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Ikea finalising its biggest overhaul in decades
Last Updated: Friday, April 15, 2016, 10:06
In two medieval Dutch cities, Ikea\u2019s most senior executives are finalising the biggest overhaul at the Swedish-born furniture
empire in over 30 years.
The aim is to help the world\u2019s largest furniture seller better adapt to changing consumer tastes, manage its increasing size
and avoid the fate of other dominant retailers overtaken by new market entrants.
However, some academics say the changes, which effectively involve breaking up the Ikea Group, could also disrupt the
smooth running that makes Ikea so efficient.
The Ikea Group announced the plan to transfer ownership of some operating entities to a small Delft-based company which
owns the Ikea brand last June. However, the 250-word statement attracted little attention.
The decision to rip up an organisational blueprint drawn up by founder Ingvar Kamprad in the 1980s was taken at a secret
meeting just outside Copenhagen in late 2014.
The meeting gathered the board of Inter Ikea, which is chaired by Kamprad\u2019s youngest son Mathias and owned by a
Liechtenstein foundation. The little known company currently plays a small operational role in the Ikea universe, employing
1,500 people, compared to 160,000 at the Ikea Group, which is technically a Leiden-based company called INGKA Holding.
INGKA currently manages almost everything that most customers see as Ikea – the stores, furniture design, manufacturing,
procurement and logistics. But Inter Ikea owns the rights to the Ikea brand, patents and business processes – collectively
considered to be the Ikea \u2018concept\u2019.
It is responsible for developing the concept but its leaders acknowledge this hasn\u2019t changed much in decades and former
executives said the unit\u2019s main role was to reduce the overall Ikea tax bill by charging INGKA for the use of the Ikea brand.
At their 2014 meeting, the directors of Inter Ikea unanimously agreed to massively expand its role and take control of
design, manufacturing, procurement and logistics from INGKA. Since it owned the rights to the Ikea concept, it could do
this. The aim, it says, is to protect Ikea for the future.
\u201cIt has been a pretty static concept,\u201d said Torbjorn Loof, chief executive of Inter Ikea Systems BV, the unit that will, in
September this year, take on the design and other functions.
\u201c[THERE)] is always also the risk that you keep that concept, you protect that and make it better and better and better, and
things in the world around you happen, and suddenly you stand and say, you know what, this is maybe not relevant,\u201d the
Swedish-Italian executive told Reuters as his boss, Inter Ikea Group CEO, Soren Hansen looked on, nodding.
The executives were speaking at the Ikea \u201cConcept Centre\u201d in Delft which combines an office wing housing Inter Ikea\u2019S
headquarters, and an Ikea store, all clad in familiar blue and yellow corrugated metal sheeting. Inter Ikea uses the store, the
only one its runs, to test new ideas such as the high-end bakery recently installed at the exit.
But the Ikea concept needs to change more fundamentally if it is to satisfy the growing number of customers who are
requesting Ikea stores in city centres and the ability to buy online and pick up from drop-off points. Loof says he can\u2019t
redesign the business concept without control over key functions like logistics.
Getting it right is important. New low-margin market entrants and online players like Amazon. com are making life harder
for everyone in retail.
\u201cWe have been a little bit protected in the home furnishing business, in margin pressure in my view, if I compare with
supermarkets or do it yourself businesses,\u201d said Loof, known to colleagues as \u2018Tobbe\u2019.
Over the past five years, INGKA\u2019s margins have been 14 per cent, and Inter Ikea\u2019s have been even higher. Supermarket
groups like Germany\u2019s Metro AG and do-it-yourself groups like Home Retail Group and Kingfisher have typically enjoyed
margins under 5 per cent. Amazon\u2019s margin has been under 2 per cent.
Organisational change has been discussed before at Ikea. Former INGKA boss Anders Dahlvig, now on the board of Inter
Ikea Systems, advocated breaking INGKA into separate North American, European and Asian companies, to make it more
manageable. The idea was never adopted.
The current plan follows a 2011 report Inter Ikea commissioned from a French consultancy that highlighted how the
structure made it harder for Ikea to adapt to changing market conditions, than comparable businesses.
Under the new regime, INGKA will essentially only manage the stores.
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\u201cWe will continue to handle the interface with our customers,\u201d said Peter Agnefjall, INGKA Holding\u2019s CEO. Like Loof, he
prefers a shirt and sweater to a business suit.
Agnefjall said the narrowing of INGKA\u2019s responsibilities will encourage a focus on its online business. Ikea\u2019s web presence
lags rivals, in part because Agnefjall hasn\u2019t yet found a way to achieve strong margins online and a fear that online
customers won\u2019t make the impulse purchases they do in-store.
\u201cThere\u2019s a lot of successful retailers doing online business but not all are profitable,\u201d Agnefjall said. \u201cIt\u2019s really about
cracking that code.\u201d
Angefjall has been the most public face of Ikea since his appointment in 2013. He says he is untroubled at losing control of
what academics say are the functions most central to Ikea\u2019s success.
\u201cI have a big responsibility today and I will have a big responsibility (in future),\u201d he said, under an Ikea picture of a
Scandinavian birch forest.
INGKA, which is owned by a Dutch foundation, plans to sell its design, manufacturing and logistics subsidiaries which
employ 25,000 staff, to Inter Ikea. The upheaval has spooked some.
\u201cSome people from Ikea are a little bit afraid,\u201d said Yves Galimidi, a former executive still in touch with people at the
company. He said employees were worried about changing reporting lines and career development paths.
\u201cIt\u2019s quite normal that if you have the lead on something and suddenly you don\u2019t have it any more, or you might not have it
in the future, it creates some kind of questions,\u201d he said.
Loof says the planned changes at Ikea are driven by strategy. Still, lawyers say that shifting activities and value to Inter Ikea
from INGKA could, in theory, have financial benefits for the Kamprad family, who on paper at least gave ownership of Ikea
to the Dutch and Liechtenstein foundations decades ago.
That\u2019s because lawyers say assets can be more easily extracted from a Liechtenstein foundation than a Dutch one. But they
add that the INGKA-Inter Ikea structure is not well designed for inheritance tax avoidance.
Inter Ikea and INGKA\u2019s Dutch base already allows the companies to operate more tax efficiently than many other retailers.
The restructuring also brings operational risks.
The business relationship Inter Ikea sees in future with INGKA is that of franchiser to franchisee. If other such relations are
a model, this could lead to new tensions in the Ikea system.
\u201cThere is a healthy tension between the franchisee and the franchiser, and the demands on each other in the business
relations will also be stronger, in what we are contemplating to do now,\u201d said Hansen.
No other franchiser has ever tried to manage a franchisee as big as INGKA, which has sales of over 32 billion euros a year.
Also, some academics say a less integrated business model may not work at an organisation which lists \u201ctogetherness\u201d as
one of its core values.
\u201cIkea has always really, really thrived on the fact that they integrate and connect all the pieces,\u201d said Professor Enrico
Baraldi at Uppsala University.
But Anna Jonsson, Associate Professor at Lund University, said the restructuring could accelerate growth by making it
easier for Inter Ikea to recruit partners to run franchised stores in new markets. Loof and Hansen declined to say if that was
their plan although the overall aim was growth.
\u201cWe\u2019re still pretty small, and people\u2019s need for home furnishings is there,\u201d Loof said.
Reuters
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