Introduction

The world’s largest seller of furniture, IKEA is known for its modernist designs, its immersive shopping concept, its attention to cost control, and continuous product development. The company was started in 1943, in Sweden, by 17-year-old Ingvar Kamprad as a mail-order furniture business. Ever since IKEA has grown and generated a massive revenue of $48bn dollars in FY22. Currently, it operates 460 stores in 60+ countries, with roughly 880 million annual customers.

Countries with IKEA stores

IKEA is an acronym, which represents the name of its founder- I: Ingvar K: Kamprad, E: Elmtaryd, the farm he grew up in, and A: Agunnaryd, the Swedish village in which this farm was located.

The company is currently led by its Chief Executive Officer, Jesper Brodin, and is headquartered in Delft, Netherlands. Furthermore, it employs 2,31,000 people to carry out logistical operations.

The story of IKEA is unique, thus it presents to us with interesting and insightful case studies to imbibe business lessons. In this project, we will delve deeper into the business model and marketing strategies which have made IKEA the success it is today.

History of IKEA

Kamprad was born in 1926 on a farm in rural Sweden. He started his first business when he was just five years old. Initially, he would buy matchboxes in bulk and sell them individually. By the time he was 10, he was selling pens, pencils, seeds for flowers, and Christmas tree decorations. Kamprad was dyslexic, but he didn’t let that hold him back. He worked hard and did well in his studies. His dad inspired him by paying him cash for doing well in school and Kamprad used that money to start IKEA in 1943.

Ever since Ingvar invested the money as it traversed from being a mail-order business to a multi-billion dollar empire.

Case Study: How does IKEA name its products?

We have all visited furniture stores at some time or the other. Have you ever observed that all the products being sold are identified by an alphanumeric code assigned to them? Perhaps, that blue bed is called B78#45 and the red shelf is called RS894!. However, this is not the case with IKEA.

Every product being sold has been assigned a name in Swedish.

• Billy Bookshelf: Named after an IKEA employee!
• NORBERG (white table): Named after a quaint Swedish Village
• FRAKTA carry bag: To freight in Swedish

It is said that the rationale behind doing so lies in the fact that the founder of IKEA was dyslexic. Therefore, since it was difficult for him to process alphanumeric codes, he assigned names which he could associate with each product!

Finances

IKEA recorded a revenue of $48 bn in FY 2022. This adhered to the trend of an annual growth of approximately 5% in revenue.

As stated earlier, IKEA has its presence in more than 60 countries. The graph below illustrates an inter-country analysis of the company’s sales.

Business Model

Revenue Streams

1. All IKEA stores (except one) operate under franchise agreements, and the company makes the majority of its money from annual franchise fees and the wholesale of products to franchisees.
2. The annual franchise fee is 3% of the store’s net sales, while the wholesale of goods to them is valued at $25.46 bn per year.

Key Activities

1. Designing of furniture: IKEA has a team of in-house designers who are tasked with the job of producing modern and futuristic designs to attract the youth and middle-aged who act as the primary target audience to IKEA.
2. Manufacturing of furniture: IKEA outsources the manufacturing of these designs to local manufacturers. Therefore, if an IKEA store has been opened up in Bengaluru, then the manufacturing of all saleable furniture will happen locally in the city, with the designs coming in from the global IKEA team.
3. Distribution: Once the products have been manufactured, IKEA sells these products amongst the masses through its franchise model, both on the offline and online spectrum.

Case Study: Labour Leads to Love

Back in the 1900s a company which ran by the name- ‘General Mills’ was a key FMCG player in the market of the United States. In a bid to make the process of baking cakes a little simpler, they introduced a cake mix which mothers could use, and have the output ready in less than half of the time. While this product was easy to use, cheap and attractive, it failed miserably.

A team of psychologists eventually found out why mothers were averse to making use of these pre-mixes. In their opinion, when mothers baked cakes with these mixes, the entire process was made a little too simple, as a result, they felt that they weren’t doing the best for their families. The paucity of ‘labor’ led to lower levels of ‘love’ for the product produced.

IKEA identified this, and used this principle to solve one of the biggest challenges of a furniture company. This is now popularly known as the ‘IKEA effect’.

What did IKEA do?

The most pressing challenge of the furniture industry is that of transportation logistics, which involves the transportation of the bought furniture to the customer’s houses. Since furniture in principle consumes a lot of space, the transportation costs are generally very high.

This led IKEA to inventing the DIY model. Within this, furniture is shipped to the consumer, packed in boxes, and consumers are required to assemble it themselves. Stemming from the IKEA effect, consumers attached more value to this furniture, because ‘labor leads to love’.

Therefore, IKEA was able to reduce its costs and create value among customers through this model.

Place Strategy

It’s nothing less than an axiom now that IKEA stores are never located within the city! Far away in the suburbs are the stores set up, causing a long travel time for most customers. Then, why does IKEA choose such locations?

IKEA will never compromise on its ‘big-box’ format, which entails a store being as large as 5 football fields! To acquire that kind of real estate, they must shift to land in the outskirts.

