IKEA is the world’s largest furniture retailer, with around 445 stores spread over 50 countries. It sells a wide range of home furnishing products such as ready-to-assemble furniture, kitchen appliances, and accessories, in addition to interior design services.
The company was founded in 1943 by Ingvar Kamprad in Sweden and currently has its headquarters in Delft, Netherlands. With over 220,000 employees worldwide, it is one of the largest employers in Europe. In 2020, IKEA generated total revenue of 39.6 billion euros with a net income of 1.189 billion euros.
IKEA’s Business Strategy
The company is guided by the vision of creating a better everyday life for its customers through home furnishing solutions. It follows a low-cost and obligation-free business model, with high flexibility and low investment cost to serve various customer needs across different geographies. IKEA has always strived to offer every product at the best price possible.
To maintain low prices across its huge store network, IKEA adopts a vertically integrated supply chain model that includes self-owned forestry operations, forestry specialists, and direct sourcing from over 1,000 suppliers in more than 50 countries. This has enabled the company to adopt an asset-light business model without investing heavily in property or inventories.
It offers a great range of products for customers to choose from, at low prices. This has helped IKEA attract many loyal customers and encouraged them to visit IKEA stores repeatedly. The company operates with ’long value chains’ that involve cross-border manufacturing and transshipment of products through its own logistics facilities.
The forever expansion into new international markets is the key to growth for IKEA. It typically enters a new country when it has established a sustainable presence in its neighboring markets. This is because it needs to focus on reaching out to customers and building up the brand image before expanding to other faraway countries.
In addition, the formation of strategic alliances with local partners is also vital to the expansion strategy of IKEA. It also acquires companies with similar offerings to its own or complementary ones to widen its product portfolio. This approach has helped the company spread globally and increase its market share.
In a move to display its omnichannel play, it acquired Geomagical Labs for an undisclosed amount in April 2020. The acquisition would help IKEA reach a wider audience through augmented reality and enable customers to experience its products through mobile phones, tablets, and physical stores.
IKEA’s SWOT Analysis
Strengths
- Large and loyal customer base: IKEA has built up a large and dedicated customer base, which shows its brand loyalty. It offers an extensive range of furniture for different room types, in addition to home accessories like kitchen appliances, home textiles, and tabletop products, at affordable prices. The company also provides interior design services to customers and makes shopping for their needs online or offline.
- Targeted expansion strategy: IKEA follows a focused growth approach that involves moving into new countries only after establishing itself well in its neighboring markets. This helps the company grow sales in new regions without being spread thin across too many market segments. Moreover, IKEA also acquires companies or launches new products that could increase its bottom line. This helps the company expand further and maintain a low investment cost without compromising its profit margin.
- High flexibility in product offerings: The Company offers a wide range of furniture styles and different home furnishing solutions for households with diverse income levels in all geographies. Also, IKEA has partnered with leading designers to launch exclusive products. The company has also launched a range of add-on services like home delivery, installation, assembly service, and free pick up for product returns.
Weaknesses
- Reliance on third-party manufacturers: More than 50 percent of furniture sold by IKEA is manufactured by third-party vendors in countries like China, Romania, Poland, and Slovakia. This means that IKEA’s business performance is susceptible to developments in these markets and its ability to negotiate prices with suppliers.
- Vulnerability to foreign exchange rate fluctuations: Due to the nature of its operations, it faces currency risks and occasional price variations for imports from most of its supply markets. It also deals with potential issues arising out of tax laws or changes in import duties when importing products into a new country. In addition, cost pressures resulting from fluctuating dollars due to exchange rate volatility also affect profitability.
Opportunities
- Expansion into developing countries: More than 90% of IKEA sales are from OECD countries. IKEA has a huge growth potential in developing nations, especially China and India, which account for 36% of the world’s population. The company could leverage its brand strength to expand more into these markets by investing in new stores.
- Omnichannel opportunities: IKEA has already started tapping the omnichannel opportunity. It plans to enhance customer engagement through mobile technology through Geomagical Lab’s augmented reality platform while exploring digital fulfillment and improving supply chain efficiency. These steps would help it reach more customers across geographies and boost sales further.
- Growth of the Internet: The Internet’s rise has given consumers more control over the products they want to buy and better product comparisons. IKEA could maximize this opportunity by offering customers a wider range of furniture designs, ranging from low-cost to luxury models. In 2020, its retail sales share for the E-commerce market accounted for 16 percent of total retail sales. The company needs to put in more effort to strengthen its online presence and improve customer experience.
Threats
- Risks associated with distinct regions: IKEA is vulnerable to economic fluctuations in some significant global markets. Its business performance depends on consumer confidence, unemployment rates, interest rate trends, and fluctuations in currency exchange.
IKEA Competitor Analysis
Though IKEA enjoys strong brand credibility, it faces stiff competition from several companies such as Wayfair, Amazon, Tesco, American WoodMark, Home Depot, etc. IKEA needs to continue innovating to offer products that appeal to a broader range of customers.
1. Wayfair
Wayfair is an online home decor retailer based in Boston, Massachusetts. It offers a wide range of furniture items, including tables, beds, lamps, sofas, and chairs for residential and commercial use. The company has stores in Canada, United Kingdom, Ireland, Germany, and throughout the US.
With IKEA trying to delve into the digital space, Wayfair, on the other hand, has been battling to bring its mobile experience up to par. It also allows customers to combine items from multiple design styles and brands using its “In-Door” technology, recommending products that complement a customer’s desired decor.
In 2019, it held a 33 percent market share, making it the leading online furniture retailer in the USA, followed closely by Amazon with 30 percent. IKEA ranked 11th with a market share of 2 percent. Wayfair’s revenue was $14.145 Billion in 2020 and reported a net profit of $9.127 billion during the same period.
