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What:

• The world leader of home furnishings has managed to become global yet still creative, agile and local
• The original vision of the founder remains what holds the company together and drives performance

Why is it important:

With a total number of stores worldwide that has increased from 345 to 433 from 2013 to 2019 (+ 25,5%) and a global revenue that has steadily risen from 28 to 41 billion euros (+ 46%) over the same period of time, the Ikea group has managed to drive expansion and performance by innovating and adapting its distribution format locally while still offering a unique range of products worldwide. The company is providing a striking example of how to consistently grow and thrive by sticking to core values.

Opening its first store in Sweden in 1958 before it started to expand abroad in the 60s, the privately-owned brand now operates in 52 countries, and while sales grew 6.5% in FY19, it has been coping with customers moving to digital and some customers slowly but steadily turning away from the company’s iconic suburban big blue boxes.

And while the latest IADS merchandising meeting emphasised strong performance in the home category at most of our members (see report), and while the value of the furniture market worldwide is expected to grow from 510 billion USD (2019) to 650 billion USD in 2027, there might be lessons to learn from how the “Flatpack Empire” has bet on innovation, adaptability and a strong culture to secure its growth in size and sales.

Innovating always

Envisioning tomorrow: Space10

Ikea is about to celebrate the 5th anniversary of Space10, a research and design Lab on a mission to help the company create and innovate. Based in Copenhagen, the project is an independent research studio, created by and for Ikea to “inform, challenge and inspire” the brand. Relevant to Geoffrey Moore’s “Incubation Zone” (see related IADS article: Responding to Disruption), the venture brings together a team of 30 experts and creatives to research and design innovative solutions through a collaborative approach.

As an interface for “prospection towards more sustainable and circular societies and lifestyles”, Space10 initiates exhibitions, talks, debates and runs residencies. It drives projects and experiments in the fields of technology, design, energy, food or mobility and works on reports and publications such as “Life without energy”, “The Digital in architecture” or “Spaces on wheels” among a variety of many other issues from many different research fields.

Latest technologies such as VR and AI have been exploited to find new ways for the consumers to dream up their new bedroom, to design a chair or to see the effect of a light in a room before deciding on it. Rugs and baskets have been produced using rice straw waste from the Indian farming sector, allowing farmers from the northern region to avoid burning left over crops and contributing to air pollution.

Thanks again to Space10’s research, the iconic pork-and-beef meatball served in Ikea stores across the globe (1 billion sold last year) now has a 100% plant-based sister version that was launched in August in European stores and which actually has a 96% smaller carbon footprint.

But the forward-thinking approach also comes along with a focus by the client-centred brand’s in-house R&D department on market trends and constant investments in adapting the offer to the consumer’s evolving expectations and habits.

Constantly adapting the offer and model

Introduced as a “response to consumer research exploring how to meet customers’ needs in ways that contribute to a circular economy”, Ikea announced in 2019 that they would test furniture leasing in 30 markets during 2020, starting in Switzerland. As we now lease cars or designer dresses, we will be offered the opportunity to lease office furniture or kitchen cabinets from the leading home furnishings retailer.

The new offer is very likely to meet a growing demand for temporary use services and is straight in line with Ikea’s sustainability goals, but the subscription model is also a way for the firm to build new revenue streams and keep customers coming back as the profits actually plunged 40% in 2018.

In another attempt to help reach the company’s goal to become a fully circular business by 2030, Ikea has announced in September they will open their first second-hand store in Sweden later this year, where only refurbished furniture and home furnishings will be offered. That new store is a pilot project that will be regularly re-evaluated and will be supplied with damaged items from nearby Ikea branches that have been restored. It will be located in Retuna, the world's first second-hand shopping centre.

As another illustration of the same push to relentlessly innovate, respond to new demands, and reach a broader audience of customers, Ikea France lately teamed up with Voltalia to offer a simple and accessible self-assembly solar panel solution. It has also partnered with Asus to launch gaming furniture, and even used a computer-generated influencer for a new advertising campaign in Japan.

>> IADS note: Offering the same narrow range on every market (with a yearly renewal rate of 20-30%), IKEA must create new products all the time to keep the client coming back. Inventiveness is part of the brand’s DNA and a strong communication tool. Department stores all have their own history of being innovative and constantly activating the “new” effect, and we see how much projects like Galeries Lafayette Champs-Elysées or SKP-S can consistently renew the approach of the business model, create excitement again for the visitor and strengthen the brand.

