Can IKEA Stay Profitable?

As part of moving my daughter into her new abode last week, I had an experience with IKEA, which got me thinking about whether the giant furniture retailer can continue its high growth and profitability.  Everyone is of course familiar with the basic approach used by this very successful company.  IKEA provides innovative, stylish low cost furniture in flat packs that you usually assemble yourself or can pay to have assembled.  

The flat packs are easy to transport and reduce transport costs while costs are also reduced by having customers do most of the leg work in giant warehouse stores to get the flat packs and then spend their own time assembling them.   As well, much of the furniture is now produced in low cost jurisdictions and the company pursues “tax efficiency” by having the company owned by a Dutch registered tax-exempt non-profit foundation.

This all sounds like a recipe for continued success but any consumer must balance the marginal benefits of an IKEA purchase (nice, cheap furniture) with the marginal cost (time to purchase and assemble as well as the hassles of dealing with flat packs that are defective).  My point is this.  Out of 27 flat packs and items that I was involved with last week, four of them had damage or missing hardware.  This represents a defect rate of 15 percent and getting everything resolved will apparently take several weeks. To me, this seems like a pretty high defect rate.  Moreover, unless you are able to transport the items back to a store yourself, you will be waiting several weeks for resolution.  We opted for both the delivery and assembly services provided given we were coming to southern Ontario from Thunder Bay. 

One may argue that this is a sample of one.   I agree and one should not generalize from individual experience.  However, a friend of mine was also involved in setting up his child’s university habitat last week and had a similar IKEA experience.  A quick check on the web suggests these types of problems are not as isolated as one might think.  So, my question is this.  Has IKEA gotten too big and is having problems with quality control in its products? If a 15 percent defect rate is an isolated experience then all is probably well and fine.  If not, then the marginal cost of buying an IKEA product also includes participation in a lottery, which involves a lot of time and hassle if the product is defective.  During the time required to resolve the issue, IKEA has your money while you do not have a bed to sleep on or a table to eat on which is not an optimal consumer experience.  Moreover, in the long run rectifying defects will actually add to the company’s expenses since they now have to ship out replacements and cover the assembly.  If this is a trend, then one has to wonder if IKEA has reached its limits to growth.

**September 15th Update: Still No Bed!**

Well, I just got a call from my daughter and the replacement IKEA bed she ordered arrived yesterday.  However, the assemblers went this morning and discovered that the bed inside the packages was again damaged.  In recognition of the urgency of the situation, IKEA will now ship out another bed mid-week directly from the Burlington store and then send out another crew of assemblers. Will keep you posted.  Apparently, the assemblers remarked that in at least one case, it took seven tries. 

**September 23rd Update! No Bed Yet!**

Well the boxes for the replacement bed arrived on the 18th and the assemblers arrived on the 21st and could not complete the bed - this time because there was a missing locking screw in the bed hardware making it unsafe for assembly.  So, it looks like we are just going to call it quits and send it all back.  Three tries is sufficient for us.  Turns out a similar bed is available at a store in the city my daughter lives and they will deliver and assemble for less than the cost of the IKEA bed.  Moreover, delivery and assembly will occur at the same time rather than distinct operations spread out with separate appointments with four hour wait windows each time.  I guess if I had to order from IKEA again, I would only do it if I lived within a half-hour drive of the store and for items that I could easily assemble myself.  Their delivery and assembly service is not well coordinated.  Now the next task will be getting reimbursed. Will let you know how that goes too.

**FINAL UPDATE: October 8th, 2013**

Well, its all finally over.  The bed was picked up last week and IKEA credited the account yesterday.  All in all, it took about a month and a half to get all this resolved.

Comments

[Stephen]

I worked at the Edmonton IKEA's warehouse (which is the store itself) one summer during college. This was just a few years ago. It was something expected to have some furniture damaged before it got to the store. I'm sure it's been in their business model for a long time.

That store would sell returned damaged goods for super cheap prices. I didn't see many takers. I think they recycled the damaged goods. The store recycled everything in-store than sold the recycled materials.

[Ralph Musgrave]

The last two items of furniture I purchased were DELIVERED by the supplier (one pre-assembled and one assembled by the supplier’s employees in my living room). The latter two modes of supply suit customers like me with cash to spare, but with little time to spare.

The IKEA way of doing business probably suits those with more time to spare and less cash to spare.

[Tom Grey]

In Slovakia, Ikea is one of the biggest single stores in Bratislava, and somewhat upscale.
Over the last 20 years of frequent Ikea buying, I'd say our experience was 96-99% good on hardware delivered.

They do have competitors. We recently bought a "Massive" bunk bed (solid pine, not particle board, not more expensive oak). This local competitor did have enough of the right hardware, and had a better product (higher difference between beds, so more comfy
to sit on bottom, especially in the L shape).

Slovakia and all central/ east Europe will continue to be big markets for Ikea until their quality problems become big, and/or other DIY shops eat away at specialist niche cream.

The money saved from building it oneself, plus transport in a big car, is a good few percentage of the price. The time is compensated for with the accomplishment feeling of having done it. What would be done otherwise? TV? Some amusement park? Sleep?

Ikea will likely reduce their quality problems with greater automation of hardware choosing and filling.

Plus they have the best value salmon lunch menu in their restaurant.

[genauer]

test

[genauer]

3. The advantage of IKEA is good price and solid quality, full wood and not the cheap plywood.
4. If you move globally, one more advantage is, that you actually get additional parts, for example for my IVAR shelves (12 now : - ), anywhere in the world, 28 years later.

[genauer]

1. I have bought many times at IKEA over the last 28 years, and I do not recall any defects with the exception of 2 missing bolts (IVAR, was most likely some other customer needing them, at that time they were fixed with tape only, I just cut myself replacements from a metal rod handy)
2. I always got it in the stores (Munich, Newark, NJ, Dresden, Germany)

[mike smitka]

Like you, I live hours from the closest store (except when I was at Chiba Univ in Japan), and have experienced defects more than once (OK, a broken glass shelf in an item shipped to me may not have been Ikea's fault...). Since I do research on the auto industry where a low-single-digit ppm error rate may be barely acceptable, high-single-digit percent is harder to accept. Then there's the design issue that they supply only the exact number of screws etc, so even if they get everything right, they've left no room for user error. I am now -- emphasis now -- very methodical in clearing out a workspace and emptying everything into a box. Good FEMA methods (or FMEA: Failure Mode and Effects Analysis) suggest they should focus on what it takes to get an acceptable end product (= customer satistfaction), not an acceptable shipped product. Spare screws, please!

Let me raise a totally different line: Ikea has a very specific palette of styles, and they're selling durable goods. Will they saturate their market, or is a combination of new household formation, adding additional pieces after an initial one, and normal depreciation enough to keep them growing?

The prices (and distance) being what they are we have a couple Ikea items that we've either never assembled / put up, or that we bought what is proving to be years in advance of intended changes. From my end (but maybe not my wife's) I've reached a point of satiation, and then some. If I'm representative, and as per above I may be underestimating the propensity to renovate and replace ("the last 28 years..."), then Ikea should see same-store sales suffer after a few years -- even without new entry in their niche ("Slovakia").

[Mandos]

When I moved to "Old" Europe ("Old" in the Rumsfeldian sense) a couple of years ago, I found that I had three choices for furniture if I wanted to buy new:

1. Very expensive high-end stores, with designer styles that tickle my funny-bone, but I wouldn't want to pay for.
2. Cheap crap with inconsistent production quality that you still have to assemble, but often doesn't quite fit together.
3. IKEA.

If I want to buy used, I would have to waste time going from garage sale to garage sale, and there's no guarantee I'd easily find stuff I actually liked even in second-hand stores, and I have a bit of an irrational squick factor with other used stuff. So most of my furniture came from IKEA, mostly delivered, which cost a bit but not enough to defeat IKEA's price advantage. Error rate, almost zero. Almost all of it still in excellent condition. Big Evil megacorp, yes, but I don't think IKEA is going anywhere.

[genauer]

In a kind of ironic parallel to Mandos,

when I moved to OLD America (New York) it was also 3 choices:

1. Very expensive high-end stores in NYC, with designer styles, I wouldn't want to pay for, despite starting with what would be now a 6-digit salary.
2. Local furniture, I actually tried first, but was just downright ugly.
3. IKEA.

Just for colorizing, when I needed a 110/220 V converter, I built it from the local hardware store, because I didnt want to waste driving time.

I drove down to Newark, because I knew, what I wanted, that I get it, and had figured out in advance that the stuff fitted in and on my sedan. Started after lunch, and back and fully assembled at prime time. Boring, swedish social democrat, working.

Livio,

could it be that you are a little over-parenting?
When I started University, I finished military duty on Thursday noon, moved in over the weekend, and showed up for work Monday morning 7 am, to earn some dough, I needed, because what I got from home covered only about half of what I needed, because we were 3 to go to university at the same time.

[Bob Smith]

Livio,

Good lord, man, 27 flat packs? Where does your daughter have room for all that furniture?

In all seriousness, I'm ambivalent about Ikea. On the one hand, I do recognize that it fills a niche in the furniture spectrum between real furniture and the Wal-Mart door crasher special. And while you're point about quality control is a good one, my experience is that other retailers are worse. I've bought furniture at Wal-Mart or Zellers - the defect rate was 100%. And as frustrating as Ikea furniture is to put together, try assembling furniture from the off-brand Ikea knock-off store Jysk, whose furniture is a combination of Ikea inspired design coupled with Soviet inspired engineering and quality control (it is cheap, though).

On the other hand, every time I put together Ikea furniture, I've inevitably been overcome with Ikea-rage - characterized by strong feelings that the designer of said furniture should be crushed to death by a truckload of "Billy" bookshelves and Allen keys. If ever I need to be reminded of the merits of Canada's strict gun control laws, I think back to the times I've had to assemble Ikea furniture and consider the bloodbaths that they surely prevented. Happily, I probably have another decade before I have to think about buying more Ikea furniture for my kids and, when that time comes, I intend to let them celebrate their independence by putting their own damned furniture together!

[genauer]

Livio,

to bring this thread back to economics, corporate strategies and the market place, and not just personal experiences, the way, I believe you intented this to be.

Could you describe, what possible alternatives you think to had to IKEA, cost, quality, time effort, etc? To what degree did you make your decisions deliberate/calculating, and how far did the gut feeling go?

I think we are actually up to something worthful to discuss. not the usual boring ginies etc.

[Livio Di Matteo]

Bob and Genauer:
There were 27 items but some of the pieces of furniture-such as the bed-involved multiple packs (5 for the bed). Don't get me wrong, the stuff that worked out looks very nice. We opted for both delivery and assembly since the move was between two cities about 1,000 km apart and the furniture was ordered online and apparently came from a warehouse in Montreal - a third location. Indeed this move is a marvel of modern globalized economic networks. When we asked why replacements could not come from the Burlington store about an hour away from the apartment we were told that the stores and online operations were separate with different objectives. It all seemed rather bureaucratic and odd and led me to wonder if IKEA is losing its edge. Are we over parenting? Probably. However, Spending a few days helping your daughter move into a new city a thousand km away to attend university is not unusual in Thunder Bay.

[Bean]

This reminds me a bit of Mountain Equipment Co-op. As they've become more mainstream they've got more clothes that are not sport-specific, and even downright pretty. I'm not sure if this has affected their outdoors, climbing, cycling, paddling gear, etc., in terms of quality or selection. The die-hard climbing enthusiasts probably have an opinion on this. Certainly everything we've bought from them recently (with the MEC label - they do carry other brands) seems to still be true to their quality standards: thoughtfully-designed, well-constructed, and usually more bare-bones than the nearest equivalent from Patagonia. MEC also has a good warranty policy too; if any of their MEC-branded gear wears out or breaks before you expect it to, they'll take it back, and you get a pro-rated credit toward buying a new one.

What brings MEC to mind is the comment about the warehouses: MEC's mail-order (well, now online) store is also separate from the retail stores. Everything used to come from a warehouse in Vancouver; the call centre was there too. With their continued expansion, I'm not sure if they've got a second warehouse in the East somewhere now. You can get products shipped to a local store, but it seems to still be two different systems, at least until you need replacement parts or have damaged goods - then you can deal directly with the local store.

So anyway, I think you could ask the same question about MEC that you did about Ikea: about whether it has hit the limit of its growth, and would any further growth dilute the quality too much, and besides, how many knapsacks that last 20 years does one family need? Especially when you're talking about adults, who have stopped growing (in height, anyway, ha ha). The clothes last forever, so you don't have to replace them frequently.

[Whitfit]

I have gone through the Ikea dilemna several times. I don't like a lot of it, but it is cheap and inoffensive, which is a rare combination in the world of furniture.

My wife and I recently bought a house and had a baby, so despite previous assertions that we wouldn't buy Ikea furniture again, we set off to that blue and yellow behemoth to buy a few items.

We did have some quality control issues. One lamp was missing its hardware (perhaps pilfered by another customer), and one chair had a leg attached the wrong way round. I was able to fix the leg (it was part of the preassembled portion). The lamp hardware was a little bit harder. We sent an inquiry on the website form, and they suggested we go to the store to pick it up. We don't have a car so would have had to rent one, and it would have taken us about 3 hours to drive there, pick it up, and drive home. For a $15 lamp. Eventually they relented and said they would send us the hardware. A few days later a package containing a whole new lamp arrived.

I have to say, I don't mind the assembly. I am a handy guy, and the assembly is pretty straightforward. I also use construction adhesive when assembling shelves etc., which I have found makes them much more durable (although impossible to disassemble/reassemble). What I do mind is that the furniture is essentially disposable. It is largely plastic coated chipboard, which will only look good for a few years, and will often start sagging and falling apart soon thereafter. There are some exceptions to that, made from plywood or solid wood, and some of the hardware is fine.

I think the Ikea business model will last, as I don't think that the market will be saturated due to the fact that the furniture generally does not last more than a few years. The fact that they are efficient, have decent design, and low prices means that they have a pretty good thing going - I think it would take a lot more qc problems to start to eat away at the business. I mean, in a few years when your daughter graduates from university and is looking to furnish her own apartment, what other choices will she have that offer affordable, decent looking furniture? I don't see many competitors around.

[Alex Bollinger]

I've gotten 3 pieces of furniture from Ikea, 1 was defective. We didn't do anything about it and just learned to live with it. Not a big defect. My partner also bought 2 other things that he had to assemble before I moved in here. One is 10 years old and still doing fine, and the other was great until we threw it away (a desk with a tray for a keyboard that really got in the way... I haven't had a desktop in years).

So a 20% defect rate for this apartment.

I was going to say what Mandos said. I live in Paris. There really is no alternative to Ikea, other than buying used furniture (I don't mind it that much, but then delivery becomes an issue). Conforama, a French chain, is selling similar kits, but the quality is several times lower at around the same price, so it's not going to replace Ikea any time soon. The one flat pack we got from Conforama wasn't defective, but within 2 years so many pieces had fallen off of it that it was unrecognizable and had to be thrown out and replaced with something used (but originally from Ikea).

[genauer]

is there anybody here, who feels, that (s)he actually had a real alternative to IKEA, at the time (s)he bought or might do in the future?

Details, trade offs considered to time spent / cost of shipping and handling , etc?

[mike smitka]

I live in a rural area, settled since the 1740s, and used furniture via "antique" stores and estate auctions are options. However, there's the opportunity cost of time, because you may not find what you want quickly. Attending auctions is also part consumption good and part community activity, so the time is offset in part by these externalities.

My set of woodworking tools is about at the point where I can make my own, but in terms of time it's less effective than stopping by the 1-2 Saturday morning estate [farmhouse] auctions this time of year. Ikea would surely beat me on quality, joinery is replete with little tricks that I don't know.

So my own house is a mixture of things we had built in with the house (lots of wood, the last two summers finishing it off with a cyprus ceiling and oak floors), furniture-store stuff, Ikea and "unfunished furniture" store items (staining and polyurethaning isn't hard and lets us match other items), and auction/used. All our better pieces are the latter, and all very substantially cheaper than furniture store stuff (which is in our experience of mediocre workmanship). The best is a day when there are two auctions (splitting the buying crowd – the rural thing, a farm-house auction doesn't draw from that great a distance) in really hot weather. Auctions with gun collections draw a larger crowd.

But back to market saturation: how durable is furniture? For someone in an economist's income bracket, we can potentially afford to replace an Ikea item once every few years – so are they a style & status good, or are they a durable good – is a dresser [just] a dresser?

I start teaching IO for the second time in several years tomorrow, so am trying to get my mind into mode. I also teach a course on the Chinese economy, Ikea is there now too...but that becomes a metric of income growth and housing size rather than an IO topic. In Japan Ikea is an indicator of the diffusion of car ownership in suburbia over the last 20 years, alongside deregulation of building restrictions that make a large floor-space store possible.

[Fran R Woolley]

I do believe that IKEA can stay profitable - though given that it is ultimately owned by a non-profit foundation (http://en.wikipedia.org/wiki/IKEA#Corporate_structure) it's not obvious that profits are its raison d'etre ;-)

People have talked about IKEA rage, but not one's talked about the IKEA rush yet - the enormous feeling of satisfaction from seeing the assembled piece of furniture and thinking "I made that." After all, when else does a typical university student produce something real, concrete and tangible? I will never again assemble an IKEA dresser - hours and hours of work, and then we ended up putting a nasty scratch on one of the drawers that had to be filled in with crayon. But I deconstructed and reconstructed an IKEA sofa the other day - just six bolts to take the arms off, and everything fit handly in the back of the car. That felt good, and the sofa looks good.

[genauer]

I wondered, whether I should wait a little longer ….

@ Fran
Forget about the “non-profit”. This is just for tax reasons. They have a very healthy 15% pre = post-tax profit rate, that enables the robust organic growth of this private company for many more years.

Triggered by Mandos 3 points, and my parallel,

I realized, that neither Livio nor Mandos or myself in the US described here a situation, in which there was real competition, where a 30% higher price would have made decisive difference. And Mike does not sound radically different.

I compare this to my situation here (Dresden):

a. Goggle Earth says my from my door to IKEA it is 3619 meter, I can walk, bike, public transfer there.
b. The Autobahn is just 322 meter away from them, the next IKEA shops 61 and 141 km

1. That means, that ca 90% of their customers can reach them within 30 min of their travel mode, 100% within one hour, and most of them with a 15 min detour after work or with other Saturday shopping.

a. Buying it physically reduces the changes that it is damaged strongly, and the ease of bringing it back for return, makes defects a minor problem. That I know, where their point for return is, means, that I actually must have brought something back, but I do not recall this, it is not disturbing my very positive memory of IKEA.

b. More important, even in this Elbepark Shopping Center, IKEA has competition, for furniture Höffner with a nationwide brand name and 2 more, JUST next door, one can and does go around and compare price, quality, look and fit, dependent on what potential gain is at stake. I am not comparing prices for a 2 Euro shower curtain, I like for the color simplicity, and would have bought, just 2 weeks ago, for 10 $ as well.

2. I believe, that my situation here is actually describing the bulk of IKEA customers, long time, short distance, repeat, and with competition. And in such efficient markets they win or lose, and Livio just represents a small side business, maybe done for just quelling future potential rivals : - )

How could we quantify, how much of their customers is me, the feeled 99%, or the 1% Livio daughter with 27 flat packs just for university start : - )

[Mandos]

I would say that the biggest downside to IKEA, in terms of the furniture itself, is the fact that all my furniture obviously came from IKEA. It's not that any of it is bad-looking, but it's simply a little bit, um, can't seem to find a word for the exact feeling, but just the slight sense of monotony is a bit of a downer.

My experience, by the way, is ALSO similar to genauer's in the USA too. I got some pieces from Target, and while they did the job, they were neither cheaper and definitely not better than IKEA. It's just that everyone else seem so far behind that there doesn't appear to be much competition on quality at that price level.

IKEA rage: my mother has mobility issues, and getting around the casino-you-must-travel-past-ALL-the-sections layout of IKEA is frustrating and painful for her. Shopping at Target or Wal-Mart for furniture is something she prefers to IKEA, even at the cost of quality. She doesn't buy furniture very often anyway, and her tastes are a lot more old-fashioned :)

IKEA rush: definitely, it's a cheap thrill of accomplishment when most of the work has actually been done for you. Lego for grownups.