How IKEA, The Undisputed King Of Furniture Has Redefined Their Industry?

The Undisputed King Of Furniture

Think that at the age of 7, you are selling matches on the street, selling pens and wallets at the age of 12, working hard every day, day and night, morning to evening just hustle, which results in at the age of 17 you open your first business, a business which is spread all over the world from Japan to Singapore, from Germany to Australia and even India. If anyone wants to purchase affordable furniture, the first thing you remember is IKEA, world’s largest furniture company.

A company which started from store room destroyed competition and dominated the worldwide furniture market.

However, it’s fascinating to note that very few people are aware that this $60 billion firm neither manufactures furniture nor pays taxes.

Not only this, after knowing everything about the business model there is no such furniture company who beat IKEA in the market, but how?

After all, how IKEA does all this and most importantly what are those most powerful business lessons which we can learn from this?

This story starts from 1943, Ingvar Kampard, 17 years old boy, prints catalogs for selling furniture, people watched the catalog and they loved the furniture too but no one buys it because the furniture prices were too low. He was widely believed to be a scam.

So in order to fix the problem Ingvar quickly converts his store room to a furniture showroom, so that before purchasing people can come and see furniture physically, experience it and after that buy it. Guess what?

After this technique, in front of Ingvar showroom there is a line of thousand people, this is the place where IKEA was born. Years went by and one by one stores were inaugurated and fast forward to today IKEA is the undisputed king of furniture.

It is one such a billion dollar empire which contains many secrets inside it. Now at first, IKEA is famous for selling furniture at low prices, that is just one side of the story because IKEA is not a furniture company, IKEA is a marketing company with an excellent logistics network.

But the question is how IKEA does this?

Well, to understand this, we need to travel back in time to when Ingvar was six years old and selling matchboxes. He asked his aunt who lived in Stockholm to send him cartons of matchboxes, which he then split into small boxes and sold them to his customers and from such a young age he knew the power of pricing. Many few people know this that IKEA didn’t start from selling furniture, IKEA first started selling pens and wallets.

When World War 2 was over, Swedish government was building homes for people, where Ingvar saw an great opportunity to enter in the furniture market and because till now IKEA has mastered in control of both pricing and cost, so for them providing furniture at very cheap price was of no big deal but from beginning IKEA is a logistics and marketing firm, not a furniture manufacturer. When IKEA first entered the furniture market after World War II, many small-scale furniture firms were already established in Sweden at the time. These factories served as IKEA’s primary sources of supply, and to top it all off, they were also located there, initially IKEA used to only print catalogs and deliver it to people’s houses. They used to place an order, and these orders were made by small manufactures and IKEA then delivered it to clients. Now, at an international level out of 100 people who visit the IKEA store, 85% of them come out with a product in hand.

But the question is, how does IKEA do this on the global level?

This thing called technology played a big part in making IKEA. In today’s date companies look for candidates who are skilled and up-to date with technology and because of this it is important to match the pace with the blooming software industries, developing skills and gaining knowledge in software development.

In today’s date, full stack development is in demand and it is very important for us to up-skill ourselves to secure a nice tech job.

But the irony is, hardly anyone teaches you field based skills.

This entire process is split into two sections,

• Sourcing

Now look at this very carefully, IKEA never makes furniture on their own, IKEA’s design team takes input from different countries about how the people like their furniture in a particular locality, country, etc. After collecting all this data, it is received by IKEA’s design team and after that the design teams, according to the preference data of different countries, create a few designs. In those designs some alterations are made and finally a mass market fit design is made.

After that, this mass market designs which are made according to the country’s preference are sent to the country’s head of IKEA.

Country heads review this design once again, and then a price is decided on for the furniture that will be built from it.

After setting the price, these designs are sent to the supplier along with the pricing, so that suppliers while controlling cost can make a proper perfect furniture for them.

• Now comes second step that is Warehousing.

IKEA performs these 3 activities under its warehousing

a) Inbound Logistics, in very simple words inbound logistics means to source the goods.

When IKEA sources all their goods from the supplier, they keep in mind the IWAY Standards. IKEA looks at 14 key factors in the IWAY Standards before purchasing goods from any source. If all those considerations are not fulfilled, IKEA does not pick up goods from that supplier.

Once IKEA picks up these goods, here comes the next step and that is “Docking”. Leaving Antarctica, IKEA is serving people across all the continents, for that they have more than 35 distribution centers.

The distribution centers’ job is to receive all items, manage them, sort them, and dispatch them. Now consider how this operates: IKEA’s largest distribution hub is located in Beijing or Shanghai, and by doing so, they are able to monopolize the Asian market. If you pay great attention, you will notice that: this distribution center of Beijing, Shanghai gives IKEA three major advantages:

• Low labor cost
• Big real estate & cheap real estate, big space is available and it is available very cheaply.
• Most importantly, Port availability.

The place in Beijing, Shanghai, were they have opened their distribution center, they have ports nearby through which all their goods is distributed to rest of the Asian countries easily. But the interesting thing is when IKEA enters in any new market, they don’t open the distributions at the starting, in the very beginning they open retail stores.

When there is a demand at the retail stores, in the radius of 600 km of their retail store, a distribution center is opened, so that their logistics cost can be further reduced,

• Outbound Logistics.

