Business Model Of Ikea – IKEA is one of the largest furniture retailers in the world today. In 2020, IKEA was the seventh most valuable retail brand in the world. It is worth nearly $19 billion, operates more than 400 stores in multiple countries, and generates more than $35 billion in revenue. The Swedish multinational group designs affordable, high-quality ready-to-assemble furniture, kitchen appliances and other home products.
Since 2008, retail has dominated the furniture market. Despite the popularity of online shopping, IKEA still attracts millions of shoppers to its physical stores. In fact, in 2020, IKEA stores had 825 million visits worldwide despite the Covid-19 pandemic. Last year they had one billion store visits.
Business Model Of Ikea
It’s clear that IKEA is a formidable giant, but how does the company do it? How have they consistently offered high-quality, innovative furniture products at affordable prices for nearly eight years? How can they attract millions of customers to their stores?
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If you’ve ever shopped at IKEA, you’ve probably fallen victim to the IKEA pull. Time seems to stop the moment you walk through the door. Instead of getting the furniture you were looking for, you end up going home with two new kitchen appliances and some Swedish meatballs. This effect is by design.
The success of IKEA’s business model can be attributed to many things. The IKEA effect is one of them. However, the most critical factor in IKEA’s success is its iron grip on cost control during product development. As one of the world’s largest privately held companies, its financial success can also be attributed to founder Ingvar Kamprad’s frugal nature.
So let’s take a deeper look at how IKEA managed to develop and sustain this business model without investors.
IKEA’s story begins in 1943, just before the end of World War II. Raised in rural Sweden, Kamprad started his own book business at the age of five. He started selling pencils, pens and flower seeds when he was 10 years old.
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In 1943, 17-year-old Ingvar Kamprad was given some money by his father to do well in school. This was quite an achievement, as he had poor digestion and had to work hard. Kamprad used the prize money to start a small business selling general household and personal items.
Sweden’s countryside is sparse, especially in the Swedish province of Samland, where Ingvar lived. The young teenager quickly realized that there was a market for cheap goods as the war affected the Swedish and global economy. Ordinary people were trying to save as much as possible.
Kamprad sells pens, wallets, table runners, watches, jewelry, postcards, nylon socks, and picture frames, all at affordable prices. His means of distribution was his mother’s bicycle, which he used to take to various farms to deliver his goods.
His business strategy proved popular, and by 1945, Kamprad could no longer cope with personal sales calls. So he started advertising in local newspapers and turned his business into a mail-order service. He partnered with a local milk truck driver who delivered his produce to a nearby train station.
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Five years later, Kamprad incorporated furniture into the IKEA range. World War II was over and the world was in the process of rebuilding. In post-war Sweden, there were young people and families looking for stylish and affordable furniture.
Traditionally, younger generations receive handmade furniture from their families. Since 1935, the Swedish Furniture Council, made up of manufacturers and retailers, has agreed to raise furniture prices. The price was 41% higher than other household products.
As the post-war Swedish government built lots of houses and paid off its furniture debt, Kamprad saw a gap in the market. In Samland, where he grew up, several small furniture factories produced furniture using wood from local forests. So he began placing large orders from local factories and selling furniture at low prices. This did not go down well with the Swedish furniture mafia.
1951: IKEA launches its iconic furniture catalog and opens its first showroom against the face of the Swedish furniture card
Ikea’s Strategy Formation Process
IKEA has released its first official catalog with the MK wing chair on the cover. The release was widely criticized. Prices were very low compared to the national average. Many people were skeptical about the quality of the furniture, believing that it was not well built. Returning items is also a problem because customers expect something different from what they ordered.
Kamprad always saw a challenge as a way to improve his business. So instead of being disappointed by the lukewarm response, he found a solution to the problem. He opened the first IKEA showroom in an old rented workshop, giving customers a chance to see what they were buying. This has greatly reduced the number of items returned by customers.
When IKEA entered the Swedish furniture market, it was a major threat to existing furniture companies. When IKEA participated in the first annual furniture trade fair, Karel prohibited them from selling directly to customers. They banned IKEA from showing their prices during the show.
Finally, the cartoon went a step further by pressuring the factories to stop selling to IKEA. It cut off the company’s source of supply in Sweden. Retailers no longer bought from manufacturers who sold to IKEA. Because of the cartoon’s influence in the industry, most producers were too afraid to violate it.
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The ban created a big problem for IKEA, as a boycott could lead to bankruptcy. The political climate at the time made trading with communist countries unpopular. However, IKEA took the plunge and set its sights on Polish suppliers.
This turned out to be a brilliant move, as Polish suppliers offer lower prices than Swedish ones, even with shipping costs included. IKEA managed to charge less than before. This combination of low prices was hard to compete with. IKEA is beginning to establish itself as a significant competitor in the Swedish furniture market.
1953-1959: Construction of the first showroom and flat packaging 1933: The opening of the first showroom and the birth of IKEA in-store restaurants
Initially, the showroom solved the doubts IKEA faced when starting to sell furniture. However, most of their products were sold by mail order. Unfortunately, the mail order industry in Sweden faces significant PR challenges.
Ikea Business Model Partnership With The Client
Due to fierce competition in the industry, prices have been reduced. Furniture Cards decided to compromise on quality to increase their profits. This led to a very negative public image that affected the entire industry.
Kamprad and Sven Goethe (one of IKEA’s early competitors) worked on a concept for a permanent showroom to solve this problem. Like the first showroom, its purpose was to allow customers to view products before purchasing them by mail order.
They opened a permanent showroom in Al Mult. The city was so remote that Kamprad worried that people would not want to travel there just to see the furniture. As an incentive, he decided to offer coffee and bread to customers, and that’s how the idea for an in-store IKEA kitchen was born. The idea worked well for the company.
In 1955, IKEA’s dealings with suppliers began to strain. Manufacturers wanted to raise prices, which would affect IKEA. Rather than raising the price of furniture, Kamprad decided to bring production and design in-house. So now IKEA designs, manufactures, displays and sells furniture.
Ikea Supply Chain
This move proved to be the right one for IKEA, as the company now has full control over its entire process. This has helped the company develop unique Scandinavian designs that highlight the IKEA brand.
But there was still a problem with sending emails. Mail order assembled furniture carries a higher risk of damage upon arrival. It was also expensive. Because of IKEA’s desire to focus on providing its customers with the lowest possible prices, Kamprad sought a solution.
Flat packaging already existed in other parts of the world, but was not popular in Sweden. An employee wanted to add flat packaging to IKEA products. The concept takes off at IKEA after one of their suppliers, Ovendals, shows how flat-packing works on a table.
The solution allowed IKEA to lower its prices. Still, the customer wants to assemble his own furniture for the job. The concept was largely unheard of in Sweden, but Kamprad was undeterred. It uses flat packaging for most of IKEA’s products and keeps prices low. Fortunately, IKEA receives positive feedback from its customers.
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He didn’t know it at the time, but Kamprad essentially gave birth to the “IKEA Effect.” This effect describes the way customers place unusually high prices on products they believe they own.
IKEA continued to create unique designs such as the HANSA bookcase in 1957.
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