Big Companies Hit a Wall in 2016. Where Is IKEA's Ceiling? | Top 15 Annual Report

"We need to take care of our existing stores and our existing customers first. Only then do we discuss expansion. That is the philosophy we have always held."

2016 was a turbulent year across the globe. Judged by business performance, the market leaders suffered more than their challengers.

The Top 15 companies QDaily tracks — the ones shaping how we live — had a rough year as it drew to a close, and they all shared one problem: the ceiling.

Whether it was developing new products (think Apple's watch and car) or developing new customers and channels (think IKEA's push into e-commerce), these industry leaders were all searching urgently — and perhaps blindly — for their "next" engine of growth.

Breaking through that ceiling proved harder than anyone imagined. The Top 15 year-end report for 2016 is not all good news.

At the Hangzhou IKEA, Peter Agnefjäll, the company's president and CEO, rested his hands on a shopping cart and adopted the easy posture of a customer strolling through the store. The photographer suggested they tuck a few colourful cushions into the cart — a new line just put on the shelves, lively-looking, a nice contrast to Agnefjäll's plain grey sweater.

Agnefjäll has been in the job for three years. This CEO, based in Leiden in the Netherlands, had visited an IKEA factory in Nantong, Jiangsu on an earlier trip, but this was his first interview with Chinese media. He spoke with genuine enthusiasm about the Chinese market and said he meant to invest more and "reinvent" IKEA.

The company now leans heavily on China for good news. IKEA has yet to release its full results for fiscal 2016 (September 1, 2015 to August 31, 2016), but the figures already made public show that it opened three new stores in China — in Suzhou, Foshan, and Chengdu — and grew 18.9%, far outpacing its performance in other markets and beating the 18% it posted in the same market the year before. China's growth rate was already double that of Russia, the second-fastest market.

By comparison, IKEA's overall performance across its 340 stores worldwide looked less impressive. Group sales kept growing in fiscal 2016, but the pace slowed to 7.1%, with half of that revenue growth coming from new stores alone. Online sales growth also slowed — from 35% the previous fiscal year to 30%.

It is easy to set this against the IKEA 2020 plan that Agnefjäll had announced earlier, and feel uneasy. The plan calls for IKEA to reach 50 billion euros in sales by 2020, with online sales making up 10% of the total. That means holding average annual sales growth at 10% and online growth above 37.5%.

Yet in his interview with QDaily, Agnefjäll played down the plan, saying the point of the schedule was not the specific numbers. "The focus is the overall direction," he said. "To create a better everyday life for the many people."

He was repeating the phrase that IKEA founder Ingvar Kamprad long kept close.

In what business, exactly, would you not have heard a slogan that unremarkable?

The fact is that even as consumer tastes and habits in home furnishings change fast, the world's largest home-furnishings retailer keeps reaching for the same well-worn language.

On its own, that is not necessarily wrong. For a long time a mild, conservative approach worked in home furnishings, and IKEA was the standard-bearer. Its products have for years paired low prices with decent design; its stores are easy to recognise yet plain and approachable, with their flat, unpretentious look; senior managers, Agnefjäll included, like to visit stores by public transport to confirm that customers without cars can get there easily.

All of this helped IKEA grow steadily over the past several years. Even as the economy turned shaky, Agnefjäll said, IKEA's growth outpaced local GDP in most markets.

Beyond the global slowdown in growth — a shift not yet widely visible in the revenue figures — problems have already begun to surface.

Home-furnishings enthusiasts, as opposed to shareholders, may not be happy with IKEA's recent performance. In years past the issue was product durability (and this year IKEA was again caught up in a product-quality controversy). More recently, even customers who prize value for money and are relatively forgiving on quality have started to frown: when will IKEA open a store in our city? And if opening a 30,000-square-metre store in one go is not easy, shouldn't it have moved online faster?

IKEA was not the quickest to react, though it was not the slowest either. In fact, its head office decided two and a half years ago to turn the company "from a store-only business into a multichannel retailer." But its execution since then has left a lot to be desired.

Over the past year, almost no media outlet thought IKEA's e-commerce progress worth writing about. Apart from the occasional mention when partial results came out, it rarely rated a story.

To a large extent, the slow progress reflects the style of this multinational. By the end of fiscal 2016, IKEA was operating in 28 markets worldwide and trying different approaches in different places. Online e-commerce, for instance, had reached only 14 markets — fewer than half of them — and over the previous two fiscal years just one new market had been added.

