COVER STORY PODCAST
When Roger Penguino heard Ikea was offering $4,000 in gift certificates to the first person in line at the opening of its new Atlanta store, he had no choice. He threw a tent in the back of his car and sped down to the site. There, the 24-year-old Mac specialist with Apple Computer Inc. (AAPL) pitched camp, hunkered down, and waited. And waited. Seven broiling days later, by the time the store opened on June 29, more than 2,000 Ikea fanatics had joined him. Some were lured by the promise of lesser prizes for the first 100. Others were just there for the carnival atmosphere (somebody even brought a grill). The newly wed Penguino got his certificates and bagged a $799 Karlanda sofa and a $179 Malm bed, among other items. He also achieved celebrity status: "Whenever I go back, employees recognize me and show me the new stuff."
Penguino is a citizen of Ikea World, a state of mind that revolves around contemporary design, low prices, wacky promotions, and an enthusiasm that few institutions in or out of business can muster. Perhaps more than any other company in the world, Ikea has become a curator of people's lifestyles, if not their lives. At a time when consumers face so many choices for everything they buy, Ikea provides a one-stop sanctuary for coolness. It is a trusted safe zone that people can enter and immediately be part of a like-minded cost/design/environmentally-sensitive global tribe. There are other would-be curators around -- Starbucks and Virgin do a good job -- but Ikea does it best.
If the Swedish retailer has its way, you too will live in a BoKlok home and sleep in a Leksvik bed under a Brunskära quilt. (Beds are named for Norwegian cities; bedding after flowers and plants. One disaster: a child's bed called Gutvik, which sounds like "good f***" in German.) Ikea wants to supply the food in your fridge (it also sells the fridge) and the soap in your shower.
The Ikea concept has plenty of room to run: The retailer accounts for just 5% to 10% of the furniture market in each country in which it operates. More important, says CEO Anders Dahlvig, is that "awareness of our brand is much bigger than the size of our company." That's because Ikea is far more than a furniture merchant. It sells a lifestyle that customers around the world embrace as a signal that they've arrived, that they have good taste and recognize value. "If it wasn't for Ikea," writes British design magazine Icon, "most people would have no access to affordable contemporary design." The magazine even voted Ikea founder Ingvar Kamprad the most influential tastemaker in the world today.
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As long as consumers from Moscow to Beijing and beyond keep striving to enter the middle class, there will be a need for Ikea. Think about it: What mass-market retailer has had more success globally? Not Wal-Mart Stores Inc. (WMT), which despite vast strengths has stumbled in Brazil, Germany, and Japan. Not France's Carrefour, which has never made it in the U.S. Ikea has had its slip-ups, too. But right now its 226 stores in Europe, Asia, Australia, and the U.S. are thriving, hosting 410 million shoppers a year. The emotional response is unparalleled. The promise of store vouchers for the first 50 shoppers drew thousands to an Ikea store in the Saudi Arabian city of Jeddah in September, 2004. In the ensuing melee, two people died and 16 were injured. A February opening in London attracted up to 6,000 before police were called in.
Why the uproar? Ikea is the quintessential global cult brand. Just take those stunts. Before the Atlanta opening, Ikea managers invited locals to apply for the post of Ambassador of Kul (Swedish for fun). The five winners wrote an essay on why they deserved $2,000 in vouchers. There was one catch: They would have to live in the store for three days before the opening, take part in contests, and sleep in the bedding department. "I got about eight hours of sleep total because of all the drilling and banging going on," says winner Jordan Leopold, a manager at Costco Wholesale (COST).
Leopold got his bedroom set. And Ikea got to craft another story about itself -- a story picked up in the press that drew even more shoppers. More shoppers, more traffic. More traffic, more sales. More sales, more buzz. A new store in Bolingbrook, Ill., near Chicago is expected to generate some $2.5 million in tax revenues, so the town is paying down debt and doing away with some local levies.
