IKEA International A/S

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IKEA International A/S

Ny Strandvej 21
DK-3050 Humlebaeck
Denmark
(45) 49 15 50 00
Fax: (45) 49 15 50 01
Web site: http://www.ikea.com

Private Company
Incorporated: 1943 as IKEA, Ingvar Kamprad
Employees: 36,400
Sales: US$5.86 billion (1997)
SICs: 5712 Furniture Stores; 5719 Miscellaneous Home Furnishing Stores

Based in Denmark, IKEA International A/S is one of the world’s top retailers of furniture, home furnishings, and house-wares. The company designs its own items, and sells them in the more than 140 IKEA stores that are spread throughout approximately 30 different countries worldwide. The company also peddles its merchandise through mail-order, distributing its thick catalogs once a year in the areas surrounding its store locations. IKEA is characterized by its efforts to offer high-quality items at low prices. To save money for itself and its customers, the company buys items in bulk, ships and stores items unassembled using flat packaging, and has customers assemble many items on their own at home. The company is owned by founder Ingvar Kamprad’s Netherlands-based charitable foundation, Ingka Holding B.V.

The Early Years

IKEA was founded in 1943 in Sweden by Ingvar Kamprad. Kamprad was born in 1926 as the son of a farmer in Småland, a region in southern Sweden. Småland was historically one of the country’s poorest regions, and its inhabitants were known for their hard work, thriftiness, and inventiveness. In 1943, at the age of 17, Kamprad upheld this characterization when he decided to become an entrepreneur and created a commercial company called “IKEA, Ingvar Kamprad.” The word IKEA was an acronym of his name and address: Ingvar Kamprad and Elmtaryd, Agunnaryd—the name of his farm and the name of the village it was located within. Kamprad’s new company was essentially a one-man effort, and sold fish, vegetable seeds, and magazines to customers in his region. He delivered the items to customers using first a bicycle and later the milk round.

In 1947, IKEA issued its first primitive mail-order catalog, within which the newly invented ballpoint pen was added to the assortment of products Kamprad was offering. Then in 1950, Kamprad set the foundation for the future direction of IKEA by adding furniture and home furnishings to the mail-order line. A year later, an expanded version of the IKEA catalog became available. In 1952, the stability of home furnishings in the IKEA product line was solidified when Kamprad took his items to the St. Eric’s Fair in Stockholm and won over customers with the high-quality, low-priced furniture items in his line.

Up to that point, IKEA items had been obtained from other sources and sold by Kamprad, making his enterprise solely a retail operation. In 1953, however, Kamprad made the decision to buy a small furniture factory and open a small furniture and home-furnishing showroom in Älmhult. The IKEA headquarters were moved from the village of Agunnaryd to Älmhult. IKEA began designing its own furniture items in 1955, and soon began taking advantage of the benefits of flat packaging and self-assembly by customers. Success followed quickly, and in 1958 the tiny showroom was replaced by a then giant store of 13,000 square meters. One year later, a restaurant was added to the store, to accommodate the needs of an ever-increasing number of customers who were traveling long distances to IKEA.

The mail-order business continued to flourish as well, helping to further expand IKEA’s customer range. This prompted the opening of the first IKEA store outside Sweden, near Oslo in Norway, in 1963. Business continued to increase, boosted in part by a 1964 article in the Swedish magazine Allí i Hemmet (All for Your Home), which listed the results of quality tests that had been run on furniture; IKEA received the highest ratings available.

Innovations and Expansion Throughout the 1960s and 1970s

The event that marked the true turning point of the business, however, came 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 in a large market. The store, located 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 acted as the main display area for furniture. The second building consisted of three floors and a basement and acted as the stockroom and service unit, where 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 seating for 350, to cloakrooms, toilets, a bank, and parking for 1,000 cars.

More important than the physical characteristics of the new IKEA store was the manner in which it revolutionized furniture manufacturing and selling. Kamprad continued the practice of selling most furniture in flat-pack form, as he said, “to avoid transporting and storing air.” To make this possible, the furniture was specially designed by IKEA staff in workshops in the Álmhult 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 of 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 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.

