 2006 (2002).  This compares with just half in 2001, the year of the dot-com bust.

With so many Americans experiencing reliable service on the Internet, sales climbed from just $47.8 billion in 2002 to “$146.4 $146.4 billion (excluding travel),  representing 6 percent of overall retail sales in 2006” (CNNMoney, 2007).  The leading product categories were clothing, accessories and footwear; computer hardware and software; cars and car parts, and home furnishings ($ 10 billion).

II.         Business Model
Our operational options essentially consist of becoming:

National super-franchise, with authority to sell anywhere in continental North America.  This is not an easy concept for Inter IKEA Systems BV to accept because all of the current 260 stores were constructed on the premise of serving a defined (physical) sales territory.  And it could well involve us in very high carrying costs owing to an inventory that extends to 10,000 individual items.

Straightforward retailer but doing business online – This immediately runs up against the current policy of not accepting any more franchisees in North America and indeed in every other country where there is already even one IKEA store.

A.      Value-added reseller
In fact, our main raison d’etre for launching an ecommerce adjunct is that giving home and office shoppers the ability to browse for all the furniture and fixtures they need to complete any given setting is meant to vastly increase the IKEA market share of around $3 trillion in annual furniture and furnishings demand in the U.S. alone.  Even if global turnover reported at €20.685 billion last fiscal year were absorbed solely in North America, sales would still be a drop in the bucket, not even 1% of total industry revenue.

In order to fund operations optimally, however, we shall negotiate a Franchisee status with Ingvar Kamprad himself.  Like any other franchisee-candidate, we will fund all necessary investments (see section X. “Equity Requirement” below).  In return for global market rights, however, we shall offer IKEA USA (initially) and the rest of the Inter IKEA system eventually multiple benefits:

1.      Greatly enlarged gross revenue by virtue of reaching remote communities and countries that IKEA has yet to penetrate, like Russia and China.  After all, satellite services have given unwired Smalltown, U.S.A. access to the Internet.

2.      A quantum leap in the use of Flash movies and slide shows to give families and interior designers the ability to visualize rooms, settings and showcases the instant they choose an item or color of that item.  This is the same technology that clothing retailers have used to great advantage to let shoppers rotate a garment and see how it looks in different colors.  Premium-item ecommerce sites also depend on it to enable their business customers to see how a blue promotional pen, for instance, would look with their company logos imprinted in white, red or whatever they choose.

3.      Greater stability and accessibility that will come from separating the ecommerce operation from the USA web site.  As it is, this site is goes down several times a day because IKEA has not yet mastered the science of accommodating the 0.15% of U.S. surfers who crowd the site throughout the day.  We deal with this by disaggregating the backroom components of the “Dream Home” e-commerce site even as it all looks like a seamless whole to Internet shoppers.

4.      Co-opting professional interior designers (instead of alienating them) by offering customers the option of paying a little bit extra for a designer-recommended package or aesthetically-pleasing combination.

5.      Remove the constraint of middle-aged shoppers tiring themselves out trying to browse all possible choices among the thousands of products IKEA carries.  Concretely, this increases the chances of larger orders per customer.

6.      Give customers the same dynamic experience they have with other ecommerce sites, a combination of animated visuals and live sales support that is not possible with the catalogue.

7.      A corporate social and community relations benefit by auctioning off product returns or donated furnishings and appliances, much as Goodwill Industries does.

B.      Rollout Stages
We shall minimize risk and fine-tune backroom operations, links to/from IKEA databases, and shipping and handling operations by rolling out the project in stages:

 

STAGE
AREA
PROJECTED DAILY VISITOR COUNT
CUSTOMER SERVICE HEADCOUNT
OUTBOUND SALES HEADCOUNT
1
San Diego, CA and British Columbia
120
5
5
2
Canada and United States
5,000
50
300
3
Europe
12,500
250
500
4
Middle East, Asia-Pacific
20,000
350
700
San Diego is a test of project feasibility in a market that is receptive to new ideas, and has a burgeoning population and large immigrant influx that both favor higher housing start rates.  British Columbia, for its part, will test the appeal of furniture e-retailing among many homeowners reached only by satellite Internet services.

III.        The Service
A.      Accreditation link on IKEA site
“Dream Home Central” shall be organizationally, legally and physically independent of the IKEA USA and Netherlands web sites.

On the IKEA web site, we shall appear solely as a setting visual alternating at random among “Dream Living Room”, “Dream Kitchen”, “Dream Entertainment”, and “Dream Dining” for each visitor who drops in.  Clicking on this visual will redirect a prospective customer to the separate “Dream Home Central” site.  Such call to action will be augmented by blurbs like: “Assemble your dream color scheme”, “The lifestyle you deserve!” and “10% off on all orders above $1,500”.
B.      On-site Market Segmentation:
The landing page on the web site shall clearly offer prospective customers the price and lifestyle options that appeal to them.