Such buzz has kept Ikea's sales growing at a healthy clip: For the fiscal year ended Aug. 31, revenues rose 15%, to $17.7 billion. And although privately held Ikea guards profit figures as jealously as its recipe for Swedish meatballs, analyst Mattias Karlkjell of Stockholm's ABG Sundal Collier conservatively estimates Ikea's pretax operating profits at $1.7 billion. Ikea maintains these profits even while it cuts prices steadily. "Ikea's operating margins of approximately 10% are among the best in home furnishing," Karlkjell says. They also compare well with margins of 5% at Pier 1 Imports and 7.7% at Target, both competitors of Ikea in the U.S.
To keep growing at that pace, Ikea is accelerating store rollouts. Nineteen new outlets are set to open worldwide in the fiscal year ending Aug. 31, 2006, at a cost of $66 million per store, on average. CEO Dahlvig is keen to boost Ikea's profile in three of its fastest-growing markets: the U.S., Russia (Ikea is already a huge hit in Moscow), and China (now worth $120 million in sales). In the U.S. he figures the field is wide open: "We have 25 stores in a market the size of Europe, where we have more than 160 stores." The goal is 50 U.S. outlets by 2010: Five are opening this year, up from just one in 2000.
The key to these rollouts is to preserve the strong enthusiasm Ikea evokes, an enthusiasm that has inspired two case studies from Harvard Business School and endless shopper comment on the Net. Examples: "Ikea makes me free to become what I want to be" (from Romania). Or this: "Half my house is from Ikea -- and the nearest store is six hours away" (the U.S.). Or this: "Every time, it's trendy for less money" (Germany).
What enthralls shoppers and scholars alike is the store visit -- a similar experience the world over. The blue-and-yellow buildings average 300,000 square feet in size, about equal to five football fields. The sheer number of items -- 7,000, from kitchen cabinets to candlesticks -- is a decisive advantage. "Others offer affordable furniture," says Bryan Roberts, research manager at Planet Retail, a consultancy in London. "But there's no one else who offers the whole concept in the big shed."
The global middle class that Ikea targets shares buying habits. The $120 Billy bookcase, $13 Lack side table, and $190 Ivar storage system are best-sellers worldwide. (U.S. prices are used throughout this story.) Spending per customer is even similar. According to Ikea, the figure in Russia is $85 per store visit -- exactly the same as in affluent Sweden.
Wherever they are, customers tend to think of the store visit as more of an outing than a chore. That's intentional: As one of the Harvard B-school studies states, Ikea practices a form of "gentle coercion" to keep you as long as possible. Right at the entrance, for example, you can drop off your kids at the playroom, an amenity that encourages more leisurely shopping.
Then, clutching your dog-eared catalog (the print run for the 2006 edition was 160 million -- more than the Bible, Ikea claims), you proceed along a marked path through the warren of showrooms. "Because the store is designed as a circle, I can see everything as long as I keep walking in one direction," says Krystyna Gavora, an architect who frequents Ikea in Schaumburg, Ill. Wide aisles let you inspect merchandise without holding up traffic. The furniture itself is arranged in fully accessorized displays, down to the picture frames on the nightstand, to inspire customers and get them to spend more. The settings are so lifelike that one writer is staging a play at Ikea in Renton, Wash.
Along the way, one touch after another seduces the shopper, from the paper measuring tapes and pencils to strategically placed bins with items like pink plastic watering cans, scented candles, and picture frames. These are things you never knew you needed but at less than $2 each you load up on them anyway. You set out to buy a $40 coffee table but end up dropping $500 on everything from storage units to glassware. "They have this way of making you believe nothing is expensive," says Bertille Faroult, a shopper at Ikea on the outskirts of Paris. The bins and shelves constantly hold surprises: Ikea replaces a third of its product line every year.
Then there's the stop at the restaurant, usually placed at the center of the store, to provide shoppers a breather and encourage them to keep going. You proceed to the warehouse, where the full genius of founder Kamprad is on display. Nearly all the big items are flat-packed, which not only saves Ikea millions in shipping costs from suppliers but also enables shoppers to haul their own stuff home -- another savings. Finally you have the fun (or agony) of assembling at home, equipped with nothing but an Allen wrench and those cryptic instructions.