Another innovative marketing tool employed in the new IKEA store in Stockholm was a self-service method of selling, which 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 and written materials about products, but no sales assistants to persuade customers to buy. In these early days of IKEA, customers had to pay for their purchases in cash to improve the finances of the firm. The customer was given a docket for each item and collected the flat-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 kitchenware and children’s furniture, and soon more IKEA stores were launched. Additional stores were opened in Sweden in 1966 and 1967, and in 1969 a store was opened in Denmark. This was followed by the first store openings outside the Scandinavian territory—in Switzerland in 1973, and in Germany in 1974. Soon there were ten IKEA stores in five European countries. The stores employed a total of 1,500 people, and sales in 1974 were SKr 616 million. Sweden remained the company’s main market, accounting for 75 percent of total sales.

Kamprad soon realized the potential for IKEA’s expansion into new markets worldwide. In 1973, he once again packed up and moved the company’s headquarters—this time to Copenhagen, Denmark, which was 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, and in the Netherlands in 1979. The company was expanding outside of Europe, as well. In 1975 the first IKEA in Australia was opened; in 1976 a store opened in Canada; and in 1978 a store was placed in Singapore.

Worldwide Growth in the 1980s and 1990s

With worldwide expansion moving along successfully, IKEA continued to enter new markets around the globe in the 1980s. Stores were placed in the Canary Islands in 1980, in France and in Iceland in 1981, in Saudi Arabia in 1983, in Belgium and in Kuwait in 1984, in the United Kingdom and in Hong Kong in 1987, and in Italy in 1989.

Company Perspectives:

Most of the time, beautifully designed home furnishings are created for a small part of the population—the few who can afford them. From the beginning, IKEA has taken a different path. We have decided to side with the many. That means responding to the home furnishing needs of people throughout the world. People with many different needs, tastes, dreams, aspirations... and wallets. People who want to improve their home and create a better everyday life. For IKEA, helping create a better everyday life means offering a wide range of home furnishings in IKEA stores. Home furnishings that combine good design, good function and good quality with prices so low that as many people as possible can afford them.

One of the company’s most challenging expansion efforts, however, began in 1985 when a store of 15,700 square meters was opened in the United States in Philadelphia, Pennsylvania. The move was a test to see whether a European retail concept, however enterprising in its methods and outlook, could succeed in a vastly different 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 previously opened Canadian stores was useful in getting the concept on its feet in the United States.

Another major 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 another small store was opened in Warsaw, Poland. In 1991, stores were placed in the Czech Republic and the United Arab Emirates, and the following year IKEA stores appeared for the first time in Mallorca and Slovakia, along with the opening of a pilot store in the Netherlands. This rapid expansion in a decade and a half helped to greatly change the pattern of sales. In 1975, the Scandinavian markets represented around 85 percent of the company’s total sales. By 1990, however, this proportion had dropped to just over 26 percent, and sales in Germany alone had risen to account for more than 27 percent of the company’s total. The rest of Europe contributed another large chunk of overall sales—34 percent—and stores in other regions accounted for just over 12 percent of the total.

While IKEA’s geographic expansion provided it with more stability—the company no longer had to rely on its saturated Swedish markets for the majority of its income—the expansion also presented minor supply problems. The component parts had to be made to strict specifications, and 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—IKEA also saw the advantages of using supplies from eastern European countries. Contracts were signed with state-controlled and other independent 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 percent of total supplies came from eastern Europe in this fashion. By 1990, however, the proportion of supplies obtained from eastern Europe had fallen to around 15 percent, even though that portion was part of a much larger total than had been the case in the past. In 1990, there were around 1,500 suppliers in 45 different countries, presenting a problem of planning and logistics, because production took place in fewer locales.

To counter any problematic situations arising from the fact that IKEA’s operations were situated all around the world, management organized the company as a whole into four different main areas with interlocking functions. The first area—Product Range and Development —was primarily carried out by IKEA of Sweden. New or improved products had always been an essential part of the success of the company, and the work was undertaken by separate product groups within IKEA of Sweden. Thus, product development tasks were completed in a more centralized fashion, and then filtered down to all other areas of IKEA’s operations. Second, Purchasing of materials for production and other small retail items was conducted by agents responsible for placing orders to the specifications laid down by IKEA of Sweden and the product development teams. Third, the Distribution Service undertook the transport and distribution of the finished products to 12 regional distribution centers and stores throughout the world. Finally, Retailing functions were carried out by those operating under the same retail concept, ensuring that selling methods and customer service were of the same standards in all IKEA stores.

