IKEA : Furniture Retailer To The World
IKEA is one of the world’s most successful global retailers. In 2007, IKEA had 300 home furnishing superstores in 35 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 rumoured to be approximately 10%, high for a retailer.
The founder, Ingvar Kamprad, now in his 80s but still an active “advisor” to the company, is rumoured to be one of the world’s richest men. 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. His first business had been selling matches; the enterprising Kamprad purchased them 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 his initials; E stood for Elmtaryd, the name of the family farm; and A stood for Agunnaryd, the name of the village in southern Sweden where
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In 1953, Kamprad was struggling with a problem: the milk truck had changed its route, and he could no longer use it to take goods to the train station. His solution was to buy an idle factory in nearby Almhult and convert it into a warehouse. With business now growing rapidly, Kamprad hired a 22-year-old designer, Gillis Lundgren. Lundgren originally helped Kamprad do photo shoots for the early IKEA catalogues, but he started to design more and more furniture for IKEA, eventually designing as many as 400 pieces, including many best sellers.
IKEA’s goal over time was to provide stylish functional designs with minimalist lines that could be cost-efficiently manufactured 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 a flat wallet would make a place for it in his spending and could afford it. ” 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 family heirlooms, 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. ” 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.
Gillis 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 realized that flat-packed furniture reduced transport and warehouse costs, and damage (IKEA had been having a lot of problems with furniture damaged during the shipping process). Moreover, 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 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 who would produce IKEA-designed furniture. Ultimately, he found one in Poland. To his delight, Kamprad discovered that furniture manufactured in Poland was as much as 50% cheaper than furniture made in Sweden, allowing him to cut prices even more. 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 of 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 revolutionary idea, 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. ” By the early 1960s, Polish-made goods were to be found on more than half of the pages of the IKEA catalogue. 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 in its own right.
The store soon started to sell car roof racks so 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 centre, and people often drove in from long distances), Kamprad experimented with adding a restaurant to the 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 catalogues 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 if not better than that from other Swedish furniture manufacturers, the prices were much lower.
For example, the magazine concluded that a chair bought at IKEA for 33 kronor ($4) was better than a virtually identical one ought in a more expensive store for 168 kronor ($21). The magazine also showed how a living room furnished with IKEA products was as much as 65% less expensive than one furnished with equivalent products from four other stores. This publicity made IKEA acceptable in middle-class households, and sales began to take off. In 1965, IKEA opened its first store in Stockholm, Sweden’s capita l. By now, IKEA was generating the equivalent of €25 million and had already opened a store in neighbouring Norway.
The Stockholm store, its third, was the largest furniture store in Europe and had an innovative circular design that was modelled 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, with 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 pick-up areas.
To try and reduce the lines, IKEA experimented with a self-service pick-up 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% in Sweden. Kamprad, however, felt that growth opportunities were limited. Starting with a single store in Switzerland over the next 15 years, the company expanded rapidly in Western Europe.
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, 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. ” 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; 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. 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 UK, 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 7 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, who sold a limited product line of basic furniture, often at very low prices. 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, that offered high-quality, well-designed, high-priced furniture. They sold this furniture in full-service stores staffed by knowledgeable salespeople.
High-end retailers would often sell ancillary services as well, such as interior design. Typically these retailers would offer home delivery service, including set up in the home, either for free or a small additional charge. Because it was ex pensive 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 United States 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, considered themselves risk takers, and 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. ” Although IKEA initially garnered favourable 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 did not always resonate with American consumers.
Beds were measured in centimeters, not the king, queen, and twin sizes with which Americans are familiar. American sheets did not fit on IKEA beds. Sofas were not big enough, wardrobe drawers not deep enough, glasses too small, curtains too short, and kitchens did not fit American-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, priced in the Swedish kronor, which was strengthening against the American dollar. This drove up the price of goods in IKEA’s American stores. Moreover, some of the stores were poorly located, and not large enough to offer the full IKEA experience familiar to Europeans. Turning around its American operations required IKEA to take some decisive actions. Many products had to be redesigned to fit with American needs. Newer and larger store locations were chosen.
To bring prices down, goods were sourced from lower-cost locations and priced in dollars. IKEA also started to source some products from factories in the United States to reduce both transport costs and dependency on the value of the dollar. At the same time, IKEA noticed a change in American culture. Americans were becoming more concerned with design, and more open to the idea of disposable furniture. It used to be said that Americans changed their spouses about as often as they changed their dining room tables, about 1. 5 times in a lifetime, but something was shifting in American culture.
Younger people were more open to risks and more willing to experiment. There was a thirst for design elegance and quality. Starbucks was tapping into this, as was Apple Computer, and so did IKEA. According to one manager at IKEA, “Ten or 15 years ago, travelling in the United States, you couldn’t eat well. You couldn’t get good coffee. Now you can get good bread in the supermarket, and people think that is normal. I like that very much. That is more important to good life than the availability of expensive wines.
That is what IKEA is about. To tap into America’s shifting culture, IKEA reemphasized design and started promoting the brand with a series of quirky hip advertisements aimed at a younger demographic: young married couples, college students, and 20- to 30-something singles. One IKEA commercial, called “Unboring,” made fun of the reluctance of Americans to part with their furniture. One famous ad featured a discarded lamp, forlorn and forsaken in some rainy American city. A man turned to the camera sympathetically.
“Many of you feel bad for this lamp,” he said in thick Swedish accent. That is because you are crazy. ” Hip people, the commercial implied, bought furniture at IKEA. Hip people did not hang onto their furniture either; after a while they discarded it and replaced it with something else from IKEA. The shift in tactics worked. IKEA’s revenues doubled in a four-year period to $1. 27 billion in 2001, up from $600 million in 1997. By 2008, the United States was IKEA’s second-largest market after Germany, with 35 stores accounting for 10% of its total revenues, or around $2. 4 billion, and expansion plans called for 50-plus stores in the United States by 2012.
Having learned vital lessons about competing in foreign countries outside continental Western Europe, IKEA continued to expand internationally in the 1990s and 2000s. It first entered the UK in 1987, and by 2008, it had 17 stores in the country. IKEA also acquired Britain’s Habitat in the early 1990s and continued to run it under the Habitat brand name. In 1998, IKEA entered China, where it had 4 stores by 2008, followed by Russia in 2000 (11 stores by 2008), and Japan in 2006, a country where it had failed miserably 30 years earlier (by 2008 IKEA had four stores in Japan).
In total, by 2008, there were 285 IKEA stores in 36 countries and territories. The company had plans to continue opening between 20 and 25 stores a year for the foreseeable future. According to one manager, an important limiting factor on the pace of expansion was building the supply network. As with the United States, some local customization has been the order of the day. In China, for example, the store layout reflected the layout of many Chinese apartments, and because many Chinese apartments have balconies, IKEA’s Chinese stores included a balcony section.
IKEA also has had to adapt its locations in China, where car ownership is still not widespread. In the West, IKEA stores are generally located in suburban areas and have lots of parking space. In China, stores are located near public transportation, and IKEA offers delivery services so that Chinese customers can get their purchases home. IKEA has also adopted a deep price discounting model in China, pricing some items as much as 70% below their price in IKEA stores outside China. To make this work, IKEA has sourced a large percentage of its products sold in China from local suppliers.