Ikea thinks outside the big box

The Ikea signage may be the familiar blue and yellow and Billy bookcases are for sale inside. But the shops in Hamburg, Pamplona, Norwich, and Quebec City are far from the usual Ikea store.

Instead, they are evidence of a big experiment taking place at the world’s largest furniture retailer as Ikea tries a number of different ways to serve customers.

The chain known for its meatballs and cheap Ektorp sofas is rethinking its reliance on large out-of-town warehouses. In as big a change as it has attempted in its 72-year history, Ikea is rolling out new store formats — from smaller city-centre shops to collection points for online orders.

Steen Kanter, who was a senior executive at the company for 20 years, says: “No doubt this is a big period of evolution for Ikea.”

One thing it will not be changing, however, is Ikea’s foundation ownership and the Netherlands base that affords it certain tax advantages.

Mr Kanter, head of consultancy Kanter International, says the chain is having to adapt. “Distribution has become a conundrum because the world has changed materially and Ikea needs to figure out how to stay relevant without losing the revenues and gross profits,” he adds. “That will force Ikea to make adjustments.”

The man driving those adjustments is sitting in Ikea’s anonymous headquarters in the Dutch city of Leiden. Peter Agnefjall, Ikea’s chief executive for the past two years, is dressed in the company’s executive uniform of shirt and a jumper. He jokes that traditionally Ikea stores have been situated “out in the potato field”.

But he says that increasing urbanisation and the rise of ecommerce is pushing Ikea to change as it seeks to fulfil its longstanding mission of “creating a better life for the many people”.

“Ikea is in constant change, but what we have maybe allowed ourselves to do now is to test a little bit more in a wider sense than we’ve done in the past,” he adds.

That experiment is taking place across the world with three new types of Ikea store. First and most widespread are pick-up points where customers can collect online purchases. Ikea has opened them in locations that are not big enough to support a large Ikea store, such as Tromso in northern Norway and Kumamoto in Japan.

But Ikea is also introducing them in city centres, with plans to open one on London’s Oxford Street and up to a dozen each in Canada and Australia. In some sites, part of Ikea’s product range will also be available inside the shop. “This is a little bit where we are experimenting to find a format for different places,” says Mr Agnefjall.

The second type is a significantly smaller outlet than normal — up to half the average size of an Ikea store at about 20,000 square metres — and one that is cheaper to build, again for towns not large enough to support a full-size Ikea. Four have been built so far, in Kaiserslautern and Bremerhaven in Germany, Zwolle in the Netherlands, and Sendai in Japan.

The final test is taking place in Hamburg’s Altona district, where Ikea has opened a city-centre store with many products on sale and even transporter bikes available free to use to take purchases home.

“That’s what we’re doing and then it will be trial and error — that’s what an entrepreneurial business is about. You don’t get everything right from the beginning and in some cases it will fail. In some cases this will be a super success, and in some cases it will be something that we can tweak and improve and that’s the way we develop Ikea constantly,” says Mr Agnefjall.

Part of Ikea’s success has been exploiting the labyrinthine layout of its stores to induce customers to purchase items they were not intending (Mr Agnefjall calls it “the long, natural way”). And a big challenge with its new stores will be ensuring the focus on convenience — new, larger shops feature more shortcuts for customers anxious not to browse too much — does not hurt profitability.

It’s growth through continuing to develop better products, improving quality, making our range more affordable to more people

“Ikea’s greatest problem will be to maintain . . . profits in a world where customers are reluctant to visit stores, which results in missing out on high gross margin impulse sales,” says Mr Kanter.

There is little sign of that happening yet. Ikea has had one of its best years ever with sales increasing 11 per cent to €32bn in the year to the end of August (it releases profit figures next week). Internet sales topped €1bn for the first time and rose 35 per cent compared with the previous year. But Mr Kanter says figuring out how to do ecommerce in a way that is profitable for Ikea and “comfortable” for customers is another significant challenge.

Ikea is in the middle of one of its big planned growth spurts. It is aiming to double its revenues from 2011 to €50bn by 2020. Half of this is due to come from growth at existing stores with half coming from new stores — it opened 13 last year to take the total to 328 — and online sales.

Mr Agnefjall describes his strategy as one of “growth”. “It’s growth through continuing to develop better products, improving quality, making our range more affordable to more people,” he says. “It’s about accelerating the expansion. And finally it’s about transforming Ikea into a multichannel retailer.”

Ikea is helped in this by its private status. Founder Ingvar Kamprad, now aged 89, split his company in two in the 1970s, placing each half under the ownership of a foundation. The aim, say both Agnefjall and Kanter, was to try to give Ikea “eternal life”.

The running of the stores — Mr Agnefjall’s job — was split from ownership of Ikea’s intellectual property, which belongs to Inter Ikea. Ikea is controlled by a Dutch foundation while Inter Ikea has a Liechtenstein-based foundation as owner.

Mr Agnefjall says that being private allows Ikea to “think long term and to do long-term investments in a way that, I guess, would really not be possible to do would we have been on the stock market”. But Mr Kanter says it also allows the group to avoid fads and “so that Ikea would be free from delivering on growth promises made to shareholders and to the public”.

Its somewhat opaque structure has come under scrutiny in recent months over whether Ikea pays sufficient tax. Mr Agnefjall concedes that tax is one of several reasons Ikea moved to the Netherlands from Sweden in 1986.

But he argues that Ikea pays a lot of tax — €801m of corporate tax last year at an effective rate of 19 per cent, plus €715m of other taxes such as property levies — and that being based in the Netherlands confers few tax advantages these days as other countries have become more competitive.

Ikea has taken several steps to becoming more transparent. It started disclosing its financial results in 2010, and it finally revealed the existence of the Interogo Foundation that owns Inter Ikea in 2011, a mere 22 years after it was set up.

Mr Agnefjall says: “We would like to be a modern, open, honest, and transparent company. And I think historically we have underestimated the interest for Ikea . . . We’re making good progress but obviously it can continue to be improved.”