MGT/448 Version 6 / 8
University of Phoenix Material
IKEA: Furniture Retailer to the World
Introduction
IKEA is one of the world’s most successful global retailers. In 2007, IKEA had 300 home furnishing superstores stores in 35 countries and was visited by some 583 million shoppers. IKEA’s low-priced, elegantly designed merchandise, displayed in large warehouse stores, generated sales of €21.2 billion in 2008, up from €4.4 billion in 1994. Although the privately held company refuses to publish figures on profitability, its net profit margins were rumored to be about 10 percent, high for a retailer. The founder, Ingvar Kamprad, now in his 80s but still an active adviser to the company, is rumored to be one of
the world’s richest men.
Company Background
IKEA was established by Ingvar Kamprad in Sweden in 1943 when he was just 17 years old. The fledgling company sold fish, Christmas magazines, and seeds from his family farm. It wasn’t his first business; that had been selling matches, which the enterprising Kamprad had purchased wholesale in 100-box lots (with help from his grandmother who financed the enterprise) and then resold individually at a higher markup. The name IKEA was an acronym, I and K being his initials, while E stood for Elmtaryd, the name of the family farm, and A stood for Agunnaryd, the name of the village in southern Sweden where the farm was located. Before long Kamprad had added ballpoint pens to his list and was selling his products via mail order. His warehouse was a shed on the family farm. The customer fulfillment system
utilized the local milk truck, which picked up goods daily and took them to the train station.
In 1948 Kamprad added furniture to his product line, and in 1949 he published his first catalog, distributed
then as now for free. In 1953 Kamprad found himself struggling with another problem; the milk truck had
changed its route and he could no longer use it to take goods to the train station. Kamprad’s solution was to buy an idle factory in nearby Almhult and convert it into his warehouse. With business now growing rapidly, Kamprad hired a 22-year-old designer, Gillis Lundgren. Lundgren originally helped Kamprad to do photo shoots for the early IKEA catalogs, but over time he started to design more and more furniture for IKEA, eventually designing as many as 400 pieces, including many best sellers.
IKEA’s goal as it emerged over time was to provide stylish functional designs with minimalist lines that
could be manufactured cost efficiently under contract by suppliers and priced low enough to allow most people to afford them. Kamprad’s theory was that “good furniture could be priced so that the man with that flat wallet would make a place for it in his spending and could afford it.” 1 Kamprad was struck by the fact that furniture in Sweden was expensive at the time, something that he attributed to a fragmented industry dominated by small retailers. Furniture was also often considered a family heirloom, passed down across the generations. He wanted to change this: to make it possible for people of modest means to buy their own furniture. Ultimately, this led to the concept of what IKEA calls “democratic
design”—a design that, according to Kamprad, “was not just good, but also from the start adapted to machine production and thus cheap to assemble.” 2 Gillis Lundgren was instrumental in the implementation of this concept. Time and time again he would find ways to alter the design of furniture to save on manufacturing costs.
Lundgren also stumbled on what was to become a key feature of IKEA furniture: self-assembly. Trying to efficiently pack and ship a long-legged table, he hit upon the idea of taking the legs off and mailing them packed flat under the tabletop. Kamprad quickly noticed that flat-packed furniture reduced transport and warehouse costs and also reduced damage (IKEA had been having a lot of problems with furniture damaged during the shipping process). Also, customers seemed willing to take on the task of assembly in return for lower prices. By 1956, self-assembly was integral to the IKEA concept.
In 1957 IKEA started to exhibit and sell its products at home furnishing fairs in Sweden. By cutting retailers out of the equation and using the self-assembly concept, Kamprad could undercut the prices of established retail outlets, much to their chagrin. Established retailers responded by prohibiting IKEA from taking orders at the annual furniture trade show in Stockholm. Established outlets claimed that IKEA was imitating their designs. This was to no avail, however, so the retailers went further, pressuring furniture manufacturers not to sell to IKEA. This had two unintended consequences. First, without access to the designs of many manufacturers, IKEA was forced to design more of its products in-house.
Second, Kamprad looked for a manufacturer that would produce the IKEA-designed furniture. Ultimately he found one in Poland.
To his delight, Kamprad discovered that furniture manufactured in Poland was as much as 50 percent
cheaper than furniture made in Sweden, allowing him to cut prices even further. Kamprad also found that doing business with the Poles required the consumption of considerable amounts of vodka to celebrate business transactions, and for the next 40 years his drinking was legendary. Alcohol consumption apart, the relationship that IKEA established with the Poles was to become the archetype for future relationships with suppliers. According to one of the Polish managers, there were three advantages to doing business with IKEA: “One concerned the decision making; it was always one man’s decision, and you could rely upon what had been decided. We were given long-term contracts, and were able to plan in peace and quiet. . . . A third advantage was that IKEA introduced new technology. One revolution, for instance, was a way of treating the surface of wood. They also mastered the ability to recognize cost savings that could trim the price.” 3 By the early 1960s, Polish-made goods were to be found on over half of the pages of the IKEA catalog.
By 1958, an expanded facility at the Almhult location became the first IKEA store. The original idea behind the store was to have a location where customers could come and see IKEA furniture set up. It was a supplement to IKEA’s main mail order business, but it very quickly became an important sales point. The store soon started to sell car roof racks so that customers could leave with flat-packed furniture loaded on top. Noticing that a trip to an IKEA store was something of an outing for many shoppers (Almhult was not a major population center, and people often drove in from long distances), Kamprad experimented with adding a restaurant to the Almhult store so that customers could relax and refresh
themselves while shopping. The restaurant was a hit and it became an integral feature of all IKEA stores.
