The IKEA Group

IKEA International A/S
Ny Strandvej 21
3050 Humlebaek
Denmark
(45) 42 19 22 11
Fax: (45) 42 19 44 38

Private Company
Incorporated: 1943 as IKEA, Ingvar Kamprad
Employees: 19,000
Sales: SKr22.3 billion (US$4.03 billion)

The IKEA group belongs to a charitable foundation established in the Netherlands, whose aim is to promote “outstanding achievements within the area of architecture and interior decoration.” Each IKEA store in the group, as well as IKEA stores outside the group, is operated under franchise from Inter IKEA Systems B.V., a company outside the IKEA Group, also based in the Netherlands. IKEA International A/S of Denmark is the advisory management company of the IKEA Group.

In 1991, the IKEA group had 79 outlets selling specially designed furniture and home furnishings in 16 countries throughout the world. Outside the IKEA Group there were 17 outlets in another 8 countries. The selling system is that of self-selection and self-service by the customers. IKEA was founded in Sweden by Ingvar Kamprad. Kamprad, born in 1926, was the son of a farmer in Smaland in Southern Sweden.

In 1943, at the age of 17 he created a commercial company, IKEA, Ingvar Kamprad. The word IKEA was an acronym of his name and address: I ngvar k amprad and E lmtaryd, the name of the farm and A gunnaryd, the name of the village. The company—in effect it was a one-man band—sold fish, vegetable seeds, and magazines, delivery being made by bicycle and later using the milk round. In 1947 IKEA issued its first primitive mail-order catalog and the newly-invented ballpoint pen was added to the assortment.

In 1950, Kamprad added furniture and home furnishings to the mail-order range. In 1953 Kamprad bought a small furniture factory and the headquarters of the firm were moved from the village Agunnaryd to Älmhult. A small furniture and home-furnishing showroom was opened in Älmhult employing 15 persons. Success followed, and in 1958 the tiny showroom was replaced by a giant store, by contemporary standards, of 13,000 square meters in the same town. The mail-order business continued to flourish and in 1963 the first IKEA store outside Sweden was opened in Norway near Oslo.

The event that marked the turning point of the business, however, was in 1965 when Kamprad opened a store just outside the major city of Stockholm, to show what could be done in the way of designing and selling modern low-priced furniture. The store, on a greenfield site at Kungens Kurva just ten kilometers southwest of Stockholm, was extraordinary for two reasons. First, it was very large, with some 33,000 square meters of total space and 15,000 square meters of selling space, and it consisted of two connected buildings. One building, circular in shape, had four floors connected ingeniously so that customers could move easily from floor to floor. This building was the main display area for furniture. The second building, consisting of three floors and a basement, was the stockroom and service unit and there was also a selling area for smaller pieces of furniture and home furnishings. Customer services ranged from a baby carriage hire service, a children’s nursery, and a restaurant with 350 places, to cloakrooms, toilets, a bank, and parking for 1,000 cars.

More important than the physical characteristics of the IKEA store was the manner in which it revolutionized furniture manufacturing and selling. Some of the new ideas that Kamprad put into practice included selling most furniture in flat-pack form in order, as Kamprad said, “to avoid transporting and storing air”. To make this possible, the furniture had to be specially designed by IKEA staff in workshops in the Älmhult headquarters and warehouse. For the mass production of the component parts of the flat-pack furniture, Kamprad had to bypass traditional furniture manufacturers and instead use specialist factories. Unfinished pine shelving, for example, came directly from saw mills, cabinet doors were made in door factories, metal frames came from machine shops, and upholstery materials came directly from textile mills. Almost all the components of each piece of furniture could be put together by the customers themselves but in some cases IKEA staff could help the customer to assemble the furniture at home. IKEA’s innovations ranged from table legs which fixed into place with snap locks to kitchen chairs that were assembled with one screw. A large number of IKEA products carried the label of the Swedish Furniture Research Institute, a byword for good quality and design.

