[2014] IKEA: The Archetypal Lifestyle Company, and How Much Energy It Holds

Top 15 Year-End Review: IKEA

Regular article

In 2014 IKEA was one of the few traditional retailers still enjoying good times. Millward Brown named it one of the world's 20 most valuable brands that year, with a brand value of US$19.367 billion. That put it 4th, behind only Amazon, Walmart and the American building-supplies retailer The Home Depot, and ahead of eBay, Tesco and Carrefour.

IKEA owes all this to changes it has been quietly making. Seventy-one years ago its founder, Ingvar, set off a democratic revolution in furniture with flat packs and low prices. Now the world's largest home-furnishings retailer, facing the crisis that has struck retail, IKEA has begun to overturn itself.

When it takes up an idea like big data, it does it properly

IKEA knows what you are thinking. It has a complete big-data system, and because it understands the market and what people want, it can plan its future better.

In 2014, 714 million people walked into IKEA stores and another 1.5 billion visited IKEA.com, both more than the year before. What these people buy has become IKEA's richest store of information.

IKEA also runs large-scale market research around the world every year. In 2014, for the first time, it published its findings from 8 markets as a report, the IKEA Life At Home Report. It presented all the results on an interactive website. The insights go as far as which places' people get up earliest, and how differences in how often people shower in the morning relate to their happiness.

The global survey was carried out by IKEA's in-house market research department, about 100 people, working with outside research firms. The department's job is to find the problems and frustrations people meet in daily life.

Long before this report, IKEA's researchers were already going into homes around the world every year, each time with a different topic, to make detailed home visits. Mikeal Ydholm, IKEA's market research manager, sees his job as "giving the whole company the drive to innovate." He looks more like a sociologist than a corporate executive. Each year he sets a research theme for IKEA, then shares the findings with its in-house design department, giving important direction to the planning of new products. In future, IKEA hopes to bring consumers in from the early research stage.

A lifestyle company that understands its customers can find more of what they need

IKEA used to rely on low prices to draw people into its stores, and made its profit by cutting costs through bulk purchasing and standardized production. You may have heard how IKEA turned a sofa into something a maker of metal ladders and a maker of office chairs could produce between them, slashing its cost. IKEA once chased rock-bottom products such as the "US$69 sofa" to meet everyone's needs. People did not mind that thousands of others around the world had the same LACK side table, as long as it was cheap enough. But as IKEA moves into more and more cities and meets consumers more varied and more individual than ever, it has to adjust the value chain it has followed for more than 70 years.

Every August IKEA launches its new products, and with them it sends every member the new edition of the IKEA Catalogue. Sales in September and October usually make up 40% of IKEA's annual sales. In August 2014 IKEA launched 10 new collections at once. That number is unprecedented: IKEA used to need only one new collection every 3 years to meet demand comfortably and hit its own targets.

The change came from two people who took office one after the other over the past two years: IKEA's new CEO, Peter Agnefjall, and its new head of product design, Marcus Engman.

"I think IKEA's product development process is very complete. We control everything ourselves and make sure every detail is precise. By comparison, we are much too weak at telling stories. I think we can change more at the product-idea stage in future," Marcus Engman told QDaily in an interview in June 2014. "We still need to learn how to do it, but I believe it is something we will have to learn."

IKEA, naturally, wants to meet this challenge cheaply. Its core design team has only 12 people. In 2014 Engman had IKEA work with more outside designers on limited-edition collections, from graffiti paintings by avant-garde street artists to crafts woven from banana fibre by village artisans in Vietnam.

Perhaps most important of all, IKEA's supply chain has begun to change to support this move toward personalization. Jesper Brodin, IKEA's product and supply manager, is building inside IKEA a supply chain like the car industry's. "Few people know that behind the scenes we are working to build a common interface for sharing technology and solutions, so that we can iterate quickly, the way carmakers do," Brodin said. In 2014 IKEA also set up a product development center in Shanghai. Twenty percent of IKEA's main suppliers worldwide are in China, and the center is meant to be a place where IKEA's designers and suppliers can work together.

When it thinks about the smart home, it turns ideas into products faster

One product of 2014 that shows how IKEA sees the future of home life is the smart home. That year IKEA released its first smart-home line, Home Smart, and pulled key staff from several departments to form a smart-home team. The core of the line is wireless chargers built into ordinary furniture, to fix the "cable mess" of modern life. IKEA believes wireless charging will change home life as thoroughly as wireless internet once did.

This came from IKEA joining, a year earlier, the Wireless Power Consortium (WPC), which sets the Qi wireless-charging standard. Compared with technology giants such as Samsung and Google, IKEA's advantage is that it can quickly turn a technology license into good, affordable products and get a technology into people's hands fast. IKEA will release new Home Smart products every year. Before this, its experiments with technology went no further than the UPPLEVA TV cabinets with built-in LCD televisions.

When it wants to do clean energy, it does clean energy

When a disruptor like IKEA decides to move into clean energy, the changes it brings will be anything but small.

You may already know how IKEA makes room for its margins: it buys and manufactures in bulk at low cost in Poland and other Eastern European countries and in China, while its biggest customers are German, American and French.

Over the past few years, though, some of IKEA's purchases in China have looked odd. Everything from LEDs to solar panels is on its shopping list.

These things seem to have nothing to do with furniture, but they are part of an investment IKEA sees as strategic and vital to its future: clean energy.

LEDs were the first clean-energy field it entered. On November 10, 2014, at the Global Efficient Lighting Forum held in Beijing by the United Nations Environment Programme (UNEP), IKEA announced that from September 1, 2015, its stores worldwide would sell only LED lighting and stop selling incandescent bulbs. That made IKEA the first retailer in the world to sell only LED lighting.