The company is not one which hopes to sell a specific product to their consumers, rather, they strive to sell an experience. When customers spend more than an hour traveling to the store, they are induced to stay within the store for a longer time, thus purchasing more products.

IKEA stores are located strategically near public transport stations, such that consumers find it convenient and cheap to approach them. For instance, in Bengaluru, the IKEA store is next to the Nagasandra Metro Station, on the Green Line, making it very convenient!

Case Study: Geo-Location Tech in Dubai Stores

Acknowledging the fact that shoppers had to spend significant time to get to its outlets, IKEA added “time currency” prices for every item in its Dubai stores.

To start with, shoppers had to turn on their Google Maps Timeline on their mobiles and record their trips to the store. The duration of the trip was then converted into savings. For example, shoppers traveling for one hour and 55 minutes could avail of a Billy bookcase for free. A shorter 49-minutes trip could get them a Lack coffee table, while a hotdog cost a five-minute trip.

By rewarding shoppers for the time they spent commuting to the stores, IKEA not only increased its footfall but also motivated shoppers to make multiple visits for greater savings.

Pricing Strategies

The success of IKEA is also attributed to its vivid understanding of consumer behavior and psychology. The company has mastered the fundamentals of behavioral economics, thus propelling customers, all the while being discreet, to make larger purchases.

Decoy Effect

Case Study: Popcorn at the Cinemas

Every time we buy popcorn at the cinema, we are greeted by a similar sight. As a rational consumer, which among the following options would you go for?

Most would say large.

For an additional $0.5, the large presents a greater quantity of popcorn over the medium. Therefore, the presence of the medium option, makes the larger one, suddenly seem attractive. Had the Medium Option not been there, perhaps, consumers would have realized how grossly overpriced the large option was.

This is called the Decoy Effect, where the presence of a ‘decoy’ in this case the middle option, makes another option seem more affordable.

IKEA has applied this very strategy in its products.

An important USP of the Scandinavian Furniture Retailer is that it possesses products for everyone in the market. If you are a college graduate, who has just shifted out of his dorm, or a successful businessman looking to adorn his mansion, IKEA is for you!

Hence, IKEA offers a range of prices for the same category of products.

Apply the popcorn case study to this example, and you would see how IKEA propels its consumers into giving it an additional few dollars!

Reference Pricing (Anchor Heuristic)

Like most other companies, IKEA follows the system of reference pricing, to stimulate consumer behavior.

They display that the actual price of the product is Rs.200, and then offer a discount reducing it to Rs.150. Consumers suddenly begin to feel that this product is value for money, because of the discount.

This draws from the anchor bias/heuristic, where consumers compare the current price with the anchor i.e. Rs.200, and thus judge the affordability of the given product!

How does IKEA manage such low prices?

DIY strategy- As discussed earlier, IKEA’s innovation in the flat-packing system has resolved the constant paradox of expensive transportation faced by every furniture company. This acts as a major cost-saver.

IKEA stores are generally structured to run on a ‘self-help’ model. If you have ever visited one, you’d know that there are very few employees, and consumers are expected to traverse through sundry of its segments themselves. Thus, this reduces the labor costs of the company.

IKEA ensures that all its products are produced in bulk. This results in an economy of scale, reducing the costs of production.

IKEA spends heavily on Research and Development. Thus, they come up with new techniques of production to enhance quality, while cutting down on expenses.

Gruen Effect

The Gruen Effect (also called the Gruen Transfer) describes the moment people enter a store and are engrossed in an intentionally overwhelming experience. This causes them to forget their original reason for going to the shop, so they tend to make more impulse purchases. Customers also lose track of time and become engrossed in this new experience.

IKEA is that one company, which has truly mastered the Gruen Effect!

IKEA stores rely on a ‘fixed-path’ design- IKEA showrooms use a “fixed path” layout — there’s a designated road that you must follow, and it guides you through the store in one direction. In most stores, customers only see about 33% of the merchandise on offer. But IKEA’s fixed path approach means you stay in the store longer, and you get exposed to most of the brand’s products.

The IKEA food court- At first glance, it might not seem like IKEA’s food has an effect on their furniture sales. But according to the company’s research, 30% of its shoppers come to the stores just to eat. In 2017, the company made $2.24 billion from food sales, and is considered the tenth-largest food retailer in the world.

The food at IKEA doesn’t only have an impact on the bottom line. It also feeds into the Gruen Effect, and changes how customers think, feel, and act in the store. Eating and smelling food releases dopamine and can create a state of happiness. That mood shift can affect how much customers spend and what they buy.

Bulla-Bulla Merchandising

IKEA uses a merchandising technique called “bulla bulla” to create the impression that an item is cheap. In bulla bulla, a bunch of items are jumbled and stacked in large bins to create the impression that there are lots of items available. And because there are so many items available, they must be cheap. Often these items are intended to be impulse buys and are priced cheaply in comparison to the items surrounding them.

