IKEA was struggling before the virus hit. Can it remake its business model for a new era?
When it comes to "retail apocalypse" the media usually mentions such suspects as JC Penny or Sears - mid-level department stores that are long in the tooth and have forgotten their reason for existence. The people who run those places just try not to rock the boat and hope the company soldiers on until they can retire. Looks like that ain't about to happen.
But the media pundits often overlook other companies - companies that appear to be more successful, contemporary and hip - but are often saddled with obsolete business models, billions in debt, or both. Stores like "Forever 21" which sells skinny-jeans to 40-year-old trophy wives, seem to have lost their way, lost their panache, and are drowning in a sea of debt.
But what about IKEA? Seems like a good business model - selling cheap furniture to the masses, along with a side of Swedish meatballs. It seemed so cool and hip back in the 1990's - and fresh, too. But over the years, the business model hasn't changed one iota. Even the menu at the cafeteria is about the same. The styles of the furniture has changed some, but everything is still assembled from flat-pack using barrel nuts and dowels. IKEA in 2020 is the same as IKEA in 1990 - and probably not too different than when it was founded in 1943.
The problem with a static business model is that times change, and you have to change with them. Sears had a very successful catalog business - and their own ISP called "Prodigy". They could have morphed this into an online catalog and been Amazon before there was Amazon. And I am sure some young IT tech - in an era before we called it "IT" but the "Computer Department" instead - tried to sell management this dream - and they told him to go back to his punch cards. They missed the boat and are paying the price now.
Compounding the problem for Sears is all that real estate - which the CEO Eddie Lampert thought was an asset, is more of an albatross around its neck. Long-term leases in malls aren't an asset, but a liability - and Sears has walked away from the bulk of them.
IKEA finds itself in the same pickle. They make most of their money, according to Investopedia, from franchising fees (!!) which I never would have guessed. I presumed all the stores were company-owned. So they have this huge "brick and mortar" footprint, which includes huge stores in remote suburbs. The target audience is 20-somethings in city apartments*, who have to Uber their way out to IKEA on the weekend if they want to buy something - and figure out a way to get it all back home, if they do.
Before the recession and the virus, IKEA understood this problem - and how antiquated their "racetrack" stores had become. People were bored with IKEA. You go there once, it seems cool and hip. Twice, less so. 10 times - meh! 100 times - get me out of this freaking place and no I don't want meatballs! I talk to a lot of people middle-aged and over and they all tell me - particularly the men - that they absolutely hate IKEA - with a passion that is greater than hatred for malls, Walmart, or even Hillary Clinton. Many feel - as I do - that they are being manipulated and used by the "racetrack" layout, and end up buying things they never intended to buy, because of the way it is set up for impulse purchases.
IKEA seems to have understood this, and before the virus and recession, there was talk of a new store model for urban locations - with a smaller footprint, that would allow people to order products and view samples, and then have them delivered to their home. No more stacking heavy boxes on the roof of your Volvo! (who drives Volvos anymore anyway?). So IKEA realized that change was necessary. But can they change fast enough?
It is a relevant question, as the privately held company saw a 40% drop in profits in recent years (according to the article above) due to declining sales and the general retail malaise.
If you want cheap(ish) cabinets, IKEA is the place to go.
IKEA has some good stuff - if you like cheap furniture. We re-did our laundry room and bought IKEA cabinets for it, as it is hard to get decent-looking cabinets from the local home improvement store. But when it was all said and done, we were short one cabinet, and had to order it online. It was difficult to order, and expensive and the shipping was outrageous. IKEA hasn't figured out online sales yet.
We are remodeling our bathroom, and I decided to "update" the vanity by putting new doors on it. I tried the home improvement stores online, but they only had "sample" cabinet doors for sale. Custom cabinet door places wanted $70 a door, which seemed kind of expensive. I tried IKEA out of desperation, and found doors I kind of liked that looked like they kind of might fit.
To quote Ron White, "I liked 'em, I didn't love 'em!"
So we ordered them about $250 in all or about $50 a door. When I went to check out, the shocker - they wanted half as much again for shipping! $120 to ship and even then, it would not arrive for over a week! I bit the bullet and ordered it, against my better judgement.
When I order things from Amazon, Walmart, or even eBay, I get a series of emails telling me the order was received, the order is being packed, the order is being shipped, the name of the shipping company, the tracking number, when the order will be delivered, a reminder on the day the order is coming, and a confirmation that it was delivered. If they ship by UPS, you can even track the delivery truck in real-time and "see" it coming down the street. It's like stalking your delivery driver!
