Features | From Pivot Magazine

IKEA: coming to a downtown street corner near you

The Swedish behemoth is opening smaller urban stores to fend off Amazon and Wayfair

A Facebook IconFacebook A Twitter IconTwitter A Linkedin IconLinkedin An Email IconEmail

IKEA’S “planning studio” storefront in central LondonIKEA’S “planning studio” in central London (Teri Pengilley/Courtesy of IKEA)

Last summer, when IKEA cut the ribbon at its latest Canadian outpost, on the edge of Quebec City, more than 4,000 people were lined up outside to buy new Billy bookcases, Malm beds and suspiciously cheap meatballs. The store didn’t open until 9 a.m., but the parking lot was full at least six hours earlier. Some people started camping out the night before, even though it was pelting rain.

Such brand fervour explains how IKEA has become the world’s largest furniture retailer, with global revenues of US$44.6 billion last year. That predominance, however, is far from secure, and the scene in Quebec City might not soon be repeated. Over the past few years, the increasingly challenging retail market—with its switch to online sales, and the millennial migration to the downtown core—has forced IKEA to rethink its reliance on suburban, car-centric markets.

Which is why, in 2017, after profits dropped by 26 per cent—the first such dip since 2009—the company shelved plans for new big-box stores in Tennessee, North Carolina and Arizona. Instead, “over the next three years, we will become more accessible and convenient for our customers with new store formats, city locations and a better digital offer,” said Tolga Öncü, retail manager of the IKEA Group. That means smaller spaces—new stores that are one-quarter the size of its typical 300,000 square-foot locations—and better e-commerce tools. To that end the company recently acquired TaskRabbit, an on-demand, smartphone-based service that quickly matches customers with helpers to assemble furniture. 

 Kitchen display inside IKEA’s central London locationInside IKEA’s central London location (iStock)

The shift is evident at one of its most recently opened stores in central London, U.K. Instead of a cavernous space with a maze-like layout that wends past just about every piece in the IKEA catalogue, the diminutive, so-called “planning studio”—just 17,530 square feet—looks more like a glass-walled Apple store and has a tight focus on kitchens and bedrooms. No items are stocked in-store. Instead, shoppers can book one-on-one sessions with salespeople to find the right products, then use one of many iPads to order what they want for home delivery. Another planning studio is set to open in downtown Manhattan in 2019, with 30 others to launch globally over the next three years. Kristin Newbigging, public relations manager for IKEA Canada, will only say the brand doesn’t “have any specific expansion plans to share” yet. However, she continues, “it is still our goal to grow and expand IKEA in Canada”—so it’s a reasonable guess that Canadians will be sampling a mini-IKEA before long.

The question is, can these changes revive the brand? “I think what they are doing is really smart,” says Craig Patterson, editor-in-chief of Retail Insider, an online industry magazine. “A lot of people, including me, don’t like going to the suburbs for their shopping. And I don’t see the end of brick and mortar anytime soon. Retail spaces are valuable for increasing brand engagement and awareness. People like lying on the mattress and feeling the pillow before they buy.” Even young people. According to a survey done by American magazine Home Furnishings News, 63 per cent of millennials’ indoor home furnishing was purchased from a bricks-and-mortar store.

Still, online sales are growing fast, and one major challenge will be catching up to the data-mining capabilities of digital natives like Wayfair and Canadian upstart Article. Both operate in the U.S. and Canada and are beating IKEA in revenue growth. In 2018, IKEA’s global sales ticked up a respectable five per cent, the majority of which came from its physical stores, not its website. Wayfair, on the other hand, saw revenues jump by 47.7 per cent. Vancouver-based Article, on the other hand, projected a doubling of its revenues. (Actuals have not been disclosed.)

While IKEA, which often wins customers with affordable prices, retails sofas for an average of US$800, Amazon is beating that by nearly US$500.

A big reason for the success of both companies is how they track and target potential customers using the granular data that comes from every click, like, share and order online. “We are constantly collecting information,” says Article CEO Aamir Baig. “We are always looking for insights that will help us answer our customers’ questions before they even have to ask, and provide an amazing shopping experience even without physical stores. I definitely see the future being this way.” Article makes it easier to buy furniture sight unseen with simple exchange and return policies: it will coordinate pickup of most items with its delivery partners, while Wayfair will issue a return label for most purchases, good for 30 days. 

The biggest threat of all, however, might be Amazon. It’s one of the world’s savviest data miners, and although it only recently launched two in-house furniture lines manufactured exclusively for the company—Rivet for modern pieces, and Stone & Beam for more traditional—it’s been aggressive as usual. While IKEA, which often wins customers with affordable prices, retails sofas for an average of US$800 (less than Article), Amazon is beating that by nearly US$500. It’s also offering free delivery on its furniture, which IKEA has yet to do. 

Bob McMahon, CPA, BDO Canada’s national retail and consumer business leader, sees strengths on both sides. Amazon, he says, is “the most competitive on price and convenience, both things that shoppers value very highly. That said, consumers still want choice and brands they know. Which gives IKEA some runway to test and implement this strategy.” Challenging its old way of doing retail is critical, he says. “[IKEA] is still the biggest in their area, which is a huge asset, but they can’t take that for granted. Look at Sears. They were the biggest, they didn’t innovate, and now where are they?”