The IKEA self-service method of selling was largely unknown in the furniture and home furnishing retail trades at the time. Customers were invited to walk around the whole store and select items by themselves. There were information desks, but no sales assistants to persuade customers to buy. In IKEA’s early days, customers had to pay for their purchases in cash to improve the finances of the firm. The customer was given a docket and collected the flat-pack, pre-packed merchandise at the delivery dock. There was no home delivery service; the customer had to provide his or her own transport. Car racks could be bought, and later self-drive vans could be rented.

The IKEA formula was an instant success, particularly for kitchen and children’s furniture. Further stores were opened in Sweden in 1966 and 1967. In 1969 a store was opened in Denmark, followed by a store in Switzerland in 1973, to test the European market, and another in Germany in 1974. By 1974 there were ten IKEA stores in five European countries. The stores employed a total of 1,500 persons, and sales in 1974 were SKr616 million. Sweden was the main market, with 75% of total sales.

The year 1975-1990 saw a remarkable establishment of IKEA stores beyond Sweden. In 1973 Kamprad moved to Copenhagen, Denmark, a more central location for European expansion. The first major expansion was in Germany. After the first store in 1974, ten more were opened by 1980, more than were in operation in Sweden, and by 1990 there were 17 stores in Western Germany. Elsewhere in Europe, stores were opened in Austria in 1977, the Netherlands in 1979, France in 1981, Belgium in 1984, the United Kingdom in 1987, and Italy in 1989. By 1990 there were 60 IKEA stores in western European countries compared with the 10 stores in 5 countries in 1974-1975.

This rapid expansion was not confined to Europe. A first store was opened in Canada in 1976, followed by six further stores up to 1982. These stores were initially operated by companies outside the IKEA Group. Later the IKEA group bought the Canadian operations. In IKEA stores operated by outside companies, capital investment and management were the responsibility of local entrepreneurs. Such stores were opened in Australia in 1975, Hong Kong in 1975, Singapore in 1978, the Canary Islands in 1980, Iceland in 1981, Saudi Arabia in 1983, Kuwait in 1984, and the United Arab Emirates in 1991.

The IKEA Group’s most challenging expansion, however, started in 1985 when a store of 15,700 square meters was opened in the United States in Philadelphia, Pennsylvania. Could a European retail concept, however enterprising in its methods and outlook, succeed in the U.S. market? The answer was yes. If anything, the American consumer was more receptive to innovative ideas and merchandise than many of the more conservative European customers. The experience of the Canadian stores was useful. By 1991 there were seven stores operating in the United States, including one in California and two in New York.

A second challenge was taken up in 1990 when IKEA stores were opened in eastern Europe. A store was opened in Budapest in a joint venture with a Hungarian firm, Butorker, and in the same year a small store was opened in Warsaw, Poland. The opening of a store in the former Soviet Union, now known as the Commonwealth of Independent States, is under discussion. These exploratory moves into eastern Europe are, however, still at a very early stage. This rapid expansion in a decade and a half changed the pattern of sales. Whereas in 1975 the Scandinavian markets represented around 85% of total sales, by 1990 this proportion had dropped to just over 26%. Sales in Germany had risen to more than 27% of the total. The rest of Europe contributed 34% of sales, and the rest of the world just over 12%.

Expansion also presented supply problems. The component parts had to be made to strict specifications. The originality of the Kamprad approach was to replace the craftsman philosophy with an engineering philosophy. In the early years of growth, while using Sweden, Denmark, and Finland as the main sources of supply (70%), the IKEA group saw the advantages of supplies from eastern European countries. Contracts were signed with state-controlled and other factories in East Germany, Poland, and Yugoslavia for the supply of furniture components. Since payment was made in “hard” currency, strict specifications could be enforced and the dates of payment could be flexible, thus improving IKEA’s cash flow. In the 1970s, some 20 to 25% of total supplies came from eastern Europe. By 1990 the proportion had fallen to around 15%, but it was part of a much larger total. With the geographical expansion of IKEA stores, other sources of supply were found. By 1990 the share of Scandinavian manufacturers in the total purchases of IKEA products had fallen to 45%, while the share of the rest of western Europe was 30%. The share of the Far East and other areas, 10%, had become more important. In 1990, there were around 1,500 suppliers in 45 different countries, presenting a formidable problem of planning and logistics.

