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  • Emerging Real Estate Digest Writer (Admin)

IKEA’s $600 million Latin America Expansion


IKEA storefront

Executive Summary

  • An anchor like IKEA, when entering a market in Latin America, will draw a lot of attention and interest from the consumer.

  • The closest examples of new entrants in Latin America, though these aren’t considered anchor stores, are the entries of H&M, Mango and Forever 21.

  • The partnership with Falabella will expand IKEA’s footprint in Latin America from three stores to twelve, and from operating in two Latin American countries (three including Puerto Rico) to five.

  • Falabella is expected to contribute a whopping $600 million of investment to launch IKEA in the region for the brand expansion into Chile, Colombia and Peru.


Introduction


Property developers understand that the key to a successful retail project is securing one or more attractive anchor tenant commitments. Anchor tenants will generally represent between 30% - 50% of total trading space of a mall, and are primary drivers of feet to the mall once opened. It’s these feet which shop in the smaller and higher rent paying line shops, and give life to the mall.


Anchors are able to negotiate favorable terms in many cases because they sign early and are expected to drive much of the mall’s traffic. In the heyday of shopping malls in America, anchor tenants were able to sometimes even negotiate $1 dollar rental rates, or the opportunity to purchase the underlying land at a steeply discounted price and pay no rent. The anchor commitment, in the form of a long-term binding lease agreement, is a major milestones which the sponsor developer must achieve to unlock bank financing. Anchor commitments signal to the other tenants that the developer is funded and ready to move, and that the project will be successful.


An anchor like IKEA, when entering a market in Latin America, will draw a lot of attention and interest from the consumer. They are accustomed to the handful of anchor shops trading in their market which are dominated by the same supermarket and department store chains. A new grocery store opening is not a major development anymore in Latin America. E-commerce has yet to penetrate Latin America to an extent it has in the more developed markets, and because of that fashion retail and department stores are still viable offerings. Movie theaters are popular in the region, and the price for admission and concessions is dramatically lower than the American movie goer pays, making the experience more accessible and popular.


The way IKEA mixes experience, entertainment and shopping for home furnishings is yet to be replicated in a meaningful way by others. Even established malls will have difficulties keeping current footfalls once a new IKEA opens in the city. It’s quite rare that new anchors enter the region, especially one with as much potential to draw interest like IKEA. The closest examples of new entrants in Latin America, though these aren’t considered anchor stores, are the entries of H&M, Mango and Forever 21.


Falabella Partnership


IKEA entered South America in 2022 with its first store in Chile. It has plans to continue expanding in Chile, as well as into Peru and Colombia. In those three markets, the retailer plans to open nine stores in ten years, as well as online channels to facilitate e-commerce purchases and deliveries in the major urban areas. Although the franchise agreement with Falabella was announced in 2018, the first store in Chile was opened in 2022. This is the first IKEA in South America, though not the first in Latin America. The Dominican Republic in Central America has a small “test” store, as does the American territory Puerto Rico. Mexico opened its first IKEA in 2021. The remaining nine stores are expected to open in the next four years, per the agreement with Falabella. The partnership with Falabella will expand IKEA’s footprint in Latin America from three stores to twelve, and from operating in two Latin American countries (three including Puerto Rico) to five.


IKEA almost always expands internationally through franchise agreements. Typically, the local franchisee will pay the IKEA parent annual royalty fees of 3% of net sales. In return, IKEA permits the franchisee to market and sell IKEA products, and to manage the local stores and sales channels. Falabella is expected to contribute a whopping $600 million of investment to launch IKEA in the region. This figure is too high to be only for IKEA store openings, so likely also includes building out e-commerce capabilities, opening new Falabella stores, and other similar investments. Falabella has previous similar experiences as the operating partner for the American chain Crate & Barrel in Chile, Peru and Colombia.


IKEA and Falabella executives announce latin america partnership
Falabella and IKEA Executives Announce the Partnership

A final point of discussion on the Falabella partnership is that IKEA is a wood-hungry company and produces the furniture it sells internally. It owns the manufacturing and timber facilities in its supply chain, and much of the input-timber comes from Chile, Brazil and Argentina. By expanding in the region, with a prominent local partner, it is strengthening its ability to secure its share of future timber exports from Latin America. By creating a larger market for its products in Latin America it may also be able to establish manufacturing capacity in the region to be closer to the timber.


IKEA in Mexico


IKEA launched in Mexico in 2020 by offering online purchases and delivery for customers in Mexico City. In 2021, the first IKEA was opened in Mexico City and is a 23,000 m² (i.e., 247,500 ft²) store. Nearby Puebla, Mexico is expected to open the second IKEA in the country in 2024. The launch of the first physical store in Mexico City was a bit of a let down since the store shelves were mostly empty on the opening day due to the supply chain challenges caused by the global lockdowns governments imposed. In spite of that, the store has recovered and had more than two million visitors in the first year of operation. Other stores are planned to be opened in Guadalajara and Monterrey.


The Mexican franchisee partner is IKANO group and that franchise agreement was granted in 2017. IKANO operates IKEA stores in Singapore, Malaysia and Thailand. The group has holdings outside of retail and IKEA, and is owned by the Kamprad family, descendants of the founder of IKEA, Ingvar Kamprad.


Structures of IKANO Group operations
IKANO Group Operations

IKEA in Brazil


The Swedish retailer does not presently trade in Brazil, but it is a logical next step based on the economy and population. Brazil is the only BRICS nation without an IKEA, and the brand is widely successful in Russia and China. The primary problem for IKEA in Brazil is the 75% tax it imposes on imported goods. Logistics in the country provide further complications given its slow ports, vast land area, and limited internal transportation infrastructure. Brazil has a competitive local furniture industry, and some of the brands have offerings which closely resemble the IKEA offering.



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