Service Option
Consumer Typologies
Class 1: Volume discount
College and graduate students in off-campus housing

Immigrant workers
Class 2: Color-coordinated showcase (living room, den, dining, kitchen) assembly and décor
New-home, convenience-oriented, urban

Suburban, new or remodeling
Class 3: Color-coordinated showcase and matching carpets, curtain, wallpaper, paint
Remote communities

New apartment tenants
Class 4: Ask the Expert
Middle-age, new or remodeling
Regardless, all visitors shall be offered full access to the online catalogue, priority notice of on-sale specials, a home design newsletter, complimentary greeting cards and a “Classic Scandinavian Mug” with their name imprinted on it for registering with their contact information.  This permits the outbound sales force to greet them on their birthdays for good will and to check in for additional needs some months later.

C.      Service Features
To keep things convenient for those who order, the ecommerce site shall:

1.      Shall take all details of shipping destination down and supply the Customer Service number at IKEA in case there are problems.  Actual fulfillment and shipping shall be care of existing IKEA staff.

2.      Receive, screen and honor warranty requests through a file copy of the warranty card furnished by IKEA Fulfillment.

IV.       Competitive Environment
A search on “home office décor ideas” yielded no less than 19.1 million web pages out there on the Web.  While many offer pleasing ideas and tips, such sites as All-Home Décor, Home Décor World,Sunland Home Décor, Spacify, All Decors, or Home Furnish are invariably static.  At the generic-named “Interior Design – Home Décor”, for instance, the prospective customer clicks on a vibrant “Home Décor Centre” link only to get a compilation of articles and a link to affiliated designer sites:

Interior design articles

ü  How to arrange a room

ü  Creating a mood

ü  Feng Shui interior design

ü  Home interior design tips

ü  Basic decorating principles

ü  Interior designers and decorators

Interior design sites we like

None offer the functionality we plan to launch.

V.        Strategy and Desired Market Image
Opportunities
Weaknesses
Unique approach to furniture ordering

Can proclaim “first”

Appeal to Net-savvy young generation

Provide new income to affiliated interior designers

Maximum accessibility, geographically and 24/7
Revenue cap owing to IKEA reputation for affordable goods

“Locked in” – Growth dependent on market penetration, not product or service diversification.

 

Strengths
Threats
Established IKEA reputation

Affordable prices

Cost-savings can be booked as income or spent on maintaining customer loyalty

Vast product range

European cachet

Gives customers virtual, vicarious  experience of window displays and in-store settings

Self-service model reduces overhead.
Can be duplicated, given time and resources, by competing manufacturers

Luxury positioning by rival brand might capture better mindshare

Liability for identity theft, especially with respect to credit card information.
The above SWOT analysis suggests a startup strategy that emphasizes:

1.    Close identification with IKEA.

2.    Maximizing the promise of convenience by making the “design your own” feature as intuitive and flawless as possible.

3.    “Rewarding” the customer by sending a print of the onscreen room layout she created.

4.    Very rapid buildup of site awareness, “look of the leader” advertising, and dominant presence in all relevant advertising so as to pre-empt “me-too” sites.

5.    Maintaining a pool of interior designers that will generate new, tasteful schemes and combinations every month and quarter.

6.    Strengthening alliances with professionals by sponsoring assemblies, prize money for design contests, trips to IKEA offices in Europe, coffee table books, “Best of the Year” trophies, and student contests.

VI.       Revenue Model and Pricing Guidelines
As accredited franchisee of IKEA, “Dream Home Builders” will be entitled to the standard 35% merchant discount from IKEA.  I propose to rebate 5% of this to Inter IKEA as payment for prominent display and “click-through’s” on the corporate web site.  The rest will go to funding overhead.

I plan to split the 15% volume discount IKEA allots for orders above $1500 into a 10% rebate to shoppers and the balance to fund sales commissions and bonuses for the outbound sales force.

My third source of earnings shall be payments from affiliate sites.  These are interior designers who rotate into the web site pool and are available, for a fee, when customers click on “Ask the Expert”.  This will mostly go to funding the marketing and advertising budget with any surplus going to stockholder dividends.

VII.     Marketing Strategy
In the first year, the marketing effort will emphasize building awareness for “Dream Home Central”.  This means advertising.

Given the nature of the target audience, the media mix will be a combination of traditional or mainstream media, Internet marketing and direct-response methods:

 

Mainstream
Internet Marketing
Direct-Response
ü  Specialty consumer magazines e.g. Elle Décor, New England Home, House Beautiful

ü  Co-op advertising
ü  Organic search

ü  Paid search

ü  Affiliate marketing

ü  Viral marketing

ü  Email marketing
ü  Trade shows

ü  Sell sheet inserts in IKEA catalogue
VIII.    Technology and General Design
A.      System Design and Workflow
(see overleaf)

B.      Home page and Site Organization
The second reason for dedicated high bandwidth is that Dream Home Central must give visitors continuous access to all of the 10,000 products that IKEA routinely stocks.

The site Gallery page will contain each of the 50 room settings or displays typically shown in a 350,000 square foot IKEA store.

 

 

Welcome to Dream Home Central!

Complete the look you want in the comfort of your home or office.