In the past, IKEA poured the largest share of the group's resources into physical stores. To keep pressing its advantage in store operations, it also tried a middle path between bricks-and-mortar and e-commerce: small pick-up and order points. Worldwide, IKEA added 19 PUPs, bringing the total to 25 — more than the number of new full-sized stores it opened.

In late May, IKEA opened a PUP inside a shopping centre in Wenzhou, a city in southeastern China. Where a full IKEA store carries more than 9,000 products, this order point offered only about 1,000 — and fewer than one in ten of those could be carried home on the spot. The rest had to be ordered from a full-size IKEA store in nearby Ningbo. According to figures from IKEA, the Wenzhou order point, under 2,000 square metres, received more than 200,000 visitors in three months. Of the customers who placed orders, 40% chose to come in and collect them.

This seemingly conservative, middle-ground choice turned out to be the right call over the past year: a Business Insider report on the home-furnishings industry found that buy-online, pick-up-in-store was the industry's new trend in 2016.

The question is what role these order points are really meant to play. Are they offline support for e-commerce, working like a local pick-up warehouse, or are they mainly there to sell bestsellers? In an interview with The Wall Street Journal, CEO Agnefjäll admitted he had not figured that out yet.

Agnefjäll does not mind if this makes IKEA look indecisive. In his QDaily interview, he said the company was still running an e-commerce pilot in Britain and Ireland — covering the website, e-commerce operations, and logistics — and would only roll it out across all markets once the pilot was complete. By IKEA's own data, Britain is a market where the company does not hold the leading market share and faces low repeat-purchase rates; even so, IKEA plans to double its e-commerce sales there.

Agnefjäll said IKEA was trying different approaches in different places at once, with the goal of eventually pinning down "the best way." Whatever that turns out to be, he said, the most important thing the current trials had confirmed was that "stores are still very important."

No one knows when that "best way" will arrive. It will take considerable time, and opportunities may be missed along the way. But for a multinational that prizes stability above all, only a thoroughly tested "best way" is likely to be rolled out across every market in the end, with enough resources behind it.

For now, it seems fair to conclude that even in fiscal 2016, IKEA's multichannel experiments remain at an early stage.

One sign of this: over the past fiscal year, IKEA's official communications released almost no detailed data here — no concrete sales figures for e-commerce or PUPs in specific markets. The company said these numbers are treated for now as "internal reference" only, and that "these formats are still at the project stage; we can't yet say it will definitely turn out this way."

IKEA also said it had set no firm sales targets for its new channels, which means it cannot say whether results are meeting expectations.

In the Chinese market, in the early morning of August 31 this year, IKEA launched an online store serving Shanghai only. The site crashed within hours and was relaunched the next day. It looked quite bare and basic, lacking entirely the social and content features that have become standard in e-commerce today. Even after some functional problems were ironed out, the online shopping habits of customers — which differ from their behaviour in stores — were not given much thought. The site's keyword search remained a little clunky, requiring customers to know the exact product name. Yet people might not think to look for that handy lint roller under its official name, "dust remover."

Although Agnefjäll said IKEA had long-term plans for China, he made no mention at all of the online store that had been in soft launch for nearly three months. He was also unfamiliar with IKEA's partnership in China with Amazon to solve the "last-mile" problem.

In all likelihood, outside the officially acknowledged pilot markets of Britain and Ireland, e-commerce in other markets is being led by local teams. Worried about the uncertainty, IKEA does not intend to flag this at the group level. It seems safe to predict that until the overall Britain pilot is finished, e-commerce in other markets will probably resemble the China experience: disappointing, to varying degrees.

In North America, the most common complaints centre on shipping costs. In China, even for small purchases, shipping is within a reasonable range; IKEA has chosen to partner with Amazon for delivery there.

Yet if e-commerce is rolled out wholesale, the pressure on logistics will multiply many times over, and could even reverse IKEA's long record of positive revenue and profit growth. Agnefjäll has already thought about this. "You have to make sure you don't spend too much money and that you end up with a positive result on the profit-and-loss side. That is very challenging — very challenging, I think," he said.

Setting those troublesome numbers aside, IKEA's focus over the past fiscal year was on something else: democratic design. This large company may be hoping to claw back ground through creativity and vitality.

In June, IKEA invited global media to its headquarters in Älmhult, Sweden, for a "Democratic Design Day." The design website Dezeen livestreamed the event for the first time. Besides showcasing new designs due in the coming fiscal year, IKEA mounted a large exhibition for its new home-living report, and the museum it had spent years building finally opened — all of which made it look like a company driven entirely by creativity.

IKEA also announced collaborations with the Danish home brand HAY and the British designer Tom Dixon. The collaborative lines had not been fully released, and not every customer was going to buy in, but almost the entire design and media world took notice — and some concluded that this was largely a marketing and PR exercise, that IKEA had no real intention of investing in design.

Others, though, noted that the limited-edition pieces had been placed in more prominent spots in stores, and displayed as complete, coordinated sets. In IKEA's catalogue and stores, "Designed for everyone" replaced the "the many people" the company had used for years. This was read as a signal that beyond affordable home products, IKEA hoped to offer more design-forward options to win over the customers who used to buy from higher-end brands.

Luca Nichetto, an Italian designer based in Sweden, believes IKEA has realised a price advantage cannot last forever — bluntly put, there will always be something even cheaper. Nichetto is also the creative director of the Chinese home brand "Zaozuo."

Yet IKEA is up against a global economic slowdown, and even in China, where momentum has been strong, growth has eased. That could dampen spending on home furnishings. Then again, the reverse is also possible: IKEA's exceptional grip on prices might prove an asset in lean times — people can get something with a bit more design flair without paying much more for it.

Agnefjäll is confident things will unfold as IKEA expects, especially in China, where he believes people's interest in home life is only just awakening. "Until quite recently, their enthusiasm for home furnishings may have been quite small," he said — and IKEA is still small here too, as if it were only just getting started.

"We need to accelerate. That's obvious, isn't it?" he said. After roughly 18 years in the Chinese market, IKEA had opened just 21 stores.

Yet just as IKEA struggled to get its transformation plans off the ground over the past two-plus years, those same challenges will persist. Agnefjäll summed up the philosophy IKEA has always held — and it helps explain why a company once associated with creativity moves so cautiously on new ventures:

"We need to take care of our existing stores and our existing customers first. Only then do we discuss expansion. That is the philosophy we have always held — start from what we have, always make sure of that first, and then do something new."

Oh, and one more thing: Agnefjäll did not meet a single Alibaba employee during his time in Hangzhou.

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The following is Q = QDaily, P = Peter Agnefjäll

Q: I think many people would consider IKEA quite conservative about multichannel retail. How do you see it?

P: I think IKEA's main focus is the store business, because we believe that part is very important to customers — being able to grab something and take it home right away, you know? That's one thing. And to a large extent, we still believe stores have huge potential. Of course, we also recognise that customers are visiting our homepage more often, or shopping online, right? So we decided we want to transform IKEA from a store-only company into a multichannel retailer.

Q: When did you make that decision?

P: Maybe two or three years ago? About two and a half years ago. What we've done up to now is build the platform — mainly three platforms: a new web solution, a new e-commerce solution, and new logistics management. Now we are rolling it out country by country. We started in Britain, with plans to extend it to all of IKEA's markets.

I think we have really put a lot of effort into transforming IKEA into a multichannel retailer. We're running different pilots in different regions to figure out the best approach — once we can prove an approach works, we can do it more professionally.

Q: What has IKEA learned from these multichannel experiments?

P: I think the most important thing is that stores are still very important — even though customers can keep shopping online and visiting ikea.com. Last year we had 2.1 billion visits, but we also have store visits. So the question becomes: when you come to buy something, you might do it through different channels — online, in-store, at a PUP. For us, the important thing is how to make all these channels work together so we can benefit from the transition. The other thing is that we need to accelerate. That's obvious, isn't it? Because the trend is that more and more consumers are shopping online, and we need to prove we have capabilities online too — that's certain.

Q: How does IKEA view the Chinese market?

P: I think China is a very important market for IKEA, but as you'll have noticed, we are still very small here. In Sweden, our 20 stores serve a population of fewer than 10 million — but China has 1.3 billion people. Think about it: to match that ratio, we'd need 2,600 stores in China. Of course we won't actually open thousands of stores, but the point is there is enormous potential.

I think many people in China like IKEA, and it resonates here — Chinese people also place great weight on family and home, which fits our values. Of course, a very important factor is China's growing middle class, which will soon become — or is perhaps already on the way to becoming — the largest middle class in the world.

So China is becoming more and more important to us, and we need to move a little faster. First, definitely more stores. In the past we opened three a year — I think we need to accelerate. We're also building PUPs, and we need to think about how to roll those out faster. And then there's e-commerce: bringing e-commerce to China comprehensively, because that is the direction China is heading.

That is what we are going to do. But I can't give you exact numbers. We will keep increasing our investment in China.

Q: As a middle path between online and physical stores, should we expect a rapid rollout of large numbers of small PUPs across China?