In the IKEA group there are four main interlocking functions. The first, Product Range and Development, is primarily carried out by IKEA of Sweden AB. New or improved products are an essential part of the success of the firm. This work is undertaken by separate product groups within IKEA of Sweden: for example, living-room furniture, kitchen and bathroom furniture, carpets and textiles, lighting, and glassware and ceramics. Second, Purchasing is conducted by agents who are responsible for placing orders to the specifications laid down by IKEA of Sweden. Third, the Distribution Service, undertakes the transport and distribution of the finished products to twelve regional distribution centers and stores throughout the world. Finally, Retailing, carried out by retailing companies operating under the same retail concept, ensures that selling methods and customer service are of the same standards in all stores. In addition there are financial, real estate, legal, and personnel operations.

The IKEA concept of specialized component production and selling its flat-pack finished products in large out-of-town locations with low occupancy costs, at 3-4% of sales, as well as self-selection and practically no delivery, leading to low personnel costs of 7 to 8%, combine, in the words of Ingvar Kamprad, “to offer a wide range of home furnishing items of good design and function at prices so low that the majority of people can afford to buy them.”

Another factor in the Group’s success has been its effective, and at times unusual, advertising and sales promotion campaigns in all countries of operation. The 20 to 35-year-old customers are targeted, and the high quality of modern Swedish design is emphasized. The IKEA catalogues have played a primary role in advertising success. The catalogues are attractive and easy to use, emphasizing quality of design and the efficiency of IKEA products. Before the opening of a new store, every household in a wide area receives a copy. Although direct mail-order sales represent less than 10% of total sales and the catalogs do not offer the whole IKEA range, they are a key factor in attracting customers to the stores.

The IKEA advertisements are unusual in their contradiction of the traditional image of the Swedish as conservative and rather serious. In France, for example, one slogan used was “Ils sont fous ces Suédois”; in Germany, the “unmögliche Möbelhaus aus Schweden”; in the United Kingdom “the mad Swedes are coming”. In the United States, advertising campaigns have been even more outrageous. Almost every advertisement includes a reindeer, leaving no doubt as to the origin of the campaign. This combination of off-beat advertising and well-designed merchandise has had a very effective impact on the target group of customers.

In 1990 there were 86 IKEA stores in 21 different countries. The total selling space, excluding central and regional warehouses, was around 1,220,000 square meters. The group estimated that the stores were visited by around 78 million persons in 1990. In the last decade, the number of stores has more than doubled and employment has risen from 4,500 to nearly 17,000 in 1990.

There are two possible causes for concern in the future. The first concerns the market. Saturation point in the number of stores may have been reached already in some countries, for example Sweden, Germany, Belgium, and the Netherlands. In other developed countries, expansion is still possible, but demand is linked to trends in the birth rate, in new housing starts, and in the age structure of the population. These factors are less important in other parts of the world, but testing of those markets has hardly begun.

Secondly, there is the complex question of the group’s future finances. Ingvar Kamprad has said that he will be satisfied if his idea is sufficiently successful to provide him with “bread, schnapps and crayfish.” So far, all profits—new investments are reported to have been some 15% of sales—have been ploughed back into the firm. To avoid problems of outside shareholders and succession, in the 1970s Kamprad donated the IKEA Group to a charitable foundation in the Netherlands. If expansion is to continue and IKEA is to keep ahead of the growing number of direct competitors, such as Habitat in the United Kingdom and France and Interio in Switzerland, other methods of finance will have to be found in the future.

—James B. Jefferys