REGISTER TO GET OUR CATALOGUE

CHOICES:

Fabric sofas & armchairs

Leather sofas & armchairs

Sofa beds

Rattan seating

Extra covers & legs

Cushions & throws

Coffee & side tables

Rugs

Bookcases

Cabinets & sideboards

Shelving units

TV solutions

CD & DVD storage

Curtains & blinds

Living room Series

More Ways to Find

Tips & ideas

– Store & organize – TV solutions – Furnish with light – Candle safety tips

Matching products

– Small storage – Lighting – Decoration & mirrors – Floors – Shelves & brackets – Desks – Clocks – Fabrics & sewing – Knobs & handles

Get Professional Designer tips!

 

 

To serve the most web-centric market of all, the web site will employ a combination of Flash animation and slideshows.  The “Living Room” showcaseshown above, for example, starts out sporting an airy, comfortable and colorful setting but gives the visitor a tasteful slew of choices.  Dozens of them, in fact.

In addition, there are supplementary menus for lighting and coordinated cabinetry.

In order to fill the consumer database for later follow-up phone calls, the site will use a combination of persuasive “call to action” devices and landing or squeeze pages where first-time visitors will be encouraged to register in return for some promotional items and home décor tips sent by email.

Whether the visitor “converts” to a customer or not, all personal details and contact information customers will be retained in the system databases essentially forever so that the Outbound Sales Force may use these “warm leads” in the future to induce follow-up orders.

At least one Tier One (T1) connection to the Internet will be dedicated as a pipeline for visitors to call up any of the 10,000 items in the IKEA online catalogue.  At least three more T1’s will likely be needed on the seventh month, when the marketing target is broadened to all North America.  Such bandwidth is required because of the Flash shows and slideshows that visitors will no doubt play around with to find something to their taste.

Consistent with the IKEA web site, “Dream Home Central” will prominently display “Featured/On Sale” items and other types of seasonal promotions as loss leaders that might induce volume buys for regular-priced items.

In common with all ecommerce sites, my site will boast shopping cart and checkout functionality.  Acceptable modes of payment shall be credit cards, debit cards, PayPal (and competitors like eGold), smart cards and digital wallets.

Except for warranty service, customer service shall be outsourced to a pay-per-call service line NuComm “OnCall” so that “Dream Home Central” need not deal with over- or under-staffing issues.  So far as the customer is concerned, she is dealing with in-house staff through whichever of three channels she finds more convenient: 1-800 toll-free line, chat, or email.

 

 

IX.       Organization
 
X.        Equity Requirement and Projected Revenue
My targeted capital structure is as follows:

My personal savings………………………………………………….. 45%

Company ESOP……………………………………………………….. 10%

Mr. Ingvar Kamprad…………………………………………………. 22.5%

A venture capital corporation…………………………………….. 22.5%

Projected Profit and Loss Statement
“Dream Home Central” Ecommerce Startup
January-December 2008

Detail

Assumptions
Income
73,069,200

On-site orders
41,472,000
Stage 1=6 months, Stage 2=next 6 months, 15% conversion rate

Outbound sales production
27,450,000
$15,000/agent/month

Affiliate orders
4,147,200
10% of regular onsite orders

Expenses
31,105,160

Advertising
450,000
Consumer magazines, year-round

Co-op advertising
125,000

Trade shows
80,000
Eight the first year

Sell sheets for IKEA Catalogue
143,000
Min. 1M copies

Paid search
184,320
Pay-per-click campaign accounts for 60% of visitors, average bid = $0.20

Other internet marketing costs
25,000

Customer service
194,400
Pay-per-call @ $4.50 x callers double the number of non-PPC visitors

Agent salaries
5,490,000
Stage 1=5 agents, Stage 2=300 agents

Agent commissions
1,372,500
5%

Affiliate fees
622,080
15% commission

Office rental
300,000
$25,000 monthly

Executive and staff overhead
720,000

Benefits
1,920,000

In-house IT equipment/LAN
640,000
320 users

Web hosting
2,400
Two servers @ $100.00 a month

T1 rental
108,000
9-12 lines

Leads rental
75,000
@$0.01/name

IKEA Franchise fee (est.)
18,653,460

OPERATING PROFIT/(LOSS)
41,964,040

 

References

CNNMoney.com (2007) Online sales spike 19 percent. Retrieved Nov. 27, 2007, from http://money.cnn.com/2007/05/14/news/economy/online_retailing/.

 

Howard, T. (2004) Ikea builds on furnishings success. USA Today, Dec. 29, 2004, 1.

 

Inter IKEA Systems B.V. (2007). The IKEA concept. Retrieved Nov. 27, 2007, from http://franchisor.ikea.com/showContent.asp?swfId=concept1.

 

Jupiter Media Matrix. (2002) Market forecast report. 6.

 

U.S. Census Bureau (2002) Industry statistics sampler. NAICS 337. Furniture and related product manufacturing. Retrieved Nov. 27, 2007, from http://www.census.gov/econ/
census02/data/industry/E337.HTM.

 

U.S. Census Bureau (2007) Population estimates. Retrieved Nov. 27, 2007, from http://www.census.gov/popest/estimates.php.

 

 

Author, A. A., Author, B. B., & Author, C. C. (Year). Title of article. Title of Periodical, volume number(issue number), pages.

 

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