IKEA can afford to do this because, through bulk buying and working with suppliers, it has solved the cost problem of LEDs. In 2012 Peter Wisbeck, IKEA's purchasing manager for Greater China, told reporters that suppliers had redesigned the LED driver and cut production costs by 50%. In 2013 IKEA sold 22.4 million LED products, including 12.3 million LED bulbs. Many of their suppliers are in China.

In 2014 IKEA is using the same method to tackle the hard problem of bringing solar power into everyday home life. It has so far launched a service in the UK, the Netherlands and Switzerland, one after another, that installs solar panels at customers' homes. IKEA says the panels can save a household more than 800 euros a year in electricity, pay for themselves within 7 years, and last 30 years.

In the UK, the first market where it sold solar panels, IKEA has sold more than 1,800 solar-system packages since 2013. A package costs about 6,750 euros, 15% to 20% below the market price. In Switzerland government tax exemptions bring the cost down further.

Unlike these two, which already have products, IKEA's investment in wind power has an uncertain outcome. In April 2014 IKEA announced it was buying the Hoopeston wind farm in the United States. Seven months later it announced the purchase of a wind farm in Texas, its largest investment in sustainable energy to date. By 2015 IKEA will have invested a total of US$1.9 billion in solar and wind power.

Besides the two bought in 2014, IKEA owns wind farms in Canada, Denmark, France, Ireland, Poland, the UK and elsewhere.

How IKEA will eventually "use these wind farms creatively" is still unknown. But its steady investment in clean energy reflects what a furniture retailer believes about how the idea of "home" will change. A home is not just a collection of tables and chairs; it also stands for many intangible things, such as a sense of security, or the relationship between the individual and the group. Both the green energy and the insurance service IKEA also launched in 2014 are its reflections on, and answers to, this "essence of home."

When a lifestyle company spreads a way of life, it can take on more roles

You may already be tired of the "lifestyle" talk that nearly every brand indulges in these days. But IKEA has every right to call itself a "spreader of a way of life." In fact, to live up to that role, IKEA wants to be "different."

On June 27, 2014, IKEA opened its first shopping center in China, Livat in Yunlin, Wuxi. Livat is IKEA's shopping-center brand in China, with 3 projects under development, in Beijing's Daxing district, Wuxi and Wuhan. Six months later the Beijing Livat shopping center opened for business, with about 270 tenants opening that day. Its four anchor stores were IKEA, the Auchan supermarket, Suning Appliance and Jinyi Cinemas.

Here IKEA has become a magnet. Wherever it goes, crowds follow, which is why Livat can attract other tenants.

Notably, in December 2014 IKEA took back the shopping-center business in China and Europe that Inter IKEA had run, in order to "better integrate and manage resources."

More important still, a lifestyle can be copied, so new markets keep bringing in more revenue

In 2014 IKEA, the world's largest furniture maker, was the same giant it had always been, but the key engine of its growth had moved from the Europe of 50 years ago to today's China. "In fiscal 2014, China became IKEA's fastest-growing market worldwide," IKEA said in a statement.

Whether or not you walked into one of those blue-and-yellow stores last year and filled an "Ingvar bag" with all sorts of things, China became IKEA's fastest-growing market in 2014.

IKEA opened its first store in China in Xuhui, Shanghai, in 1998. Yet by 2005 it had only 3 stores in the country, in Beijing, Shanghai and Guangzhou. From 2006 it began opening one or two stores a year in second- and third-tier cities such as Chengdu, Dalian and Shenyang. China's growing urban population and the spending power of its middle class have drawn more and more Chinese into IKEA's maze-like stores; besides, when you are tired of wandering, you can nap on the beds, sofas and chairs in the showrooms.

In March and September 2014 IKEA opened stores in Chongqing and Wuhan, bringing its total in mainland China to 16. That is still less than half of its 39 stores in the United States and not even a tenth of its 222 in Europe, but the crowds on opening day were proof enough of IKEA's potential in China. The Wuhan store, its first in Central China, marks IKEA's push into the country's central and western regions.

And IKEA is speeding up. According to The Guardian, 8 of IKEA's 10 largest stores in the world are in China. Zhu Changlai, president of IKEA Retail China, told QDaily in an interview that in 2015 IKEA will open stores in China at a rate of 3 a year, with the next one in Xi'an. Reports also say IKEA stores in Hangzhou, Harbin and other cities are under construction or in planning.

IKEA has not only been opening stores in China; over the past year it has been busy across Asia.

In 2014 IKEA opened its first store in Seoul, South Korea, also its largest single store in the world by floor area. This year, to promote its new store in Sendai, Japan, it even chartered a subway train and turned it into a showroom. In 2014 it was also preparing to enter India. About 15% of IKEA's sales now come from emerging markets including Asia, Russia and Australia, up from just 7% in 2012.

In the end, it is about democracy

A lifestyle company serves the needs of the middle class, letting those people enjoy more and better products and services. That is the role IKEA plays in China, and IKEA sums up its essence in one word: "democratic." In June 2014 IKEA held a grand Democratic Design Day at its headquarters in Sweden. Democratic Design is the first big "story" Engman created for IKEA. For it, IKEA also designed and built a new Democratic Design Center at its headquarters. It was the first time IKEA had set out its design philosophy to the outside world in a systematic way, and made design the core of its business model.

IKEA's Democratic Design combines five dimensions, design, function, quality, sustainability and low price, and guides all of IKEA's products and its supply chain. These ideas had been practiced inside IKEA for decades before Engman signed off on the document, but no one had ever summed them up this way.

"To me, Democratic Design is not hard to understand or explain. It is the foundation of everything IKEA does, and something I deal with every day. Put simply, Democratic Design is not about making products, but about making better products," Engman said.