Constantly exploring new paths and able to quickly adapt its products and services offer, Ikea has initiated over the past few years an unprecedented diversification in the distribution’s architecture and channels.

Shifting to a multiformat and omnichannel distribution model

After decades of developing mainly the same iconic model of big out-of-town and self-service stores all around the world, the biggest furniture retailer is now starting to move towards a different multi-offer distribution model with new city-center smaller stores, malls, and a new multichannel approach.

From the suburban big box to the inner-city store

In May 2019, IKEA opened its first ever inner-city store in France (Ikea’s 3rd worldwide market after Germany and the U.S., and before the U.K. and China). Located in the heart of Paris, the 400 square metre new store spreads over two levels, employs 140 members of staff and offers only a selection of the brand’s items in a much smaller scale space that is curated like a showroom. Items that cannot be taken from the store can be ordered online and delivered at home. The highly experiential retail space also features a café and offers themed workshops.

While located in the city center, with more than 2 million people living within a 20-minute public transport radius, and significantly smaller in size, the new store nevertheless retains the long-standing store model of the regular big box, only with less items on display and no warehouse attached, but the customer here also remains part of the distribution chain with a self-service checkout.

Quickly followed by other attempts to explore the market of smaller city stores in Moscow, New York and other cities in the U.S., the Paris Madeleine store quickly proved a success, with 1.3 million people visiting in the first 4 months, and sales levels running just below those of a warehouse six times the size. But besides this latest attempt, Ikea has also been exploring the shopping mall option and keeps building bigger blue boxes.

Exploring the malls while still developing the standard box model

Ikea has recently made significant investments in malls in San Francisco (6X6 Mall) and London (Hammersmith’s Kings Mall) as more and more retail spaces are becoming vacant after the tenants had to shut down.

The retailer is proving its ability to keep exploring new prospects and investing in different environments while sticking to a distribution model now developed in different formats of store. Ikea appears to want to redefine malls as gathering places and to focus on the customer’s experience. The strategy underlines for department stores the remaining strong potential of a local place where the customer may live a more engaging experience with brands.

However, exploring new tracks and adding alternative store types to the long-standing suburban warehouse does not mean that the company is giving up. Ikea is still opening mostly new big-box stores this year, and has actually announced the opening next year of its biggest store ever in the Philippines. Located in the SM Mall of Asia in the Manila Bay Area, the upcoming Ikea Pasay City store will spread across a huge 65,000 square metres, when the average store size was still 35,000 square metres back in 2010.

Slowly but surely moving to omnichannel

Ikea has been surprisingly slow to move to online shopping, but while the number of visits to ikea.com worldwide has jumped from 700 million in 2010 to 2.8 billion in 2019, and online sales have grown by 46% in 2019 (11% of total retail sales), the company is now actively using technology to put the best practices of omnichannel to work.

With the help of augmented reality and most probably thanks to the Space10 tech research, the IKEA Place app helps you visualise and plan where to put pieces of furniture in your house, and with the help of your smartphone, you can imagine how a piece of furniture would look and feel in the ambience of your room.

The company also claims to be moving forward with omnichannel for its ongoing strategic expansion in India, where it plans to open 25 stores in 9 cities by 2025, and expects online sales to be a strong growth driver in this new market.

>> IADS note: Ikea took time to finally start moving from its unique store model to local diversification, and to start implementing an omnichannel approach, but that says a lot about how much the company remains ultimately consistent with its model and values, even if it may take more time. Department stores can explore many different business approaches at the moment, but they should favour the ones that match their long-term vision of what their department store should be and what their business should become.

The values, model and organisational structure working together

A unique vision and strong values grounded in Swedish culture

Since the earliest developments of his company back in 1943, the late founder Ingvar Kamprad infused Ikea with unique company values that derived from his strong vision for business with a social ambition to “create a better everyday life for the majority of people”.

Once asked about the company’s unique culture, Anders Dahlvig (CEO of Ikea from 1999 to 2009) basically outlined a combination of simplicity in behaviour, capacity of delegating and accepting responsibility, daring to be different, striving to meet reality and cost-consciousness.

He emphasised that those values were strongly connected to the Swedish values which foster a humble attitude and encourage simplicity, as well as to the well-known characteristics of people from Småland, the rural region in Sweden Kamprad was from: frugal, humble and hard-working.

