After reading Eli Greenblat’s recent article, “IKEA to Slash Prices as It Doubles Number of Stores” in the October 16, 2012 issue of The Sunday Morning Herald, I recommend that you decrease your holdings in IKEA, as the company may see huge loss in the future. According to the article, IKEA will “double its store network in Australia in coming years while slashing prices to remain competitive”. The article also mentioned that Australia is “one of the most expensive places to do business” and the Australians are considerate consumers. The reasons why I recommend that you sell part of your IKEA holdings are as follows.
* IKEA has had five stores on the east coast of Australia. Doubling the number of stores may increase IKEA’s influence in Australia, but the profitability of the strategy is questionable. It is costly to open new stores. The company may issue big number of debt and the work force of Australia is expensive. The strategy may lower IKEA’s global profit. The stock price will be expected to fall.
* The cost of doing business in Australia is higher than most countries that IKEA is in. More stores require more employees. IKEA will be expected to pay these employees higher salaries than it pays in other countries. It will significantly increase the cost, making the company less profitable.
* IKEA will “slash the prices of its product to remain its competitive edge”. This
