Corruption in Russia: IKEA’s expansion to the East (A)
introduction
In 2000, IKEA, the world’s largest furniture retailer entered the Russian market. The Swedish
retailer wanted to be part of the gold rush fueled by the emerging middle class in Russia after
the fall of the Iron Curtain. The company was preparing to open its first flagship store on the
outskirts of Moscow, only the first of several planned projects. After substantial investments in
infrastructure and logistics, IKEA focused on marketing, but quickly faced a sudden
complication. Its major ad campaign in the Moscow Metro with the slogan “[e]very 10th
European was made in one of our beds” was labeled “bad taste”. IKEA had to stop the
campaign because it “couldn’t prove” the claim.1 Soon Lennart Dahlgren, the first general
manager of IKEA in Russia must have realized that the unsuccessful ad campaign was going to
be the least of his problems: A few weeks before the planned opening, the local utility company
decided not to provide their services for the store if IKEA did not pay a special service fee.2
What should IKEA and Lennart Dahlgren do? Was there any alternative to playing the game the
Russian way, and paying?
This case study was prepared by Urs Müller of ESMT European School of Management and
Technology. Sole responsibility for the content rests with the author(s). It is intended to be used
as the basis for class discussion rather than to illustrate either effective or ineffective handling
of a management situation. Copyright 2016 by ESMT European School of Management and
Technology, Berlin, Germany, www.esmt.org. ESMT cases are distributed through Harvard
Business Publishing, http://hbsp.harvard.edu, The Case Centre, http://www.thecasecentre.org,
and Ivey Publishing, https://iveycases.com. Please contact them to request permission to
reproduce materials. All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –
electronic, mechanical, photocopying, recording, or otherwise – without the permission of
ESMT.
From a small company to a global player
IKEA was founded in 1943 as a general mail-order company in a small village in Southern
Sweden. By then end of 2000, the privately owned IKEA Group was operating 151 stores in 29
countries with a turnover of about €9.5 billion (see Exhibit 1 and 2).3 IKEA continued to carry
out its mission of providing quality furniture with an innovative design at an affordable price to
average income consumers, in particular to families. IKEA had described its vision and business
plan as such: At IKEA our vision is to create a better everyday life for the many people. Our
business idea supports this vision by offering a wide range of well-designed, functional home
furnishing products at prices so low that as many people as possible will be able to afford
them.4 As early as 1955, IKEA established its innovative business model of self-assembly by the
customer and flat packaging for easier transport. IKEA founder and owner Ingvar Kamprad
described this as an optimal method “to avoid transporting and storing air.”5 IKEA opened its
first flagship store just outside of Stockholm in 1965. Opening a store close to Stockholm, IKEA
proved that the company’s new idea of producing and selling low-cost furniture could succeed
in a metropolitan market. With the innovative concept came the new idea of self-service in an
industry that had traditionally been dominated by large numbers of salespeople.6 In the mid-
1960s, IKEA began its international expansion, first to its Scandinavian neighbor Norway and
then moving into Denmark. In the next two following decades IKEA opened stores in much of
Western Europe, expanding into Germany in 1974 and France in 1981. Having opened stores in
Australia in 1975 and Canada in 1976, IKEA took on the US market almost ten years later,
opening its first store in Philadelphia, Pennsylvania in 1985.7 During its rapid expansion, IKEA
targeted young people between the ages of 20 and 35. Demonstrating its family-friendliness
and marketing savviness, IKEA launched the Family Card in 1984, a customer card giving
discounts and special deals to cardholders, including a free cup of coffee anytime one came into
the store.8 IKEA served the coffee in its own in-house restaurant, the first of which was opened
in Sweden in 1960.9 And of course, IKEA became famous for running small playgrounds and
offering child care while parents strolled through the exhibition halls. IKEA’s founder Ingvar
Kamprad stepped down as CEO in 1986, but as owner and honorary chairman, he maintained
significant influence on the company’s strategy and culture. The company culture and strategy
was often described as highly cost-cautious, sometimes even as stingy. 10 IKEA always sought
out the lowest possible production cost to provide the most competitive price.11 Accordingly,
the company’s internationalization was not only driven by the desire to sell more products to a
broader customer base but also the search for low-cost production opportunities and
capacities. IKEA turned into an international business early on.
Behind and after the fall of the Iron Curtain
Long before 1989, IKEA recognized that buying supplies from countries behind the Iron Curtain
would give them a competitive cost advantage, the Swedish retailer was already holding
contracts with factories in East Germany, Poland, and Yugoslavia. In the 1970s, supplies from
Eastern European contractors made up for around 20 percent to 25 percent of the company’s
total needs, even during the political turmoil and changes in 1989, around 15 percent of the
supply came from Eastern Europe.12 After the dissolution of the Soviet Union, IKEA quickly
seized the opportunity to expand its concept into Eastern Europe, first opening a store in
Budapest, Hungary, in 1990, and then moving into the Czech Republic and Poland the following
year.13 IKEA’s immediate success in these markets demonstrated that Eastern European
average income consumers really had a demand for stylish and budget-friendly furniture.
Between 1990 and 2000, IKEA opened a total of five stores in Poland, two stores in Hungary
and Czech Republic respectively, and one store in Slovakia. A move further eastwards to Russia
seemed like a logical next step. In 2000, IKEA planned to open its first store in Moscow. By
entering Russia, IKEA wanted to tap into a huge and potentially highly attractive market of
around 146 million consumers.14 Between its foundation in 1943 and 2000 IKEA had already
entered (and conquered) most of the established, developed economies and had even started
to move into emerging markets such as Malaysia (1996) and China (1998). Additional growth
was seemingly only possible by capturing market share in additional emerging markets – and
given its size Russia appeared to be an obvious choice, especially since IKEA had already
sourced raw-material and finished products from Russia before. In 2000 Russia was still
perceived as the Wild Wild East. In the decade after the fall of the wall, the country had been
going through political and economic turmoil including a slight decrease in its overall
population (from 148.3 to 146.6 million inhabitants from 1990 to 2000) and periods of
extremely high inflation and negative GDP growth.15 Only in the last few years before 2000 the
situation had gotten more stable even though inflation was still at 20.1%.16 But the economic
indicators seemed to point into the right direction and the country was still far behind the
European average consumption for furniture, with the expenditure rate estimated at €7 per
person in 2000. Compared to up to €300 spent annually per person in Germany, there was
certainly the prospect of a large and growing market, especially if a company could successfully
reach out to the emerging middle class.17 A Russian emerging middle class was eager to
improve its standard of living, including making changes to the interior design of its homes.
Little improvements had been done to apartments since Soviet times, with old-fashioned
cupboards and tables often being mixed with homemade essentials. Sovietmade furniture was
large and heavy and often filled almost all of the little space in small Russian apartments.18
According to the New York Times, Russian households seemed to be “a goldmine of need” for
durable goods.19 Russia, indeed, seemed to be a must for international retail chains in general.
Problems before opening the mall in Khimki
Soon after the decision to enter Russia, IKEA learned that doing business in this country
required some adjustment. The company had some initial successes, for instance in resolving
the issue of the calculation of import duties on furniture.20 However, IKEA soon struggled to
get hold of a prime location at the necessary low cost to fit into the business model. After an
unsuccessful search within Moscow, IKEA decided to open the first store three miles outside of
the city in a place called Khimki.21 Scouting the site, development, and construction took two
and a half years, but new issues came to light. After IKEA’s disastrous ad campaign, the city of
Moscow blocked the construction of an overpass that was supposed to ease the traffic to the
new store. The region’s officials were reported to order IKEA to build the overpass, but after
already investing $4.5 million, and with only two pillars left to build before the structure was
complete, the city of Moscow stopped construction. The city had control over a street that also
had to be passed, as the day of the opening came closer and closer, the traffic issue remained
unresolved. Finally, a few weeks before the grand opening of the first IKEA in Russia in 2000,
the local utility company reportedly approached the company’s management and gave an
ultimatum: Lennart Dahlgren, general manager of IKEA in Russia, could either pay a special
service fee or proceed without electricity.22 Already under pressure from the previous
challenges associated with the grand opening, Dahlgren had to act fast. Could IKEA afford to
postpone or even completely cancel the opening in Khimki? Or should he just pay whatever was
required?
