This post by Beth Kowitt was found on http://fortune.com/ikea-world-domination/
It took some time to figure out just the right shopping complex, off just the right highway interchange and just the right distance from Seoul, that could accommodate a 624,000-square-foot store—that is to say, one more than three times the size of the average Wal-Mart Supercenter. It took more time to solve certain mysteries, like how big to make the store’s children’s section in a country where kids are often given ample space in the family living quarters. It took more time to figure out how to showcase kitchens that incorporate kimchi refrigerators, a uniquely Korean appliance—and even more time to untangle nuances of the market, like the South Korean’s preference for metal chopsticks.
In all, it took about six years for Ikea to unveil its inaugural store in South Korea, in Gwangmyeong, starting from the first scouting trip. Ikea celebrated the opening in December with a tree planting rather than ribbon cutting. (Chalk that up to Ikea tradition rather than to South Korean custom.)
The lag was quintessentially Ikean. “They are ferocious about not expanding too rapidly,” says David Marcotte of consulting firm Kantar Retail. But six years? “The more global, the more complex it gets,” replies Mikael Palmquist, the regional manager of retail for Asia Pacific. “We need to get these things right or we will never be taken seriously.”
Even with all that careful planning, Ikea managed to get a few things wrong. It misjudged the number of parking spaces needed, and a seemingly benign map for sale upset some customers: The body of water east of Korea was labeled the Sea of Japan rather than the East Sea, as South Koreans prefer.
But the Koreans seem, for the most part, to have forgiven the Swedes. Today theGwangmyeong store, which is the company’s largest in the world by shopping area, is on track to become one of Ikea’s top-performing outlets for 2015.
The success is hardly a fluke. Ikea, it seems, is a genius at selling Ikea—flat packing, transporting, and reassembling its quirky Swedish styling all across the planet. The furniture and furnishings brand is in more countries than Wal-Mart, Carrefour, and Toys “R” Us. China, where Ikea has eight of its 10 biggest stores, is the company’s fastest-growing market. An outlet in Morocco is coming soon, and there are hints that Brazil may not be far off. Meanwhile, Ikea is going meatballs out in India, where it plans to invest about $2 billion over a decade to open 10 stores.
Getting it right in emerging markets like China and India, where Ikea is well-positioned to capitalize on a growing middle class, is a key factor in its goal of hitting €50 billion in sales by 2020. That’s up from €28.7 billion in its fiscal 2014 ($39 billion based on the average exchange rate for Ikea’s fiscal year) and almost double its 2005 sales level. Today the Ikea Group has 318 stores, not including the brand’s some four dozen franchised locations; it’s aiming for around 500 by 2020.
With €3.3 billion ($4.5 billion) in net income, up 31% in the past five years, the chain is more profitable than behemoths Target and Lowe’s. And it has gotten that way by mastering one of the hardest challenges in the retail universe: selling high volumes of inventory at a consistently low price in vastly different marketplaces, languages, and cultures. Ikea is a model for retail regeneration—though, ahem, some assembly is required.
There are important lessons here for Wal-Mart, which has sometimes struggled overseas, and for Target, featured in Fortune’s March 1 issue, which recently decided to pull out of Canada after a disastrous expansion.
The Ikea model is based on volume—producing a lot of the same stuff over and over, which helps it secure a low price from suppliers and in turn charge a low price to customers. One Billy bookcase, an Ikea classic, is sold every 10 seconds. More stores mean more volume and the chance to drop prices even more, which Ikea did by an average of 1% last year.
For the company, this isn’t just a business model, apparently. It’s a mission: helping “the many people” and those with “thin wallets,” which is a mantra spoken by company employees everywhere from Croatia to Qatar. “We’re guided by a vision to create a better everyday life for the many people. That is what steers us, motivates us—that is our role,” says Ikea Group CEO Peter Agnefjäll, a 20-year company veteran, who took the helm in 2013. “We feel almost obliged to grow.”
