IKEA: For the many people, not just the few.
More than just low-cost procurement, manufacturing and logistics.
IKEA strives to 鈥渙ffer 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.鈥� Given that every living space I鈥檝e had since starting college has looked like an IKEA showroom, I鈥檇 say they鈥檙e doing pretty well. The numbers would agree 鈥� with 鈧�3.3 billion net income on revenue of 鈧�28.5 billion in 2013, IKEA is the world鈥檚 largest home furnisher, holding almost 5% of the highly fragmented market in 2011 (the runner up held a measly 1.2%).
Extreme affordability, IKEA鈥檚 core value proposition, is achieved through a relentless focus on cost efficiency, which leads to lower prices and in turn higher volumes. It鈥檚 their unmatched ability in this regard that forms the basis of the company鈥檚 competitive advantage. A number of IKEA鈥檚 cost-saving measures are immediately clear to anyone who has purchased one of their products (i.e., everyone): a self-service warehouse, unassembled products sold in flat-packs, mugs designed to stack incredibly densely, and so on. But these are just part of a broader philosophy known as 脰vertag, 鈥渢he unique IKEA way of combining the use of inexpensive good raw materials, rational production methods and all other low cost factors at our disposal throughout the whole value chain to develop home furnishing items of good design and function at prices substantially below the lowest known price.鈥�
IKEA鈥檚 virtuous cycle.
IKEA has an incredibly efficient global supply chain. The company sources much of its raw materials close to their final country of sale and third party manufacturers often ship products directly to stores. It also benefits greatly from scale and purchasing power, for example, IKEA is one of the world鈥檚 largest consumers of lumber, purchasing 鈥�1% of all industrial wood sourced on the planet [in 2013].鈥� While procurement, manufacturing and logistics are undoubtedly at the core of cost efficiency, they are also relatively unsurprising components of such a strategy. There are, however, two others factors that I find truly fascinating: (1) IKEA鈥檚 ownership structure and its tax implications, and (2) IKEA鈥檚 catalog and website development.
When most people think of 鈥淚KEA鈥� the relevant entity is the IKEA Group, which is the largest franchisee, owning and operating almost 90% of stores. IKEA Group is owned by INGKA Holding, a private Dutch company, which is owned by the Stiching INGKA Foundation, a tax-exempt non-profit controlled by IKEA鈥檚 founder, Ingvar Kamprad. To further complicate matters, the franchise agreements are administered by the 鈥渢rademark and concept鈥� owner, Inter IKEA Systems (also Dutch). Inter IKEA Systems is owned by Inter IKEA Holding (of Luxembourg), which is owned by the Interogo Foundation (of Liechtenstein), also controlled by Ingvar Kamprad. I鈥檝e always thought that a 鈥渄ouble Irish with a Dutch sandwich鈥� was a complicated tax avoidance mechanism, but this takes the cake. Mr. Kamprad is reported to have said that 鈥溾�檛ax efficiency鈥� was a natural part of the company鈥檚 low-cost culture鈥�.
IKEA has also done an admirable job of maintaining a common product range across stores and regions. However, some concessions had to be made to expand successfully in new markets, first with Japan in 2005, and more recently in China and India. Similarly, the IKEA catalog and website are customized to suit the preferences in various regions (e.g., layout, featured products, color palette). Imagine the cost of preparing hundreds of these promotional 鈥渞ooms鈥�: product shipment聽(including non-IKEA items such as appliances), construction and photography. In 2004, IKEA began relying on 3D artists to develop computer generated imagery to replace traditional photography. By 2014, 60-75% of individual products were computer generated, along with 35% of full rooms. This not only reduces upfront cost, but substantially lowers the barrier to minor (or major) reworking of an image. And all of this was achieved with essentially no loss of quality, just look at the fully computer generated images below.
Computer-generated imagery saving time and money 鈥� can you spot all of the differences?
IKEA鈥檚 success, and its mission to provide well-designed affordable furniture, could only have been achieved through its relentless focus on cost efficiency. Mr. Kamprad can rest easy in his birch veneer PO脛NG chair knowing that his legacy is a business model well aligned with it鈥檚 associated operating model.
Sources
[1] 鈥淭he IKEA Business Model鈥�, IKEA Supplier Portal,
[2] 鈥淭he secret of IKEA鈥檚 success鈥�, The Economist,
[3] 鈥淪ustainability at IKEA Group鈥�, 性视界 Business School,
[4] 鈥淏uilding 3D with IKEA鈥�, CGSociety,
Do you believe the cost savings at IKEA provided by passing labor to the customer is fully reflected on the price?
Maclean, thanks for the great article on IKEA. I have always wondered how IKEA offers such wide variety of products at such low costs, and that too in any location worldwide. This article has been great in understanding their focus on cost efficiency which drives the business model. I am wondering how the private Dutch company achieved such a scale and why other players could not succeed (assuming they could have also used cost efficiency measures).
Great blog post! It seems that IKEA has been offering more “higher end” projects in recent year, notably through their Stockholm line. How does this reach towards higher value, and presumably higher margin, products fit in with the overall drive towards efficiency that seems to underscore their operating model?
I love IKEA and interesting fact, their only US based manufacturing facility is near Danville, VA, a place I grew up. They formed a union to get better pay. Here is a link about the plant: