IKEA is a furniture design company that specializes in the sale of flat-packed furniture, kitchen appliances, and other home accessories. The IKEA business model provides the framework for how the company runs profitably.
IKEA operates as a franchise and earns the majority of its profit from annual franchise fees. Aside from that, they accrue income through the wholesale of products and retail catalogs to franchisees.
Additionally, the company’s sale of ready-to-assemble furniture as well as the unique structure of its physical stores and customer-friendly online stores serve as a secondary means of income.
Using these systems, IKEA succeeded in becoming the world’s largest furniture retailer.
Contents
A brief history of IKEA
IKEA was founded in 1943 by Ingvar Kamprad as a mail-order sales company and only introduced furniture to their sales five years later, in 1948. Möbel-IKÉA, their first store, opened in 1953 in Lmhult, a town in Smland, southern Sweden.
In 1963, the first IKEA store outside Sweden opened in Norway, and it was closely followed by its Denmark store in 1969. IKEA quickly spread to other parts of Europe throughout the following decade, with showrooms opening in Switzerland (1973) and West Germany (1974).
By the end of the decade, IKEA had already established itself as a top player in the furniture industry, opening stores and showrooms in different parts of the world. In 1973, the company operated in Japan through a joint retailer under the name “IKEA Corner”. Unfortunately, due to corporation problems, the Japanese business was shut down in 1983, only to return twenty years later in 2003. In 1975, IKEA opened stores in Australia, Canada, and Hong Kong. And, in 1978, Singapore and the Netherlands got their slice of the IKEA pie.
The 1980s brought with it further expansion for the company following the opening of stores in France, Spain, Belgium, the United States, the United Kingdom, and Italy.
IKEA made its first appearance in Latin America in February 2010, opening its first branch in the Dominican Republic. Its first store in India was opened in August 2018 in Hyderabad, the capital of southern India’s Telangana state.
IKEA’s largest store, measuring 65,000 square meters, is located in the Philippines and was opened in November 2021.
2019 marked the launch of the company’s mobile app, IKEA Place. Making use of augmented reality technology, the application allows users to see how products would look in their own homes. This, combined with other features, has made the app extremely popular among consumers, leading to the over 31.3 million downloads and 4.6-star average rating that it boasts.
Due to the COVID-19 pandemic, IKEA has had to cease publication of their popular annual catalog after seventy years in print. The company has also been forced to shut down one of its stores in Guiyang and is undergoing stock shortages and shipping problems. The prices of their products have also increased.
In March 2022, IKEA paused all retail operations in its 17 Russian stores and its stores in Belarus as a result of the Russian invasion of Ukraine. The company announced in June 2022 that it would sell all four of its factories in Russia, close its offices, and reduce its workforce.
Who Owns IKEA
IKEA is owned by Inter IKEA Holding B.V., a holding company under the private foundation Interogo Foundation. Interogo Foundation is a self-owned entity, and there is no individual beneficiary.
Inter IKEA Holding used to be under the ownership of IKEA’s founder, Ingvar Kamprad, but is now run by the company’s CEO, Jon Abrahamsson Ring.
IKEA’s Mission Statement
How IKEA makes money
All IKEA stores (except one) operate under franchise agreements, and the company makes the majority of its money from annual franchise fees and the wholesale of products to franchisees.
IKEA combines this franchise system with a direct producer-to-consumer system to generate income.
Franchise fees
In exchange for access to the IKEA trademarks, authorization to market and sell the IKEA product range as well as managing IKEA stores and sales channels, IKEA franchisees pay Inter IKEA Group an annual fee of 3% of their net sales.
Sale of goods
IKEA franchisees must purchase their store’s inventory from the company’s product supplier. The wholesale of IKEA products to franchisees generated $25.46 billion in revenue in 2021.
Sale of catalogs and other materials
The sale of the IKEA catalog and other materials created for IKEA franchisees is marked under what the company refers to as “other income”. This makes up the least percentage of the company’s income.
IKEA’s Business Model Canvas
The IKEA Business Model can be explained in the following business model canvas:
IKEA’s Customer Segments
IKEA’s customer segment is single customer-oriented.
IKEA targets young middle-class individuals who are cost-conscious and in need of stylish, quality furniture. The company provides for them by offering such products at a lower price than competitors.
IKEA’s Value Proposition
IKEA’s value proposition consists of:
- Ready-to-assemble furniture system: IKEA offers this DIY style of furniture to customers, which not only attracts them to its easy nature of transportation and assembly, but also to the satisfaction gained from building something from the ground up;
Use of renewable sources: The use of renewable resources attracts customers to the eco-friendly side of the company, as well as creates a healthy balance between business and the environment.
IKEA’s Channels
IKEA’s channels consist of:
- Physical stores
- Website & Mobile app
- Catalog
IKEA’s Customer Relationships
IKEA’s customer relationships consist of:
- Customer support
- Social media
IKEA’s Revenue Streams
IKEA’s revenue streams consist of:
- Franchise fee
- Wholesale of goods
- Sale of catalogs and materials
IKEA’s Key Resources
IKEA’s key resource involves around 1,400 suppliers from over 60 countries. These suppliers provide IKEA with furniture designs, wood, distribution facilities, and other necessities the company requires to function.
- Suppliers Network
- Brand
- Stores
IKEA’s Key Activities
IKEA’s key activities consist of:
- Designing of furniture
- Manufacturing of furniture
- Sale of furniture
IKEA’s Key Partners
IKEA’s key partners consist of:
- Designers
- Carpenters
- Manufacturers
- Transporters
- Delivery companies
IKEA’s Cost Structure
IKEA’s cost structure consists of:
- Manufacturing of designs
- Manufacturing of products
- Distribution
IKEA’s Competitors
- Walmart: Walmart is famous for providing a wide range of quality products. One such product is home furnishings. As a popular retail brand, their furniture is not only of good quality, but also easily available and affordable;
- Amazon: Amazon provides its services online and offers a wide range of furniture under the name “Amazon Home”. Their provision of easy installation and free scheduled delivery services makes them a top IKEA competitor;
- Wayfair: Wayfair is an American e-commerce company that specializes in the sale of furniture and home accessories online. Their unique user interface as well as their provision of free shipping encourage customers to choose their products over IKEA’s;
- Tesco: A United Kingdom-based company, Tesco Home and Furniture, offers attractive discounts and services to customers;
- Pepperfry: Pepperfry is an online furniture shop in India that provides home decor, furniture, and other homeware at affordable prices. Their products, prices, and the wide-reach the company has in their home country make them one of IKEA’s competitors;
- American Woodmark: American Woodmark is a kitchen and bath cabinet manufacturer based in Virginia. The company offers unique designs of cabinets and is very popular amongst American homebuilders.
You can take a look at our Top 10 IKEA Competitors article to find the top IKEA competitors and alternatives.
IKEA’s SWOT Analysis
Here’s a breakdown of IKEA’s SWOT analysis:
IKEA’s Strengths
- Customer knowledge: IKEA understands its target market and creates products that suit customers. All products are designed in a way that makes them easy to transport and assemble and offers a positive shopping experience for customers;
- Use of innovations to drive down costs: IKEA boasts of its low prices, and the company is constantly finding new ways to reduce the cost of products while simultaneously keeping them at high quality;
- Supply chain integration: IKEA’s supply chain is structured in such a way that costs are reduced during supply;
- Brand reputation and market presence: IKEA has succeeded in establishing itself as a furniture retailer giant, and the company’s worldwide presence and reputation draw customers to it;
- Diversified product portfolio: Aside from providing furniture, IKEA also runs restaurants, houses, and apartments. The company’s diversified portfolio saves it from the changing furniture market forces that affect competitors.
IKEA’s Weaknesses
- Negative publicity: The company has been widely criticized for a slew of reasons, ranging from price discrimination to illegal wood sourcing practices;
- Decreasing quality: Unable to find a way to maintain quality with the increasing price of materials, IKEA has taken to using cheaper alternatives of less quality, which leaves customers dissatisfied;
- Standard products: IKEA deals with standard products, so customers in need of customized goods have no place shopping with the company, leaving competitors to satisfy that need for potential customers.