IKEA? I get one e-mail from "donotreply" with the title, "thank you for your order!" - no indication on the e-mail that it is from IKEA until I open it! When I open it, I get..... nothing. No tracking number, no hyperlink to "check the status of your order" or anything.
On the IKEA site, when I enter the order number to "track" my order, it provides even less information. It tells me what I ordered, but provides not even the shipping cost, the shipper, tracking number or expected delivery date. How can you "track" an order on a site like that? All it is telling me is that I ordered something.
I tried to e-mail IKEA but "due to Covid we are only taking order cancellations at this time!" I try calling their phone number, but get a recording telling me to go to the website to use their "order tracking" feature.
Even with Covid, Amazon does a better job than this. Walmart does a better job than this, eBay does a better job that this.
Funny thing, but I ordered a new medicine cabinet on Thursday night from Wayfair. It was shipped that night and arrived Friday morning - free standard shipping via FedEx. And yes, they gave me updates for order received, order packed, order shipped, tracking number, order arriving today, and order delivered. And this from a company that is supposedly "struggling" (to be fair, their site can also be a PITA to use as well). But heck, I received my order in less than 24 hours on Wayfair. Struggling or not, they have their back-room operation tight!
Jeff Bezos isn't too worried about IKEA - in fact, he sells some IKEA stuff on his site - from 3rd parties. Maybe he should buy a franchise!
Going forward, you have to wonder how IKEA is going to adapt to the new reality - when they've had so much trouble adapting to reality before this all went down. It was a struggle to buy things from IKEA before - online or in the store (order kitchen cabinets there sometime, it can take hours!). How will this play out when people stop coming to the stores for virus-infused meatballs?
While the country is "reopening" I suspect a lot of people have changed their habits. We've all been ordering things online now for a month. I just ordered some grocery items from Walmart for "next day delivery" and it was pretty painless (and cheap). Will I go back to many of these stores in person in the future? Perhaps - but not as often.
The question remains - can IKEA survive as a brick-and-mortar franchise in the post-covid online world of 2020? At the very least, they have to up their game, in terms of online presence, ordering, tracking, shipping and so forth. The shipping costs are outrageous (likely because high-density particleboard is so heavy). If you google "Why is IKEA shipping so expensive?" you'll see I'm not the only one to wonder this.
And unlike Amazon, they can't fold the shipping cost into the price of the item (and thus offer "free shipping") as this would raise the prices in-store. Nor do they generate enough regular return business to offer "frequent flyer" programs like Amazon Prime. In short, they are like Sears, stuck with a business model which was groundbreaking at one time - perhaps back in 1970 - but is now antiquated and ossified. IKEA doesn't seem like a company that is nimble enough to change and change rapidly.
Change has come - and has been coming for years. And yet IKEA has done little or nothing so far - their online presence is a joke, their online ordering, shipping, and tracking system as ridiculously clumsy and expensive. I am just guessing, but they are in a conflict between the company and their franchisees. The franchisees don't want to see an online ordering system work or be cheap - it would divert business from their brick-and-mortar franchises. Even within corporate, the folks who run the brick-and-mortar end no doubt sabotage any attempt at online ordering. "We'll have to study that and get back to you" - it is the death-knell of any new idea or program.
You can't run a business and not change it for a half-century. Just because something worked before doesn't mean it will work now. And "this is the way we've always done it" was what folks told me at General Motors back in 1979. We know how that worked out.
Ingvar Kamprad, the founder of IKEA died in 2018. Maybe that is a problem with an iconic founder - they tend to want to do things a certain way and won't change with the times. Henry Ford hung on to the Model T until it was an embarrassment. He refused to implement independent front suspension or hydraulic brakes until again, it was embarrassing that cheaper makes had these features. Once he died, his heirs could update the Ford products to be contemporary with the times.
I am not so sure the same is true with IKEA - Mr. Kamprad, the founder left the company to an interlocking set of foundations and companies, so that no one person has control over the entire thing. This may have sounded like a swell idea, but the net result is, the place is now managed by a hoard of mid-level managers, none of which want to stick their neck out trying new things or innovating.
This does not bode well for IKEA in the long run - or the short one. And it could be a very short one, too!
* Hey, at least they got my name right. The Wall Street Journal called me "Robert Bell Platt"! Mark was not amused as being called a "wife".