Corruption in Russia: IKEA’s expansion to the East (B)
Introduction
In line with IKEA’s image as innovative company, the organization came up with a creative
solution vis-à-vis the local utility company’s demand for a special service fee. Instead of paying
a bribe the global furniture retailer simply bypassed the utility company by renting diesel
generators to power the outlet.1 But IKEA will soon have learned that corruption in Russia was
systemic and could not be easily defeated through innovation or creativity alone.
IKEA’s successful grand opening in Khimki
The opening of IKEA’s first store in Russia was an enormous success. When the diesel
generators started operating in the morning to provide the necessary electricity for the lights,
computers, and cash registers, customers were already lining up outside to get in. About 37,000
people crowded the 31,000-square-meter store on the first day. But due to the unresolved
issues with the city of Moscow, the planned overpass to the store was still missing its last two
pillars. Consequently, the line of cars that were trying to exit the highway to IKEA was close to
five km long by noon. And even though 70.
This case study was prepared by Urs Müller of ESMT European School of Management and
Technology. Sole responsibility for the content rests with the author(s). It is intended to be used
as the basis for class discussion rather than to illustrate either effective or ineffective handling
of a management situation. Copyright 2016 by ESMT European School of Management and
Technology, Berlin, Germany, www.esmt.org. ESMT cases are distributed through Harvard
Business Publishing, http://hbsp.harvard.edu, The Case Centre, http://www.thecasecentre.org,
and Ivey Publishing, https://iveycases.com. Please contact them to request permission to
reproduce materials. All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –
electronic, mechanical, photocopying, recording, or otherwise – without the permission of
ESMT. percent of the 265,000 people entering the outlet during the first weeks were only there
to take a gander, the remaining 30 percent of visitors (i.e. almost 80,000 people, which is more
than 6,500 per day) had already started adapting to the IKEA way of living. The company’s
assessment of the market proved to be correct: Most Russians were in need to upgrade the
interior of their apartments. Only three percent of all purchases were paid by credit card, and
the large number of middle-class cars in the parking lot demonstrated that it was not just the
upper class that could afford to buy IKEA.2 Hopes and plans for more IKEA stores on the base of
a huge potential market demand across the country were high. And things even looked
brighter: After realizing that IKEA was not going to play the corruption game, the utility
company caved in and started providing the necessary electricity. Nevertheless significant
challenges remained during the opening of the next spate of stores. During subsequent new
openings in Russia over the following years, IKEA reportedly faced similar bribing attempts from
utility companies. Then the retailer followed the established pattern of renting diesel
generators to provide enough electricity for the large shopping malls in which the IKEA stores
were located. And IKEA executives took pride in having found a creative solution to the
demands for bribes. In a newspaper interview, Lennart Dahlgren commented: “We Swedes are
poorly educated in corruption. Whoever complains about corruption should know one thing:
Without anybody giving, there is nobody to receive.”3
Plans for expansion in Russia
As of the end of 2008, IKEA had opened eleven giant shopping malls, called MEGA malls, in
Russia. MEGA malls housed not only IKEA stores, but also other retailers, restaurants, and
entertainment facilities like skating rings.4 Three IKEA outlets were located in Moscow, where
the first two stores were opened in 2000 and 2001. St. Petersburg followed in 2003 and
received another store in 2006. In 2006, IKEA opened a total of three stores, the most in any
single year, and then slowed down its expansion, opening just two stores in 2007 and one in
2008.5 IKEA had planned to expand more quickly in Russia; the declining rate of openings
reflected an increasing level of problems, most of which had to do with administration and an
opaque Russian bureaucracy. Like the issue with the half-finished overpass, IKEA repeatedly
encountered more bureaucratic challenges. A classic example was the planned construction of
a MEGA mall in Samara. The construction began in 2007, but local officials repeatedly
prohibited IKEA from opening the Samara store due to the violation of “numerous safety
regulations and other rules”.6 Apparent problems like this continued to put a damper on IKEA’s
rapid expansion plans. Despite the slowdown in opening new stores, Russia already accounted
for almost five percent of IKEA’s global business at the end of 2008. The company initially grew
at a rate of 20 percent per year in Russia and enjoyed an increasing popularity with the general
public, making it necessary for emergency vehicles to be on the scene of grand openings of new
stores.7 IKEA clearly wanted to be in Russia, and to grow even faster than their current rate.
