In this video, we will review the case of IKEA's expansion into Russia in the year 2000. It's a fascinating case that demonstrates the need for the rule of law and the need for perseverance in its absence. If you're not familiar with IKEA, IKEA is a home goods delivery company founded in Sweden that sells ready to assemble furniture, kitchen appliances, and home accessories. IKEA began operations way back in 1958 and began to expand internationally in the 1970s. IKEA today is the largest furniture retailer in the world, with more than 400 IKEA stores operating in more than 50 countries. After the dissolution of the Soviet Union in 1991, Russia became an attractive and open market for Western retailers. In the later half of the 1990s, IKEA made plans to enter the Russian market in the Moscow region. After an extensive and frustrating search, IKEA eventually found a suitable location in Khimki, a suburb of Moscow. The Khimki store opening was scheduled for April 2000, which was after two years of planning, and about an investment of $100 million. However, just weeks before the opening, the local electric company demanded that IKEA pay a special services fee to connect the store to the grid. If IKEA didn't pay the fee, there'd be no electricity for the grand opening. Further, the city of Moscow stopped construction of a critical overpass that would provide easy access to the store. The city demanded that IKEA provide further payment to complete its construction, and this is even though IKEA had already spent $4.5 million on the overpass project. With the store opening in jeopardy, what should IKEA do? Pause the video for a moment and reflect on IKEA's options. Should it go with the flow and pay the special services fee to the electric company and further subsidize the completion of the overpass? Should IKEA fold operations and abandon its ambitions to expand into Russia despite its already large investment? Should it delay the store opening and go to court to try to force the utility in the city of Moscow to finish their work, or perhaps something more creative? Pause the video for a moment and think about these options and decide what you should do. Then resume the video to discover what in fact they did. Well, as it happened, IKEA proceeded with the store opening as scheduled. How did they do it? Well, in order to open, IKEA rented diesel-powered generators to provide electricity and directed customers to use surface roads to reach the store, since the overpass was still missing two pillars. Despite these challenges, the grand opening was a great success. A total of 37,000 people visited on the first day alone. Because there is no overpass, cars lined up for more than six kilometers to get in. That's about three miles to those of us without the metric system. In the first weeks, more than 265,000 customers visited the store, and after the successful start, today the Khimki store remains a successful operation more than 20 years later. IKEA continued expanding into Russia after the opening of the Khimki store, and by 2008 had 11 IKEA mega malls in Russia. IKEA was increasingly popular with Russian consumers to the extent that Russian stores accounted for about five percent of IKEA's global business. Five percent that's a lot. However, bureaucratic challenges, hassles, and obstacles continued to plague store construction and operations. More than 300 separate permits were required to build a store. Utilities continued demand a connection fee to service new IKEA stores, so IKEA continued to rent generators, and to fight bureaucracy IKEA became involved in numerous ongoing corruption lawsuits and controversies within the Russian legal system. IKEA today successfully continues to operate in Russia. It has 14 mega IKEA shopping centers in 11 cities with a total of 2.2 million square meters of retail space. These stores host 250 million visitors per year and have hosted about 2.1 billion visitors since 2000. In addition to growing its physical retail presence, IKEA today is rapidly growing its online business in Russia. More generally, IKEA is the largest foreign investor in Russia after oil companies, and the largest owner of commercial real estate in Russia, IKEA has been so successful that in Russia, millennials are known as the IKEA generation. In the previous video, we saw that the rule of law is not strong in Russia. As a cautionary tale, the IKEA case illustrates that without effective rule of law, operating in a foreign country can be challenging and frustrating, to put it mildly. But the case also illustrates that with perseverance and creativity, a company can overcome these challenges and eventually achieve substantial business success. Just unexpected to come easy.
