Much of the answer lies in those transportation costs. Consider that a table or a bookcase sold through a shop has to be transported at least twice and often three times — from the factory to a warehouse; from there to the store; then from the store to the customer’s home. IKEA eliminates most of this cost. Typically, its goods travel only once at IKEA’s expense — from the manufacturer to the store. And because the goods are in flat packs, they are much easier and cheaper to transport and to store than pre-assembled furniture. Of course, somebody then has to take the product to the customer’s home and assemble it there. But that person is the customer! We’ll come shortly to why customers are happy to do this.
First, though, we need to look at what else IKEA does to make its prices so attractive? If all there was to IKEA was flat-pack furniture, it would be easy to imitate. Indeed, many other stores now sell flat-pack furniture. But none has come close to emulating IKEA’s scale, success or rock-bottom prices. Why is that?
Part of the answer lies in the giant stores that IKEA has built on the edges of cities. These are far larger than its rivals’ equivalents in all of the countries where it operates. Another part of the answer is the way it organizes its stores. Right from the beginning, the stores were massive and featured a novel way of enticing customers past their wares — what IKEA cheekily calls “the long natural way.” This involves a steady progression, as though in a theme park, anticlockwise through the store. There are a lot of product categories, but relatively few products within each category. Instead of asking a salesperson for advice, customers must choose for themselves, helped by clear instructions, placards and a very well-designed, mass-produced catalog. They then take their purchases on a cart or in a bag to the checkout, and from there they take them home.
IKEA therefore obtains for itself and its customers five further cost benefits, over and above the transport cost savings:
One-stop shopping. IKEA covers just about every category of goods you need to furnish a home, from bedding and cushions to artworks. This is convenient for customers and also increases sales.
High sales per store, even relative to space, combined with lower premises costs as a result of being located outside the city center.
Low cost of sales staff as there are very few of them.
High sales per product stocked, by stocking a relatively limited range within each product category. The mugs may be cheap and cheerful, but don’t expect a huge choice of them.
By testing new designs in a few stores first, IKEA works out which lines will work and which will not, so it doesn’t order large quantities of goods that won’t sell and will have to be discounted (a common bugbear in the furniture trade).
Yet that is not all. At the heart of IKEA’s simple system is a different way of organizing its industry. IKEA is a retailer, but it also designs most of its furniture and selects its manufacturing partners carefully, giving them very large orders for only a few products. This lowers the furniture-makers’ costs dramatically; it also raises IKEA’s bargaining power. The manufacturers become part of the IKEA system.
The all-encompassing IKEA system is a lot simpler and more efficient than the traditional way of producing and selling furniture, which comprises a patchwork of mainly small furniture-makers, selling to small chains of retailers, with the difficult job of moving products to retail outlets sometimes handled by the manufacturers’ own small transport systems, but mainly contracted out to third-party logistics firms that are not specialists in furniture. Before IKEA came along, the furniture industry was a mess — highly complex and sub-scale in all three stages (production, retail, and distribution), with poor coordination across these stages.
Ingvar Kamprad gradually reconstructed the whole industry, just as Henry Ford did with the car industry. Both men developed new business systems that offered customers a much better deal — much lower prices and better value for money — by making their industries hugely more efficient. Cars and furniture are obviously very different products, yet there are common elements in what Ford and Kamprad did, elements that you can emulate if there is a chance to reconstruct your own industry:
Simple product design to eliminate unnecessary costs.
Limited product variety within each category, so more of each product line can be made and sold; as a result, stock-keeping costs are decimated.
Much greater scale.
Great reduction in cost at every stage of production and distribution. In Ford’s case, this was achieved through the assembly line, whereas Kamprad organized the functional equivalent of an assembly line within his stores, with the customer doing most of the “assembly,” both in the store and at home.
The beauty of Ford and Kamprad’s systems was that they became proprietary — peculiar to their own organization, excluding rivals. Once Ford had built the biggest factory in the world, there wasn’t space in the market for anyone else to follow suit. Once Kamprad had built his stores, nobody else could copy his system — the market in each location and overall was just not big enough. If he had moved too slowly, and an imitator had managed to out-IKEA IKEA by building a similar but larger system, Kamprad’s company would have foundered. But nobody did. The charm of his new business system was the way it all fitted together. Once rivals really understood how it worked, it was too late for them to imitate it.
How IKEA Seduces Its Customers
IKEA would not make so much money without getting its customers to lend a hand. So how does it manage to convince those customers to do so much hard work? And why do they put up with it?
A very low price — less than half the price under the traditional system — is the obvious answer. This is also the correct answer. But it is not the whole answer.
If price were IKEA’s only appeal, it would have far fewer customers. If you walk through an IKEA store, you will see not only hard-up students and young married couples, but also plenty of well-heeled people. You don’t even need to go into the store — just wander around the parking lot and you’ll see plenty of Volvos and 4×4s and BMWs, not to mention a small number of Bentleys and Jags. But you may need to go into the store to understand why. If you look at the shoppers’ experience, you’ll soon realize that, although IKEA asks a lot of its customers, it gives back a lot too — advantages you won’t find in a typical furniture store.
IKEA increases the usefulness of its products and its shopping experience by offering a one-stop solution. A visit to the store can be a day out for the whole family — there are play areas for children, and inexpensive restaurants.
Then there is the art embodied in the products. We define art as anything that is emotionally appealing or attractive that cannot be reduced to hard economic usefulness. IKEA’s products meet this definition by being well designed and stylish.
IKEA also increases ease of use for its customers. The stores are easy to find — with their colossal yellow-and-blue signs — and have ample, free parking. There is a more extensive range of stock sitting within the store than elsewhere. And the vast majority of items can be taken away immediately — no waiting for delivery.
For many customers, these advantages of shopping at IKEA — quite apart from the low prices — balance or even outweigh the disadvantages (mainly the time and effort that the IKEA system demands). But this is where Ingvar Kamprad was particularly cunning. If you scrutinize the non-price advantages, you notice one thing