The response of IKEA’s competitors to its success was to argue that IKEA products were of low quality. In
1964, just after 800,000 IKEA catalogs had been mailed to Swedish homes, the widely read Swedish magazine Allt i Hemmet (Everything for the Home) published a comparison of IKEA furniture to that sold in traditional Swedish retailers. The furniture was tested for quality in a Swedish design laboratory. The magazine’s analysis, detailed in a 16-page spread, was that not only was IKEA’s quality as good as if not better than that of other Swedish furniture manufacturers, but also the prices were much lower. For example, the magazine concluded that a chair bought at IKEA for 33 kroner ($4) was better than a virtually identical one bought in a more expensive store for 168 kroner ($21). The magazine also
showed how a living room furnished with IKEA products was as much as 65 percent less expensive than one furnished with equivalent products from four other stores. This publicity made IKEA acceptable in middleclass households, and sales began to take off.
In 1965, IKEA opened its first store in Stockholm, Sweden’s capital. By now, IKEA was generating the
equivalent of €25 million and had already opened a store in neighboring Norway. The Stockholm store, its third, was the largest furniture store in Europe and had an innovative circular design that was modeled on the famous Guggenheim Art Museum in New York. The location of the store was to set the pattern at IKEA for decades. The store was situated on the outskirts of the city, rather than downtown, and there was ample space for parking and good access roads. The new store generated a large amount of traffic, so much so that employees could not keep up with customer orders, and long lines formed at the checkouts and merchandise pickup areas. To try to reduce the lines, IKEA experimented with a self-service pickup solution, allowing shoppers to enter the warehouse, load flat-packed furniture onto trolleys, and then take them through the checkout. It was so successful that this soon became the company norm in all stores.
International Expansion
By 1973 IKEA was the largest furniture retailer in Scandinavia with nine stores. The company enjoyed a
market share of 15 percent in Sweden. Kamprad, however, felt that growth opportunities were limited. Starting with a single store in Switzerland, the company expanded rapidly in Western Europe during the next 15 years. IKEA met with considerable success, particularly in West Germany where it had 15 stores by the late 1980s. As in Scandinavia, Western European furniture markets were largely fragmented and served by high-cost retailers located in expensive downtown stores and selling relatively expensive furniture that was not always immediately available for delivery. IKEA’s elegant functional designs with their clean lines, low prices, and immediate availability were a breath of fresh air, as was the self-service store format. The company was met with almost universal success even though, as one former manager
put it: “We made every mistake in the book, but money nevertheless poured in. We lived frugally, drinking
now and again, yes perhaps too much, but we were on our feet bright and cheery when the doors were open for the first customers, competing in good Ikean spirit for the cheapest solutions.” 4
The man in charge of the European expansion was Jan Aulino, Kamprad’s former assistant, who was just
34 years old when the expansion started. Aulino surrounded himself with a young team. Aulino recalled
that the expansion was so fast paced that the stores were rarely ready when IKEA moved in. Moreover, it was hard to get capital out of Sweden due to capital controls, so the trick was to make a quick profit and get a positive cash flow going as soon as possible. In the haste to expand, Aulino and his team did not always pay attention to detail, and he reportedly clashed with Kamprad on several occasions and considered himself fired at least four times, although he never was. Eventually the European business was reorganized and tighter controls were introduced.
IKEA was slow to expand in the United Kingdom, however, where the locally grown company Habitat had
built a business that was similar in many respects to IKEA, offering stylish furniture at a relatively low price. IKEA also entered North America, opening seven stores in Canada between 1976 and 1982. Emboldened by this success, in 1985 the company entered the United States. It proved to be a challenge of an entirely different nature.
On the face of it, America looked to be fertile territory for IKEA. As in Western Europe, furniture retailing
was a very fragmented business in the United States. At the low end of the market were the general discount retailers, such as Walmart, Costco, and Office Depot, which sold a limited product line of basic furniture, often at a very low price. This furniture was very functional, lacked the design elegance associated with IKEA, and was generally of a fairly low quality. Then there were higher-end retailers, such as Ethan Allen, which offered high-quality, well-designed, and high-priced furniture. They sold this furniture in full-service stores staffed by knowledgeable sales people. High-end retailers would often sell ancillary services as well, such as interior design. Typically these retailers would offer home delivery service, including setup in the home, either for free or for a small additional charge. Since it was expensive to keep large inventories of high-end furniture, much of what was on display in stores was not readily available, and the client would often have to wait a few weeks before it was delivered.
IKEA opened its first U.S. store in 1985 in Philadelphia. The company had decided to locate on the
coasts. Surveys of American consumers suggested that IKEA buyers were more likely to be people who had travelled abroad, who considered themselves risk takers, and who liked fine food and wine. These people were concentrated on the coasts. As one manager put it, “There are more Buicks driven in the middle than on the coasts.” 5
Although IKEA initially garnered favorable reviews and enough sales to persuade it to start opening additional stores, by the early 1990s it was clear that things were not going well in America. The company found that its European-style offerings didn’t always resonate with American consumers. Beds were measured in centimeters, not the king, queen, and twin sizes with which Americans are familiar. American sheets didn’t fit on IKEA beds. Sofas weren’t big enough, wardrobe drawers were not deep enough, glasses were too small, curtains too short, and kitchens didn’t fit U.S. size appliances. In a story often repeated at IKEA, managers noted that customers were buying glass vases and using them to drink out of, rather than the small glasses for sale at IKEA. The glasses were apparently too small for Americans who like to add liberal quantities of ice to their drinks. To make matters worse, IKEA was sourcing many of the goods from overseas and they were priced in Swedish kroner, which was strengthening against the