A vocal minority rails at Ikea for its long lines, crowded parking lots, exasperating assembly experiences, and furniture that's hardly built for the ages (the running joke is that Ikea is Swedish for particle board). But the converts outnumber the critics. And for every fan who shops at Ikea, there seems to be one working at the store itself. The fanaticism stems from founder Kamprad, 79, a figure as important to global retailing as Wal-Mart's Sam Walton. Kamprad started the company in 1943 at the age of 17, selling pens, Christmas cards, and seeds from a shed on his family's farm in southern Sweden. In 1951, the first catalog appeared (Kamprad penned all the text himself until 1963). His credo of creating "a better life for many" is enshrined in his almost evangelical 1976 tract, A Furniture Dealer's Testament. Peppered with folksy tidbits -- "divide your life into 10-minute units and sacrifice as few as possible in meaningless activity," "wasting resources is a mortal sin" (that's for sure: employees are the catalog models), or the more revealing "it is our duty to expand" -- the pamphlet is given to all employees the day they start.
Kamprad, though officially retired, is still the cheerleader for the practices that define Ikea culture. One is egalitarianism. Ikea regularly stages Antibureaucracy Weeks, during which executives work on the shop floor or tend the registers. "In February," says CEO Dahlvig, "I was unloading trucks and selling beds and mattresses."
Another is a steely competitiveness. You get a sense of that at one of Ikea's main offices, in Helsingborg, Sweden. At the doorway, a massive bulletin board tracks weekly sales growth, names the best-performing country markets, and identifies the best-selling furniture. The other message that comes across loud and clear: Cut prices. At the far end of the Helsingborg foyer is a row of best-selling Klippan sofas, displaying models from 1999 to 2006 with their euro price tags. In 1999 the Klippan was $354. In 2006 it will be $202.
The montage vividly illustrates Ikea's relentless cost-cutting. The retailer aims to lower prices across its entire offering by an average of 2% to 3% each year. It goes deeper when it wants to hit rivals in certain segments. "We look at the competition, take their price, and then slash it in half," says Mark McCaslin, manager of Ikea Long Island, in Hicksville, N.Y.
It helps that frugality is as deeply ingrained in the corporate DNA as the obsession with design. Managers fly economy, even top brass. Steen Kanter, who left Ikea in 1994 and now heads his own retail consultancy in Philadelphia, Kanter International, recalls that while flying with Kamprad once, the boss handed him a coupon for a car rental he had ripped out from an in-flight magazine.
This cost obsession fuses with the design culture. "Designing beautiful-but-expensive products is easy," says Josephine Rydberg-Dumont, president of Ikea of Sweden. "Designing beautiful products that are inexpensive and functional is a huge challenge."
No design -- no matter how inspired -- finds its way into the showroom if it cannot be made affordable. To achieve that goal, the company's 12 full-time designers at Almhult, Sweden, along with 80 freelancers, work hand in hand with in-house production teams to identify the appropriate materials and least costly suppliers, a trial-and-error process that can take as long as three years. Example: For the PS Ellan, a $39.99 dining chair that can rock back on its hind legs without tipping over, designer Chris Martin worked with production staff for a year and a half to adapt a wood-fiber composite, an inexpensive blend of wood chips and plastic resin used in highway noise barriers, for use in furnishings. Martin also had to design the chair to break down into six pieces, so it could be flat-packed and snapped together without screws.
With a network of 1,300 suppliers in 53 countries, Ikea works overtime to find the right manufacturer for the right product. It once contracted with ski makers -- experts in bent wood -- to manufacture its Poang armchairs, and it has tapped makers of supermarket carts to turn out durable sofas. Simplicity, a tenet of Swedish design, helps keep costs down. The 50 cents Trofé mug comes only in blue and white, the least expensive pigments. Ikea's conservation drive extends naturally from this cost-cutting. For its new PS line, it challenged 28 designers to find innovative uses for discarded and unusual materials. The results: a table fashioned from reddish-brown birch heartwood (furniture makers prefer the pale exterior wood) and a storage system made from recycled milk cartons.
If sales keep growing at their historical average, by 2010 Ikea will need to source twice as much material as today. "We can't increase by more than 20 stores a year because supply is the bottleneck," says Lennart Dahlgren, country manager for Russia. Since Russia is a source of timber, Ikea aims to turn it into a major supplier of finished products.