Russian customers, in turn, wanted IKEA products. But external circumstances seemed to
hinder the company to grow.
A growing concern within IKEA
After several years of business in Russia, the focus moved from external to internal issues.
Refusing to give in to the seemingly systemic corruption in Russia, IKEA continued to rent diesel
generators whenever a local utility company tried to solicit bribes to provide electricity. This
tried-and-true method worked for years and seemed to be the ideal solution for getting around
the bribes. The company once again rented diesel generators when confronted with the
request to pay bribes from utility companies before the opening of two malls with IKEA stores
at the end of 2006. The stores opened on schedule and just in time for the year-end shopping.
But still at the end of 2008, generators were still supplying electricity for both malls, because
the companies asking for special fees proved to be stubborn.8 At the beginning, IKEA did not
notice the skyrocketing rental costs for the diesel generators but over time, the first signs of an
underlying issue surfaced. In 2008, when IKEA became aware of the high costs, the board hired
a private investigation company based in London. After examining the Russian operation, the
investigators identified a former employee who testified that a Russian IKEA executive in charge
of renting and managing the generators was responsible. Apparently, the manager was taking
substantial kickbacks in the form of weekly cash payments from the diesel generator rental
company. Allegedly, the generator company charged IKEA a much higher than normal rental
price. This suspected fraud might have been occurring for more than two years, and IKEA
estimated the damage to be around €135 million. When confronted with the allegations, the
IKEA executive denied any wrongdoing, and the owner of the generator rental company argued
that the high costs were due to the fact that the generator had been rented as standby power
source, but had supplied the two MEGA malls continuously for years.9 While the diesel
generators were still buzzing after two years in operation, and while the customers were still
rushing into the 11 Russian stores, IKEA had to turn its attention inside its own organization.
After findings of alleged corruption within the organization, IKEA faced a new issue: internal
corruption. Which next steps should the company have taken in the short and long run to
address those problems?
Corruption in Russia: IKEA’s expansion to the East (C)
Introduction IKEA decided to follow through its no-corruption policy, after the discovery of
signs of corruption within the organization. IKEA terminated the contracts with the diesel
generator company and with the purchasing manager, even though both insisted on their
innocence. The former IKEA employee accused of accepting kickbacks denied any wrongdoing,
and claimed instead that IKEA’s country managers were trying to cover up their own expensive
incompetence by blaming Russian subordinates. He also argued that the Russian police
investigated and cleared all IKEA’s allegations1 .
The blindfolded Justitia in Russia
Once so proud of their innovative solution to bribery attempts in Russia, IKEA executives were
forced to recognize that the systemic problem had not been solved. Christer Thordson, an IKEA
board member and global director of legal affairs, publicly admitted that IKEA was slow in
recognizing the soaring rental costs for generators. He blamed IKEA’s “pell-mell rush to expand
This case study was prepared by Urs Müller of ESMT European School of Management and
Technology. Sole responsibility for the content rests with the author(s). It is intended to be used
as the basis for class discussion rather than to illustrate either effective or ineffective handling
of a management situation. Copyright 2016 by ESMT European School of Management and
Technology, Berlin, Germany, www.esmt.org. ESMT cases are distributed through Harvard
Business Publishing, http://hbsp.harvard.edu, The Case Centre, http://www.thecasecentre.org,
and Ivey Publishing, https://iveycases.com. Please contact them to request permission to
reproduce materials. All rights reserved. No part of this publication may be reproduced, stored
in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means –
electronic, mechanical, photocopying, recording, or otherwise – without the permission of
ESMT.
