IKEA to Beat “The Way to Communism” and to Invest US$2.1 BLN in its Russian Malls

By Marina Romanova

The Supreme Court of Russia has affirmed the lower court’s ruling rejecting a claim of an agricultural enterprise, former collective farm “The Way to Communism”, which demanded to demolish two 15 store’s buildings of the “Khimky” business park, belonging to Swedish furniture retailer. Thus the court has settled the claim of IKEA, Russian news agency RIA Novosti reports.

The 16.4 hectare plot of land has been at the root of a long-term dispute between the retailer and former collective farm, now called Khimki Collective Agricultural Enterprise. They accuse IKEA of faking the documents required to obtain the land on the Leningradskoe highway, the Russian Kommersant daily reported.

Agricultural Enterprise board members claim that their signatures were faked and that they never agreed to give away the disputed land to the Khimki administration. Khimky city administration leased out the plot of land to IKEA for 49 years in 1993 and then sold the land to the retailer in 2011.

The news came along with country’s largest shopping center operator, IKEA Centers Russia, known for its large warehouse-like out-of-town stores and flat-packed self-assembly furniture, announcing its plan to reinvest at least US$2.1 billion to upgrade and expand its current portfolio of 14 locations across Russia. In Russia the stores operated by the group are known as mega malls. The vacancy rate of the 14 malls currently fluctuates around 1.4 percent.

“More retailers want larger space to showcase their products,” said Olga Shevtsova, head of sales and commercial development at IKEA Centers Russia explained reporters. The new areas are targeted at renters in the fashion, electronics, toys, entertainment and food sectors.

Russia’s economy may be slumping, but there appears to be a bright spot in the retail sector, The Wall Street Journal speculates when writing about IKEA’s reinvestment plan.

IKEA Centers has long-term plans to develop more malls further east in Russia in the next 10 years. The most eastern so far IKEA’s mall was opened in 2007 in Siberian city of Novosibirsk, which is located approximately 1747 air miles to the east of Moscow. Swedish flat pack furniture retailer currently holds 40 percent market share in Novosibirsk region.

Earlier in January 2016, Swedish firm announce its plan to build mega hypermarket in another Siberian location, city of Krasnoyarsk, the home of the second world largest aluminum plant (RUSAL).

According to the local media, the retailer plans to erect its mall on a 47.7 hectares land plot located in a city suburb called Solontsy-2. The company also gets 3.4 hectares of land nearby for the parking lot of the future shopping center. Both areas were leased from the local authorities for the initial 7 years for 244,2 million rubles (around US$38 million) and 13,7 million rubles (around US$213,000) correspondingly. The new mall is expected to open its doors to the customers’ in two years.

As a reference, the company’s policy envisages construction of IKEA hypermarkets in Russian cities with population of more than 500,000 inhabitants. The population of Krasnoyarsk city was about 1,052,000 in 2015.

The group has been successfully working in the Russian market for over 16 years and the first IKEA store opened in 2000. The average mega centers house about 200 stores and welcome around 275 million visitors a year, according to the company.

Unlike other Western manufacturers in Russia who were hit by the ruble depreciation and weaker consumer demand, IKEA’s sales in the country grew 14.7 percent last financial year (September 2014 – August 2015), the company reported without specifying its total Russian earnings. In a last two years IKEA also has increased its local production in Russia.

“About 60 percent of products on sale are made in Russia. This share has been increasing gradually, year after year. Two years ago, the localization was about 50 percent”, a spokesman for IKEA told TASS on Wednesday.

The spokesman added that IKEA is working with about 60 local suppliers from different regions in Russia, and this number will only grow.