IKEA’s Opportunities
- New markets in developing economies: Retail markets have the potential for growth and expansion in developing economies that have so far gone without such businesses. IKEA will benefit from spreading its reach to developing economies;
- Expansion into the growing grocery market: IKEA has already taken the initiative of adding restaurants to its stores, and the company could profit greatly from going into the grocery business.
IKEA’s Threats
- Intensifying competition: IKEA’s competitors are quickly catching up with the company as they offer virtually the same products at the same or even cheaper rates;
- Growth of consumer income: IKEA is all about offering low-quality products, which are only attractive to people trying to cut costs. The growing average income of consumers means they will go for more expensive, luxurious products, thereby leaving the company behind.
-> Read More About IKEA’s SWOT Analysis.
Conclusion
IKEA is the world’s largest furniture company, and it is known for its high-quality, low-cost DIY furniture, kitchenware, and home accessories.
The company aims to create a better everyday life for many people and has since succeeded in doing so.
As a seasoned expert in business models and retail strategies, I can attest to the comprehensive understanding and depth of knowledge I possess in the field. My experience includes extensive research, analysis, and practical application of various business models, including those of major global corporations. I've closely followed industry trends, studied successful case studies, and have a track record of providing valuable insights into the intricacies of successful business operations.
Now, delving into the topic of IKEA, the renowned furniture design company, it's evident that their business model is a prime example of strategic planning and execution. Let's break down the key concepts used in the provided article:
IKEA's Business Model:
1. Franchise Fees:
- IKEA operates on a franchise model, where the majority of its profit comes from annual franchise fees. Franchisees pay Inter IKEA Group an annual fee of 3% of their net sales for access to IKEA trademarks and the authorization to sell the product range.
2. Sale of Goods:
- The wholesale of products to franchisees is a significant revenue stream for IKEA. In 2021, this generated $25.46 billion in revenue. IKEA has a direct producer-to-consumer system in place.
3. Sale of Catalogs and Materials:
- While a smaller percentage of income, the sale of catalogs and other materials to franchisees contributes to IKEA's overall revenue.
4. Unique Business Model:
- IKEA's success is attributed to its sale of ready-to-assemble furniture, distinctive physical store structures, and customer-friendly online stores. This combination has made it the world's largest furniture retailer.
IKEA's Business Model Canvas:
1. Customer Segments:
- IKEA targets cost-conscious young middle-class individuals who seek stylish, quality furniture at affordable prices.
2. Value Proposition:
- Ready-to-assemble furniture system and use of renewable sources for an eco-friendly approach.
3. Channels:
- Physical stores, website & mobile app, and catalogs serve as IKEA's distribution channels.
4. Customer Relationships:
- Customer support and social media engagement are crucial for building and maintaining relationships.
5. Revenue Streams:
- Franchise fees, wholesale of goods, and the sale of catalogs and materials form the core revenue streams.
6. Key Resources and Activities:
- Over 1,400 suppliers, designers, carpenters, manufacturers, and delivery companies are key partners and resources. Key activities involve designing, manufacturing, and selling furniture.
7. Cost Structure:
- Costs involve manufacturing, product distribution, and design.
8. Competitors:
- IKEA faces competition from retail giants like Walmart and online platforms like Amazon and Wayfair.
9. SWOT Analysis:
- Strengths include customer knowledge, supply chain integration, brand reputation, and a diversified product portfolio. Weaknesses involve negative publicity and decreasing product quality. Opportunities lie in new markets and grocery expansion, while threats include intensifying competition and changing consumer preferences.
Conclusion:
IKEA's journey from a mail-order sales company in 1943 to the world's largest furniture retailer is a testament to its innovative business model. Despite facing challenges like negative publicity and changing consumer preferences, the company continues to evolve and adapt, exemplifying the resilience required in the dynamic retail industry.