Wayfair’s major competitive advantage over IKEA is its online presence in all the major markets across the globe. The company has expanded its offerings to include home appliances, patio furniture, and kitchen products. Moreover, it has a large employee base of about 16,122 as of 2020.
2. Amazon
Amazon is the world’s largest online retailer, with more than 81 percent of US internet users between 18-35 years making at least one purchase from Amazon. It is a household name and has established itself as a leader in home automation, cloud computing, video game streaming, and artificial intelligence technologies.
This e-commerce giant uses technology to streamline its operations and expand its offerings across geographies. It has recently invested in several new technology innovations, including robotics and automation, that would help it lower its cost structure and improve its supply chain capabilities.
Amazon entered the furniture market in 2017 and has since launched several unique furniture products for modern homes. It is also offering free shipping to its Prime subscribers across some of its markets. The company’s product offerings include sofas, chairs, tables, wardrobes, and beds, among others.
Records from Statista indicate that Amazon controlled about 30 percent of the online furniture retailers’ market share in the US in 2019. In the same year, Wayfair accounted for about 33 percent of all online furniture sales. IKEA had a meager 2 percent share in this market and ranked as the 11th largest online furniture retailer in the country.
3. Tesco
With over 4600 stores in 11 countries, Tesco gives IKEA a run for its money in the UK market. The company owns and operates its logistics, distribution, and retail infrastructure. It is also a popular name on television in the country.
It currently boasts about 423,092 employees distributed across its 4613 stores and has a strong presence in furniture and white goods (appliances) markets. Tesco offers its products through an extensive online portal, and it is also the largest grocery supermarket chain in Europe.
Its sales revenue was 53 billion British pounds during the financial year ending 2021, and its net profit was $7.961 billion over the same period.
Its huge customer base in Europe, excellent brand name and experience in furniture retail have made Tesco a significant threat to IKEA’s dominance in Europe. Unlike IKEA that primarily focuses on furniture sales, Tesco operates supermarkets across the country.
4. American Woodmark
With immense success in the furniture industry, American Woodmark is a direct competitor of IKEA and has an extensive product portfolio across various price points. It offers many standard and custom-designed products from leading designers aimed at sophisticated consumers keen on decorating their homes with quality furniture.
American Woodmark has a solid retail presence in the USA that makes it an attractive option for the discerning consumer. Its customers have access to the company’s extensive product portfolio through its online portal.
In the financial year ending 2021, it recorded a revenue of $1.74 billion, a growth from $1.65 billion in 2020 (Marketwatch). As of August 16th, it had a market cap of $79.23 (Ycharts)
It is a direct competitor of IKEA in the USA and has gained prominence by offering modern furniture with an array of customization options to customers. Although the company has yet to establish a strong presence in the global furniture market, it has made a name among the top US furniture retailers.
5. Home Depot
Home Depot is another competitor of IKEA with a global presence. It offers customers the convenience of shopping for home renovation and improvement products through an extensive product portfolio of kitchen cabinets, bathroom vanities, faucets, appliances, and many more items.
It also offers professional installation services for its clients. The company has a robust e-commerce presence in the market. Its website features an extensive product portfolio and information on using those products, offering customer convenience in shopping for home improvement products during evenings or weekends.
Home Depot’s net sales in the financial year ending 2021 were $37.5 billion (Home Depot), while its 2021 first-quarter operating income was $5.781 (Macrotrends)
The company offers modern furniture and has an expanded product portfolio that includes sleek designs for living rooms and bedrooms with valuable customization options for customers interested in completely renovating their homes at affordable prices. In 2019, it controlled 3 percent of the online furniture market in the United States.
How IKEA Stands Out Against Its Competitors
IKEA has a significant presence in the retail furniture market. Its competitive advantage lies in its ability to meet customer needs using an extensive product portfolio and innovative design concepts.
The company uses an interactive website that provides customers with comprehensive information on products, including how to assemble them depending on the preferences of their end-users. It is also among the few companies that offer customers the ability to customize products before purchasing them.
IKEA also uses a unique direct delivery system, where goods are transported directly from its warehouses to its customers’ homes. Through this strategy, it has managed to gain customer loyalty in many countries across Europe and North America.
Cost efficiency has also played a key role in the growth of IKEA. The company uses simple but classy designs to keep costs low and pass those savings onto its customers. Moreover, its supply chain is designed in a way that allows it to save on freight costs.
IKEA Competitor Analysis (FAQs)
Question: What differentiates IKEA from its Competitors?
Answer: IKEA has managed to differentiate itself from its competitors by offering modern furniture designs at an affordable price. Its brand image is also powerful, which has helped it gain customer loyalty and market dominance in many countries across Europe and America.
Question: What industry does IKEA compete in?
Answer: IKEA competes in the retail furniture market. It offers customers a wide range of modern designs as well as other products related to home improvement.
Question: Why Is Ikea successful globally?
Answer: IKEA has managed to achieve tremendous success in the furniture retail industry. Its success is attributed to its core product offering, modern and stylish, and competitive pricing strategy.
Question: What pricing strategy does IKEA use?
Answer: It employs the cost reduction strategies of product differentiation and cost leadership. These strategies have allowed the company to reduce costs, which has enabled it to keep selling prices low while maintaining a high-profit margin.
Conclusion
It’s clear that besides IKEA, there are several quality furniture companies in the global market. To remain competitive and stand out against its competitors, IKEA has focused on a customer-centric approach. This strategy has enabled the company to maintain its competitiveness and profitability by meeting the needs of modern consumers keen on decorating their homes with high-quality furniture items at affordable prices. The company uses various strategies to gain competitive advantages, such as direct home delivery and simple but classy designs that reduce costs.
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