This is based on the scarcity principle- ‘if there are too many of a given product, it must be cheap, and if there are fewer pieces, they must be expensive!’

Hence, IKEA has these ‘bulla-bulla’ facades hidden at every 100m within the store, to induce customers into buying more!

Localization

IKEA has its stores spread in over 60 countries, yet it manages to drive sales in each of these nations. The manner in which this foreign giant has adapted to regional idiosyncrasies points to the importance of localization for any business.

IKEA's localization strategy requires researchers to go into the homes of regular people who live in the areas where they plan to launch stores.

“We sit down in the kitchen and talk to them ... That’s the way we try to learn and understand. ‘What are you annoyed with? What are your frustrations? What would you like to have? How much can you afford?’”

Case Study: How IKEA is Capturing the India Market

IKEA at present has stores in Hyderabad, Bangalore and Mumbai, with a couple more in line to dot metropolitan cities of India. Ever since, the Swedish Company has begun advertising campaigns, which are strategically aligned to lure Indian audiences.

The company collected local feedback and changed its restaurant menu from their signature pork and beef meatballs to chicken and vegetarian items. This helped correspond to the eating habits of Hindus and Muslims, the primary audiences of the Indian Market.

After extensive research, they have been able to develop products specifically for us Indians. For instance, they produce kitchen appliances for the making of khichdi and Pongal!

Lastly, the greatest peculiarity identified in the Indian Market is its frugality. As a result, IKEA had to bring modifications in their prices and now sells over 100 products which are priced at less than Rs.200!

Advertising Campaigns

Augmented Reality:

Ikea was among the very first online furniture stores to give people the added advantage of augmented reality. It was back in 2013 that Ikea came out with a catalog app feature called ‘Place in Your Room’ that allowed users to try out their desired products in their homes. As most people ended up buying the wrong size of furniture, this came in handy and was, as expected, widely accepted!

IKEA’s Place in Your Room AR Tech...

Guerilla Marketing

Guerrilla marketing is an advertisement strategy in which a company uses surprise and/or unconventional interactions in order to promote a product or service.

At many instances, IKEA has used guerrilla marketing strategies to further their reach.

IKEA ethics

Employee Respect: Most companies call the people that work for them- ‘employees’. However, IKEA approached this from a different perspective. In their opinion, these people don’t work ‘for’ the company rather ‘with’ the company.

Hence, the supposed employees are all called- ‘co-workers’ in IKEA.

In 2021, IKEA was named one of PEOPLE’S “50 Companies That Care” by Great Place to Work® and PEOPLE, which is a US based organization.

Sustainability campaigns

Reducing carbon emissions: IKEA recognises the impact its operations have on the environment and is taking action to minimize that impact. For example, the company has made significant investments in renewable energy, such as wind and solar power, and is actively working to transition its energy sources away from fossil fuels. IKEA has also set ambitious targets for reducing its carbon emissions, such as reducing energy consumption in its stores and distribution centers by 80% by 2030.

Developing sustainable products

IKEA is further committed to developing more sustainable products that will positively impact the environment. The company is investing in research and development to create products that use less energy and resources and have a longer lifespan. For example, IKEA developed furniture made from renewable materials, such as bamboo, and is working to improve the recyclability of its products.

Circular economy

A circular economy is one wherein, every new product is made from another old product. Therefore, in such a model there is no waste nor is there any exploitation of resources. IKEA allows customers to return old IKEA products in exchange for store credits and vouchers, and uses those old parts to make new products.

Case Study: Most sustainable IKEA store in Greenwich, London

The IKEA store in Greenwich, London, is supposed to be the most sustainable among all of its franchises. To promote people to reach the sustainable stores in a sustainable fashion, IKEA launched the ‘Steps’ movement.

Through this, they encouraged people to either walk or make use of public transport to reach their store!

Competitor Analysis

IKEA is far ahead of the rest of its competitors in the furniture space, as it surpassed a revenue of $44bn last year, with its competitors lagging behind, the nearest of which has just managed to touch $13bn.

Based on a study conducted by Business Chronicle, IKEA possesses an approximate 50% market share of the US furniture Industry.

Conclusion

After the completion of this comprehensive report on IKEA, we can confidently conclude that this company is driven by remarkable business acumen and presents to us case studies which fraught insightful lessons for every student of business.

As we read more about the company, we deciphered that the code to its success lies within the simplest nuances of business. Mastering the fundamentals of consumer behavior and psychology, while maintaining an emotional connection with their customers has played a pivotal role in IKEA’s growth journey.

As students of Business, it was fascinating to learn more about IKEA’s advertising and marketing strategies. Their campaigns, riddled with creativity, inspire us to become like them someday.

We live in a world where ‘sustainability’ is the buzzword. IKEA’s efforts towards bolstering these causes present to the world a precedent, that the adoption of sustainable methods need not be a reduction in the company’s profits.

To conclude, through the course of this project, we have learnt innumerable lessons and were able to apply our theoretical knowledge to the practical world of Business.

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