As soon as distribution center receives goods, these goods are dispatched ahead to mini warehouses from where all these goods go to different IKEA’s retail stores, Inbound Logistics, Distribution center and Outbound Logistics.

Two things which give IKEA unbeatable cost advantage

a) Opt ledge packaging.

 Almost everyone knows that IKEA doesn’t sell assembled furniture, IKEA’s furniture comes in different disassembled parts and you have it assemble it on your own. Now the catch is that, in earlier times, to store all this furniture parts IKEA used wooden blocks which took a lot of space and it wasn’t cost efficient.

So to solve this, IKEA used opt ledge racks to store their furniture. Opt ledge racks are made from poly-propylene which is a recyclable material. With this, it is too light and most importantly it is very cheap, and the interesting thing is as using opt ledge packaging IKEA increased its storage capacity by 44% because using opt ledge packaging, their cubic optimization increased more. In very simple words a whole truck in which IKEA goods are transported, the space inside that trunk is divided into cubes and after that it is seen that how much goods then can be stored in 1 cubic meters When they started using opt ledge racks they were able to store 44% more goods in one truck.

Let us now look at IKEA’s second cost advantage:

b) Location mapping.

If you closely analyze, you won’t get any IKEA stores in the main city. All IKEA stores are located in the outskirts, why?

IKEA benefits from three key factors as a result of this item:

Large space.

All the IKEA stores have space 2 lakhs to 5 lakhs square foot, they don’t open stores smaller than this

Cheap land.

Whenever IKEA opens a store they buy out the land and outskirts get more 30-40% discount rates compared to main cities.

Most importantly, engaged efforts.

People must make more effort to visit IKEA stores because they are placed on the outskirts, and when people make more effort, it is evident that they spend more time in these stores. Additionally, a person spends more money in a store the longer he stays there, and data analytics and machine learning are used to make this happen. Inside IKEA even a small data is recorded and analyzed for better location mapping, cubic optimization and design trends.

Many of us think that IKEA dominates the furniture market because they sell cheap. But you know what, there is a lot more to it. Did you ever think that why people who are visiting IKEA store, 85% of them buy something before coming out. Well this answer is hidden in IKEA’s store design, IKEA’s store design looks something like this, once you enter the IKEA store your exit will be directly on the 2nd floor. While IKEA store is designed like a maze so that you end up spending more time and end up buying more things.

Why is a cinnamon bun counter kept at the end of the IKEA store?

There is a significant psychological factor at play here.

According to studies, anytime we spend a significant amount of money, we unconsciously experience psychological tension that causes us to feel unpleasant. At IKEA, everything is discounted. Additionally, a person spends more money in a store the longer he stays there, and data analytics and machine learning are used to make this happen.

Because of which the subconscious stress increases more. This bun counters aren’t kept at the end of the stores to increase sales, rather it is kept because when this buns bakes, the sugar smell is so soothing that you get a pleasant experience from the smell, which reduces your subconscious stress. As a result, the psychological stress you have caused by overspending will also decrease. Your mood improves. As a result of your wonderful experience, you then inform others about the IKEA store. Remember in the beginning it was mentioned that, after having 60 billion dollar value and 40 billion dollar revenue, IKEA hardly pays any taxes?

This is a well-kept IKEA secret that very few people are aware of.

How does Kamprad family take billions of dollars legally without paying any taxes?

Well now look at this very carefully, All the IKEA stores are operated and controlled by INGKA foundation. INGKA foundation is a non-profit organization but the catch is, that IGNKA foundation leverages the IKEA trademark to run IKEA stores and this trademark INGKA foundation takes from Inter IKEA systems. Inter IKEA systems is also a non-profit organization, the catch is the non-profit organization already pays 33% less taxes than profit organizations and now the more interesting thing is that Inter IKEA systems is again owned by a small non-profit organization and nobody knows who are the owners of that non-profit organization but there are high chances that their owners belong to Kampard family now what happens is the IKEA trademark which is used to run IKEA stores a very huge portion of profit as expense is given to Inter IKEA systems by INGKA foundation and this same thing is done by Inter IKEA systems Through the privately owned company, all the money is moved from INGKA foundation to Kampard family.

Since this system was designed in such a complex manner that it is hard for anyone to tax IKEA, it is actually a highly oversimplified representation of IKEA’s tax evasion techniques. All of this leads us to some very important business lessons:

• Get your customer emotionally attached to your product,

If you look very closely all the IKEA products are DIY, that means Do It Yourself.

You have to assemble the whole product yourself. On the one side this thing comes with a very large cost saving advantage for IKEA but on the customer side this thing attaches the customer to the product more. Why?

Because when a customer gets involved in the making process, so they take care of it nicely and along with it they get more attached to that product. One thing never accounts to all, we all think that retail stores like IKEA and DMART are more profitable because they buy in bulk and sell in cheap that’s why their profit up scales.

• Warehouse management

However, the truth is that there are other factors at play when it comes to making money off of low prices. Any company’s price advantage and selling edge are the result of a variety of contributing elements, if you examine very closely. Like in IKEA’s case, sourcing, logistics management, logistics, and operational cost management all work together to keep the company successful even when it sells products at a loss.

• Consumer psychology is the key to sales

Everything from the store’s design to IKEA’s pricing strategy, the cinnamon bun counter to IKEA’s location. All the decisions are taken according to the studies of consumer’s psychology and if you do the same in your business, your customers won’t leave you ever.

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