In addition to its strong corporate organization of operations, another factor in IKEA’s success during the expansion years was its effective—and at times unusual—advertising and sales promotion campaigns around the world. Targeted customers were mainly 20- to 35-year-olds, and the high quality of modern Swedish design was emphasized. The IKEA catalogs played a primary role in advertising success. The catalogs were attractive and easy to use, emphasizing quality of design and the efficiency of IKEA products. During the busy years of geographic expansion, every household in the area surrounding a new store received a copy of the catalog. Although direct mail-order sales always represented a very small portion of total sales and the catalogs did not offer the whole IKEA range, they were always a key factor in attracting new customers to the stores.

IKEA advertisements themselves were 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 ees Suédois”; in Germany, the “unmögliche Möbelhaus aus Schweden”; in the United Kingdom, “the mad Swedes are coming.” In the United States, advertising campaigns were even more outrageous, and almost every advertisement included a reindeer, leaving no doubt as to the origin of the campaign. The combination of offbeat advertising and well-designed merchandise had a very effective impact on the group of customers IKEA was targeting.

The Mid-1990s

IKEA continued to open stores in new locations throughout the world. It became interesting to see a company which offered the same basic products at all stores do so well in so many different cultures with different tastes. In 1994, IKEA opened its first store in Taiwan. Two years later, the company placed new stores in Finland, Malaysia, and Spain. By 1998, IKEA had also opened a store in mainland China.

In 1997, IKEA joined thousands of other companies online when it introduced its site on the World Wide Web, aptly named the “World Wide Living Room Web Site.” The web site not only offered information about the company, its origin, and its future vision, but also made it possible for customers to see IKEA’s merchandise on their computers at home. Part of the company’s catalog was available for viewing online, and information about new product lines and pictures of the items were present.

The company also continued its practice of being environmentally friendly, which was actually a practice that the company had embraced since its beginnings. In the 1990s, when media hype about recycling and saving the environment was at its height, IKEA had already taken steps to cut down on waste years before. In order to save money in the production phase, IKEA had long strived to be as economical as possible and use only the amount of materials that was absolutely necessary when producing items. The company had also been saving money (and trees) by using flat-packaging for the storage and transport of items, which dramatically reduced the amount of cardboard packaging materials used by the company. The company’s web site challenged customers to “search for new and economical uses of our precious environmental resources to adapt ourselves to the forests, lakes, air and mountains. Not the other way around.”

The End of the Century and Beyond

As the end of the 20th century neared, there were a few possible causes for concern in the future. First, some feared that the saturation point in the number of stores may have been reached already in some countries—for example Sweden, Germany, Belgium, and the Netherlands. This would mean that the potential for continued future growth at the same rate would possibly decrease, unless IKEA continued to aggressively enter new markets around the world. In these other developed countries that were less saturated by the IKEA concept, possible expansion was linked to trends in the birth rate, new housing starts, and the age structure of the population.

Furthermore, there existed the complex question of the company’s future finances. Ingvar Kamprad had stated that he would be satisfied if his business was sufficiently successful to provide him with “bread, schnapps and crayfish.” Throughout the company’s history, most profits were ploughed back into the firm. To avoid problems of outside shareholders and succession, in the 1970s Kamprad had donated the company to a charitable foundation in the Netherlands called Ingka Holding B.V. The move had been made to help prevent the company from being taken over and/or split up when Kamprad died. Some analysts believed that if expansion was to continue and IKEA was to keep ahead of the growing number of direct competitors, other methods of finance would have to be found in the future.

Outsiders felt that IKEA’s next course of action would have to be going public on the stock market. But according to a July 1998 article in the South China Morning Post, “Kamprad has no intention of releasing his grip on his empire, to the dismay of many investment banks, salivating over the successful retail chain that attracts 140 million visitors each year.” As a private entity, IKEA was free to engage in expansion without the pressure of having shareholders demanding quick profits. This meant that the company could take things at its own pace, and potentially fare better in the long run.