According to Dahlvig, this unique vision of the company has remained one of its biggest strengths, and is basically “the soul that has kept the organisation together”. And that vision has been the foundation on which the company was able to build a model of cost-obsessed integrated organisation that can grow and thrive while remaining fully committed to its core values.

A differentiating business model

Offering well-designed, quality, functional, and sustainable home furnishing at a low price for the middle classes involved for the company in developing an efficiency-driven business model that differentiates it from its competitors.

In an essay (The Ikea Edge, McGraw Hill, 2012) sharing lessons and insights from his 26-year experience growing as an employee up to the job of CEO at Ikea, Dahlvig explains the company’s successful business model: differentiation through control of the value chain. Based on his experience, while many in the retail sectors split brand and retail to operate either one or the other, leading to very little differentiation between their offers, the key to profitability for him is differentiation through vertical integration.

According to Dahlvig, Ikea spent the first 30 years developing its business model before the company started expanding abroad. The main reasons of this long period of time are the stability of the home furnishing retail sector – with few developments in both the industry and the competition - and mostly the company’s very conservative financing policy which also explains why growth has been mainly organic.

Legendary cost-consciousness and agile decision-making process

The combination of the founder’s original vision with the company’s values and business model - which involves a unique range of products for all the markets - has set up a highly effective cost-obsessed vertically integrated organisation where the decision-making process remains short thanks to a horizontal management model that keeps the group agile.

The company’s vision and related goal to deliver good design, function and good quality for a very low price, has forged Ikea’s legendary cost consciousness. The firm has always been obsessed with aggressive sales prices and constant cost reductions: the internal goal is apparently to always have price tags that are at least 20% below the competition on comparable products, while the control and coordination of the whole value chain allows the company to always keep the costs at the lowest point.

But vertical integration also makes Ikea a “complex company” according to Dahlvig, and the company has grown until the late 90s guided by its strong original entrepreneurial spirit, which came along with little coordination, small overhead structure and different functions working on separate agendas.

His main challenge as the CEO has been to transform Ikea so it could keep growing and prospering at the same time. He brought the company back together with a common agenda and moved its way of thinking from a functional method to a process-oriented way of working. That has also been the occasion to redesign the supply process and to improve the retailing initiative in order to use the full advantages of a big organisation while keeping those of a small and agile company.

Key in Ikea’s successful operating, while the firm has managed to set up an optimised organisational structure that can now fully support cooperation across core functions globally, it also still has a very horizontal management structure, with limited hierarchy and decisional levels. Dahlvig points out how he, as a CEO, has refused intermediary regional levels and always favoured a system with fewer managers and larger spans of control and decision instead.

According to him, this flat management model gives more liberty to people reporting to fewer managers, which also involves everyone needing to be on the same page with common objectives and values. But with that freedom comes the space to keep an entrepreneurial approach and come up with initiatives that move the company on.

>> IADS note: The flat management model, with a limited number of hierarchy levels, is key for Ikea to make swift decisions, rapid changes, and engage prompt implementation when needed. The combination of cross-functional cooperation and horizontal management could be kept in mind as a way for department stores to shorten, facilitate and speed up their decision-making process, for more agility.

Perspective

Global, yet still relentlessly inventive and adaptable to local markets, Ikea has managed to become the world’s biggest home furnishing retailer, and to keep growing and performing while continuously sticking to its differentiating Swedish character and original core values. And the company has managed to transform those values into a business model, an organizational structure, and a transversal and quick-decision-making management pattern.

While the firm itself actually rests on a very complex corporate structure made of several corporations owned by non-for-profit foundations registered in different countries, the company has successfully managed to transform its values into efficiency, inventiveness, agility and, most basically, a stunning simplicity for a global retailer of that size.

In the light of what Ikea has been doing, department stores should continue to focus on their culture and values to navigate through uncertainty and keep the company together. El Corte Inglés and El Palacio de Hiero, in different ways, have built very strong staff loyalty value around their company over the years. Magasin du Nord has developed a light, lean and close management team that works very efficiently together towards a common goal. Breuninger has staff members who can reportedly be recognised at a thousand metres as their personality is very much in line with the company core values. The current effort by Manor to restructure their team is most probably relevant to that same push to strengthen a team through commitment to a shared culture.

Each member of IADS has their very own history, culture and values, and those stand as the most precious asset on which to capitalise to ensure continuity and design the future of department stores.

Credits: IADS (Renaud Pillon)