Obligation or not, Ikea used to be pretty lousy at expansion. When the company first went into the U.S. market in 1985, it forgot it was a retailer. Instead it behaved like an exporter, taking beds and cabinets measured in centimeters and plopping them down in its first U.S. store near Philadelphia. Even sales successes happened for the wrong reasons: Americans bought an inordinate amount of Ikea vases … using them as water glasses. The European-size ones were too small to satiate Americans’ preference for ice. “We thought everything was going to be easy, and it was hell,” says Steen Kanter, a former executive who now runs Kanter International, a retail and brand consultancy.
In 1992 the board met to consider pulling out of the market, according to the New York Times. But instead the company decided to do something it had never really done: study the market intensely.
Today research is at the heart of Ikea’s expansion. “The more far away we go from our culture, the more we need to understand, learn, and adapt,” says Mikael Ydholm, who heads research. Rather than focus on differences between cultures, it’s his job to figure out where they intersect.
The company, for example, did a study of 8,292 people in eight cities, examining morning routines. People are the fastest out the door in Shanghai (56 minutes) and the slowest in Mumbai (2 hours, 24 minutes), where they’re also the kings of the snooze (58% hit the button at least once). New Yorkers and Stockholmers are the most likely to work in their bathrooms (16%). But regardless of city, women spend more time than men picking out their outfit for the day, a process many find stressful.
With this data in hand, Ikea came up with a freestanding mirror that has a rack on the back for hanging clothes and jewelry. The Knapper, as it’s called, is intended to help customers assemble an outfit—clothes and accessories—the night before to cut down on morning panic. Other research showed that as more of the world’s population moves into cities (with smaller living spaces), Ikea could serve customers by creating multifunctional products. The company, for instance, is about to roll out lamps and bedside tables with built-in wireless charging for mobile devices. “The best thing for making your home more beautiful is to take away ugly things,” says Jeanette Skjelmose, who’s the business manager of lighting. “Cables are normally not that beautiful.”
Even surveying 8,292 people doesn’t always get you the right answer. The problem is that people lie. Ydholm puts it more delicately. “Sometimes we are not aware about how we behave,” he says, “and therefore we can say things that maybe are not the reality. Or it could be that we consciously or unconsciously express something because we want to stand out as a better person. That’s very human to do it like that.”
One way Ikea researchers get around this is by taking a firsthand look themselves. The company frequently does home visits and—in a practice that blends research with reality TV—will even send an anthropologist to live in a volunteer’s abode. Ikea recently put up cameras in people’s homes in Stockholm, Milan, New York, and Shenzhen, China, to better understand how people use their sofas. What did they learn? “They do all kinds of things except sitting and watching TV,” Ydholm says. The Ikea sleuths found that in Shenzhen, most of the subjects sat on the floor using the sofas as a backrest. “I can tell you seriously we for sure have not designed our sofas according to people sitting on the floor and using a sofa like that,” says Ydholm.
The aim of gaining all this cultural knowledge is not to tweak the products for each market. The Ikea model, remember, is volume, volume, volume: It needs vast economies of scale to keep costs low, and that means creating one-size-fits-all solutions as often as possible. Rather, Ikea has gotten awfully good at showing how the same product can mesh with different regional habitats.
Witness the full-size sample rooms that Ikea sets up in stores and where customers will sometimes be caught napping. The rooms play an essential, if secret role, showing consumers how to fit Ikea pieces into their lives. Displays in Sendai, Japan, and Amsterdam could feature the same beds and cabinets, for example. But the Japanese version might incorporate tatami mats, and the Dutch room will have slanted ceilings, reflecting the local architecture. Beds in the U.S., meanwhile are covered with pillows.
Ikea’s catalogues serve a similar purpose as the sample rooms—and, again, the company has invested in the strategy in a comprehensive way. Catalogues come in 32 languages and 67 versions, with each reflecting local customers and customs. There are two catalogues for Belgians: one in French, another in Flemish. Ikea customers in Winnipeg and Calgary typically see a different version from their Francophone countrymen in Montreal.