After this experience, IKEA executives might have wanted to regain control. In addition to the
termination of the contracts with the diesel generator company and with the purchasing
manager, IKEA went to court and claimed compensation for fraud. However, instead of
receiving reimbursement for the alleged €135 million in damages from the kickback scheme, an
arbitration appellate court in Moscow ruled in June 2009 that IKEA had to pay €5 million for
breach of contract to the diesel generator company.3 IKEA appealed, but had to deposit the €5
million in an escrow account, to be paid to the head of the generator rental company only if the
appeal was lost as well. In another instance, a lower court ordered that the money also be
directly withdrawn from IKEA’s account. At this point IKEA had paid out €10 million – twice as
much as the initial ruling, although the appeal process had not started yet.
Opaque and absurd
While the denial of corruption in Russia was widespread, the country’s politicians started to
admit that the country was having a problem. Several high ranking politicians repeatedly
criticized corruption as a significant impediment to foreign investment. They were also urged to
take action from non-government organizations such as Transparency International (TI). TI
published an annual Corruption Perception Index, which measured in a composite index the
perceived levels of corruption in various countries and which ranked Russia (together with
Bangladesh and Kenya) in 2009 at place 146 (seven places behind Pakistan) from 180 countries
in the area of “clean government and business” (see Exhibit 1).5 Despite public statements,
Russian leaders did not seem to have an answer to corruption by 2009. In the same year,
Russian President Dmitri A. Medvedev enacted a law prohibiting surprise inspections from state
employees, a practice often used by fire fighters and health department employees as a decoy
for extortion. This law also required that spouses of bureaucrats disclosed their income and
assets so that tax evasion and money laundering within the family became more difficult.6 TI’s
reaction was cautiously optimistic. And while TI applauded IKEA’s position regarding corruption,
the NGO also said about the larger context: “[I]f companies like IKEA don’t see results in their
daily business practices, it’s sad news for Russia.”7 The National Anti-corruption Committee
estimated that one-fifth of the annual GDP in Russia, almost $200 to $300 billion, was paid out
in bribes to bureaucrats. Lennart plgren, first general manager of IKEA in Russia, had stepped
down in 2006 and written a book titled Despite absurdity: How I conquered Russia while it
conquered me.8 In this book he remembered that there were often so many bureaucrats in the
IKEA offices that it was impossible to tell them apart from employees.
When a market is almost too attractive
Russians needed furniture. It was as simple as that. A legacy from the Soviet era had been a
lingering deficit of durable consumer goods, including furniture. The growth rate within Russia
averaged 20 percent for IKEA for most of the 2000s, which definitely made it easier to ignore
the challenges of doing business in what the New York Times described as “a maddeningly
opaque but potentially lucrative market of 140 million people.”10 And despite all their
struggles, IKEA managed to open their 12th store, another 25,000 sqm, in Omsk in 2009.
By this point, IKEA seemed able to overcome graft, corruption, and an opaque bureaucracy with
persistence and adherence to company policies and, more importantly, with creativity. The
Moscow Times quoted Dahlgren as he described the necessity of getting more than 300
separate permits to build a store: “If we had waited to receive them all, we would have lost
years.”11 Accordingly, the company had seemingly always looked to come to agreements with
local authorities so that they could begin construction and receive the permits “in the
process.”12 But the problems had not only spilled over from external to internal challenges:
After the court’s ruling and the double withdrawal of the €5 million, it seemed as if the
problems also extended beyond the business arena into the judicial system, which unveiled an
even larger societal issue. On the one hand, IKEA seemed to be alone in this fight, but on the
other, the Swedish retailer had to wonder if there was anything that the company could do to
enable its continuous operation in a market that seemed to be toxic. How could IKEA continue
to do business in a country placed in a cluster of the 20 percent most corrupt countries in the
world, and in which even the legal system apparently failed to provide the necessary level of
security for business? The average Corruption Perception Index of all countries into which IKEA
had expanded since its foundation per decade had fallen from 8.7 in the 1950s-1970s to 5.4 in
the 1990s. In 2009, Russia scored only a shockingly low 2.2 (see Exhibit 2). Had IKEA, in its
decades of geographic expansion, grown too far?