P: At IKEA, we always want to develop in a sustainable way. I think accelerating our expansion would be easy enough. But steady development matters more than rapid expansion. We need to take care of our existing stores and our existing customers first. Only then do we discuss expansion. That is the philosophy we have always held — start from what we have, always make sure of that first, and then do something new. Our first store in China opened in 1998, more than 15 years ago, and it also requires us to keep investing to reinvent IKEA.

Q: Let's talk about design. I think people have already sensed IKEA's growing ambition on the design front — and in stores, IKEA has started placing some limited-edition pieces in more prominent spots, which wasn't the case before…

P: (interrupting) Actually, IKEA has had a design-focused line since 1995. The PS series. But back then we developed a new edition only about every three years. Since then, IKEA has believed customers have a need for "vitality" — they'll keep coming back to IKEA stores only if there is always something new to discover. So we keep the steady, consistently performing products while also refreshing 20 to 25% of the range on a rolling basis. On top of that, we offer customers more energetic collections, on shorter cycles and at higher frequency. This is to make IKEA look more attractive and alive — and it's also what our customers want us to do.

Q: Do you really believe the collaborations with Tom Dixon and HAY will help IKEA earn more money, rather than just sustaining the low-price model?

P: I think you have to look at what IKEA is doing and where it is heading as a whole. The starting point is always that we want to create a better everyday life for the many people. We genuinely want to do that. In that context, we are still very small — we are only just getting started. In China, for example, we feel there is a long road ahead. Along that road, we want to move steadily, and also truly give customers a great experience — store visitors and online visitors alike. That means products with more vitality and, at the same time, low prices. In that context, the collaborations with HAY and Tom Dixon are important. I need tables and sofas at three, four, five euros; but when some customers want to spend more for a better product, we should be able to offer that too.

Q: The economy is sluggish, and large companies serving the middle class all seem to be running into trouble. What about IKEA?

P: Some people say we have stopped growing — that's not true; we are still growing, and growing strongly. Look at China: GDP has held around 7% growth, which is fantastic, the envy of many. IKEA in China grew 19.8%. Overall, the middle class is growing, they care about home, they are willing to invest in it — and so IKEA is growing too, faster than GDP. That is IKEA's situation in most markets.

Q: IKEA has its 2020 plan — 50 billion euros in sales by then. Has that changed?

P: We probably revisit things every four years or so. Of course, from time to time we check how far we are from the plan. But I want to say again: we have a long-term direction.

We said we'd reach 50 billion euros by 2020 — but it might happen in 2019, or it might be 2021. What we are always trying to do is create a better life for the many people, and what we have to make sure of is that we are heading in the right direction and ready to take the next right step. That is what the schedule means. So it is a complete roadmap — about growing, about people, about making our colleagues more passionate, and about making the planet better. That is the direction IKEA is heading. That is our business agenda.

Q: What are IKEA's most recent breakthroughs or innovations?

P: I think we have invested a lot of resources in developing IKEA. Making stores the world's leading channel takes the largest share of our resources. Beyond that, there is IT, and there is the logistics behind the scenes that you may not see — these are what make the entire multichannel distribution system strong enough, and capable enough of matching our supply volume, to complete the journey from our distribution centres all the way to customers' homes and into stores.

Q: So logistics is essentially a new business for IKEA?

P: We've always had a logistics department — but the difference is that in the past, of course, logistics meant getting products to the store, and customers would take things home from there. In the future, it is more about delivering straight to customers' homes. That is the new thing.

Q: Is that a challenge?

P: I think the challenge is the same for any company doing home delivery — it's the "last mile." That means adapting to customers, but it also means making sure you don't spend too much money and that you end up with a positive result on the profit-and-loss side. That is very challenging — very challenging, I think.

Q: From your perspective, what is IKEA's biggest challenge right now?

P: I think it is transforming IKEA from a traditional store-only business into a fully multichannel retailer. We have already spent a lot of time and invested a lot of resources on this.

Q: How do you go about it?

P: We think it comes down to listening to customers. On the other side, building our own capabilities — being able to deliver, as close to their needs as possible; solving the IT challenges; customer contact centres, online, multichannel distribution centres, all the way through to being able to offer home delivery. One step at a time.

Q: If a new channel-expansion proposal is put forward, who has the final say — the Sweden headquarters or the Chinese team?

P: The way it works is that each market develops its own expansion plan. In the end, these plans are consolidated at the group level, and we look at what we can achieve and what resources we have to make things happen. Generally speaking, from a group-management perspective, we support the development plans of individual regions.

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Cover image and header image are from the film Harry Potter*, via IKEA*