Ikea printed 217 million copies of its most recent annual tome—which the company claims is the biggest run of any publication of its kind in the world—producing them in a studio in Älmhult, Sweden. For every room setup, there is an Ikea employee standing by responsible for tracking any element that needs to be switched out—making sure that glass products produced in mainland China don’t show up in Taiwan’s catalogue and removing Persian rugs from the one that gets mailed to Israelis.
Ikea has not always gotten these local nuances right. The company came under fire for Photoshopping women out of its catalogue in Saudi Arabia and for removing a lesbian couple from its magazine in Russia. “We have done mistakes,” acknowledges Kajsa Orvarson, communications officer at Ikea Communications, the home of the catalogue, “but we are becoming more and more aware of how to improve and to share our values.”
Another critical challenge for Ikea is setting prices. Part of the brand’s allure is that customers know they can buy some products ridiculously cheap. Ikea has a term for them—“breath-taking items,” or BTIs—and they are very much a part of the business model, creating a price halo for the whole store. But a price tag that takes a customer’s breath away in the Wembley store, in northwest London, might be met with no more than a “meh” in China, where prices are generally so rock bottom that an Ikea soft ice cream cone sells for 1 renminbi, or 16¢. (Ikea got its prices in Chinese stores down by manufacturing some 80% of the goods it sells there domestically, cutting shipping costs.)
As Ikea expands into newer, less developed markets, it is likely to face a much tougher time finding BTIs. In Älmhult, design manager Marcus Engman walks by a display and points to a Knopparp sofa listed at an eye-popping €69 ($77). Though a remarkably good value in Sweden, it’s still a lot of money for many in the world to spend. Finding a price point that will feel like a BTI in India too is essential if the company is ever to thrive there. Of course, if Ikea solves that puzzle, the benefits may well accrue beyond emerging markets. After all, says Engman, “what’s a good price in India is an even better price in the U.S.”
The Ikea Way
In the furniture world there’s an oft-cited statistic that we have our sofas longer than our cars and change our dining room tables as frequently as our spouses. Furniture can be its own kind of ball and chain. It’s passed down from generation to generation, or it’s so expensive that people feel it’s forever. From the get-go, Ikea shook up that paradigm. “It traumatized furniture retailing,” says Martin Toogood, who has run several companies that have competed against Ikea over two decades.
Ikea kept its prices down with an obsessive focus on costs. It might skip an extra coating of lacquer on the underside of a table that people never see or use. The company has also stripped out as much labor as possible from the system, pushing tasks that were once done by traditional retailers onto the customer. Flat packed furniture made it easier for customers to take purchases with them, cutting out the expense of stocking and delivery. (Ikea figured out flat packing in 1956, when a designer took the legs off a Lövet table to get it in his trunk.)
Two-thirds of Ikea’s goods are made in Europe. Ikea factories account for 12% of total production; the company’s 1,002 suppliers make the rest. (Unlike Target or Wal-Mart, Ikea sells only its own brand, with the exception of some food items.) Some 9,500 products comprise what Ikea calls the range, but in reality it’s more like 50,000 because of variations in elements like plugs for different countries.
To pack it all up, the company uses 800 million square meters of cardboard every year. “I am not proud of it,” says Allan Dickner, the deputy manager of packaging. “We try to minimize it.”
He walks through the evolution of packaging a particular floor lamp. It started in a rectangular box wrapped in plastic with lots of wasted space inside. “Now comes the logistics wet dream,” Dickner says as he shows the final result—L-shaped boxes that can be nestled against one another like puzzle pieces. In the early days designers resisted having their floor lamps cut in half for aesthetic reasons, but today not one comes in a single piece.
The magic of flat packing allows goods to be jammed into shipping containers without wasting any space. Wasted space means wasted money and is also environmentally unfriendly. “I hate air,” says Dickner. In the beginning of the 2000s, the company did an internal air hunt competition. The winner, who received a two-week vacation to Thailand, came up with a better way of transporting tea lights. They had been packaged loosely in a bag, but a Dutchman had the idea of stacking them in rows and vacuum sealing them. The metal cups encasing the candles were redesigned to sit neatly on top of one another. “It was rocket science,” Dickner marvels. Ikea then borrowed from another very Nordic industry in constructing a machine that could sort them. “We looked at how to pack fish sticks,” he says.