Adding to the challenge, the suppliers and designers have to customize some Ikea products to make them sell better in local markets. In China, the 250,000 plastic placemats Ikea produced to commemorate the year of the rooster sold out in just three weeks. Julie Desrosiers, the bedroom-line manager at Ikea of Sweden, visited people's houses in the U.S. and Europe to peek into their closets, learning that "Americans prefer to store most of their clothes folded, and Italians like to hang." The result was a wardrobe that features deeper drawers for U.S. customers.
The American market poses special challenges for Ikea because of the huge differences inside the U.S. "It's so easy to forget the reality of how people live," says Ikea's U.S. interior design director, Mats Nilsson. In the spring of 2004, Ikea realized it might not be reaching California's Hispanics. So its designers visited the homes of Hispanic staff. They soon realized they had set up the store's displays all wrong. Large Hispanic families need dining tables and sofas that fit more than two people, the Swedish norm. They prefer bold colors to the more subdued Scandinavian palette and display tons of pictures in elaborate frames. Nilsson warmed up the showrooms' colors, adding more seating and throwing in numerous picture frames.
Ikea is particularly concerned about the U.S. since it's key to expansion -- and since Ikea came close to blowing it. "We got our clocks cleaned in the early 1990s because we really didn't listen to the consumer," says Kanter. Stores weren't big enough to offer the full Ikea experience, and many were in poor locations. Prices were too high. Beds were measured in centimeters, not king, queen, and twin. Sofas weren't deep enough, curtains were too short, and kitchens didn't fit U.S.-size appliances. "American customers were buying vases to drink from because the glasses were too small," recalls Goran Carstedt, the former head of Ikea North America, who helped engineer a turnaround. Parts of the product line were adapted (no more metric measurements), new and bigger store locations chosen, prices slashed, and service improved. Now U.S. managers are paying close attention to the tiniest details. "Americans want more comfortable sofas, higher-quality textiles, bigger glasses, more spacious entertainment units," says Pernille Spiers-Lopez, head of Ikea North America.
Can the cult keep thriving? Ikea has stumbled badly before. A foray into Japan 30 years ago was a disaster (the Japanese wanted high quality and great materials, not low price and particle board). The company is just now gearing up for a return to Japan next year. Ikea is also seeing more competition than ever. In the U.S., Target Corp. (TGT) has recruited top designer Thomas O'Brien to develop a range of low-priced furnishings, which were launched in October. Kmart has been collaborating with Martha Stewart on its own furniture line. An Ikea-like chain called Fly is popular in France. In Japan Nitori Co. has a lock on low-cost furniture.
Perhaps the bigger issue is what happens inside Ikea. "The great challenge of any organization as it becomes larger and more diverse is how to keep the core founding values alive," says Harvard Business School Professor Christopher A. Bartlett, author of a 1996 case study. Ikea is still run by managers who were trained and groomed by Kamprad himself -- and who are personally devoted to the founder. As the direct links with Kamprad disappear, the culture may start to fade.
For now, the founder's legacy is alive and well. The Klippan couches are selling briskly. New lines of foods, travel gear, and toiletries are due soon. Ikea is gearing up for its Christmas tree promotion -- you buy a live tree, then return it for a rebate (and end up shopping at Ikea in the slow month of January).
And the fans keep clamoring for more. At least once a year, Jen Segrest, a 36-year-old freelance Web designer, and her husband travel 10 hours round-trip from their home in Middletown, Ohio, to Ikea in Schaumburg, Ill., near Chicago. "Every piece of furniture in my living room is Ikea -- except for an end table, which I hate. And next time I go to Ikea I'll replace it," says Segrest. To lure the retailer to Ohio, Segrest has even started a blog called OH! IKEA. The banner on the home page reads "Ikea in Ohio -- Because man cannot live on Target alone."
By Kerry Capell, with Ariane Sains in Stockholm, Cristina Lindblad in New York, Ann Therese Palmer in Chicago, Jason Bush in Moscow, Dexter Roberts in Beijing, and Kenji Hall in Tokyo