But Dickner admits that sometimes Ikea has gone overboard with flat packing, putting too much of a burden on customers. To ensure it doesn’t take three hours to put together a tiny inexpensive item, the instruction-manual team—which crafts some 1,400 assembly instructions a year, featuring a gender-neutral cartoon character called the “assembly figure”—is sometimes called on to give input that might impact the manufacturing process. New employees who aren’t yet accustomed to the ways of the Allen wrench are brought in to do assembly tests. There’s an internal nickname for products that take too long to put together. “Sometimes,” Dickner says, “we call it a ‘husband killer.’ ”
It may not be noticed by everyone, but in recent years Ikea has been killing far fewer husbands. The company has accomplished this modest feat in large part through improving its product design. As much as it has doubled down on market research and logistics, Ikea has been relentless in its focus on design.
Engman, Ikea’s design manager, and his team come up with some 2,000 new products every year, including redesigns of existing items. Marianne and Knut Hagberg, a brother and sister design duo who have been with Ikea for 36 years, have redone one of their most successful products, a three-tiered mesh document tray, three times. “Everybody has it,” says Marianne. Each redesign resulted in a different shape of the support holding the trays—a horseshoe, a triangle, and a rectangle. Knut jokes that soon they’ll run out of shapes.
Products under development go through rapid prototyping in the pattern shop to provide a sense of what they will actually look like in the flesh—or at least in plastic. On a recent visit, one of the four 3-D printers was outputting a toilet brush. Apparently this is one of the more normal items. “We have a lot of strange things,” says Henrik Holmberg, who manages the department. “That is very good that we can do it in our own shop rather than spreading the crazy ideas externally.” One of the oddest things he’s ever worked on was a lamp made from the same material as egg cartons. “I thought that was very crazy,” he says, “but we proved the technique was possible.”
If air is the enemy in shipping, it is the ally in design. “The more air in our products, the better,” says Engman, who started working at Ikea when he was a teenager, pushing trolleys. (His dad was an Ikea product developer and came up with the idea for the Klippan, a round, informal sofa, after seeing how his kids wore out the furniture.) In the design center, Engman points out a table under development that consists of two trays cobbled together. Its hollow center means the use of fewer materials. Its legs even attach without screws—part of a general move at Ikea to try to simplify assembly. Fittings can constitute about a third of a product’s cost and are also a hassle for customers.
Ikea’s designers look well beyond the furniture industry for expertise when it comes to trimming production costs. They’ve commissioned a shopping-cart manufacturer, for instance, to mass-produce a new table and a bucket maker to punch out a chair. As the price of wooden drums declines, Engman has considered using a drum supplier for round tables. The same goes for materials such as cork, which is in greater supply as wine bottles increasingly employ screw tops and plastic stoppers.
So, too, design inspiration comes from everywhere. Engman points out a folding table that he saw in bars and restaurants throughout China. “It costs near to nothing,” he says. “It is the smartest table. It has the construction of an ironing board.” He is also excited these days about acacia wood, which Ikea sources primarily from Southeast Asia. Normally used in outdoor furniture, acacia has the properties of teak but the price of pine. Its downside is it turns as it grows and does so even more when it dries, making it hard to glue together. (That’s why particleboard became so popular in furniture; it’s also cheap, and every piece is alike.) But Engman says his team had a “breakthrough” in working with and drying the wood.
Walking through the design center is a bit like seeing into the future. Some of the designers are already working on products for 2019. There’s an electric bike on the horizon in some markets, as well as products that, Engman says, encourage social interaction and play. Socializing through devices like smartphones is eroding togetherness, he says, and that togetherness is an essential part of home life and therefore vital to Ikea.
Indeed, electronic technology is one area where Engman says Ikea won’t go. “We weren’t any good there,” he says. Ikea’s long-ago venture into televisions was one of the company’s great failures. “We are world champions in making mistakes,” adds Engman. “But we’re really good at correcting them.”
This story is from the March 15, 2015 issue of Fortune.