IKEA, the world’s largest furniture retail store, is continuously expanding its territories by reaching newer markets from around the globe. But how does IKEA manage to maintain its business operations even in the face of competition?
If you’re curious about IKEA, you may be asking, what is the IKEA business model, and how does it work? I wondered about the same thing and decided to research the matter. That said, here’s what I discovered!
What Is The IKEA Business Model In 2022?
The IKEA business model is based on a franchise system that allows several individuals and companies to work under the IKEA brand while maintaining a commitment to IKEA’s vision as of 2022. Owing to the popular brand name, the franchisees under the IKEA parent company are widely known for designing and manufacturing ready-to-assemble furniture and houseware.
If you need more information about the IKEA business model, its uniqueness, and much more, keep reading!
How Does IKEA’s Business Model Work?
IKEA’s business model relies on the company’s vision of “creating a better everyday life for many people.”
Created by IKEA’s founder, Ingvar Kamprad, the franchising business model gave IKEA a pathway to grow internationally and develop a means of financial security for all its employees.
Given this, IKEA strategized on the franchising system as a means of reaching the masses with high-quality and affordable furniture.
Also, the franchise system presents a challenge to franchisees who have to test and explore new markets while safeguarding the underlying IKEA concept and its entrepreneurial spirit.
Ideally, a franchisee has to be evaluated by the Inter IKEA Systems B.V. before working under the IKEA brand.
Then, once a franchisee meets the standards of an Inter IKEA Systems B.V. and is chosen, they have to sign an agreement that permits the franchisee to operate as an IKEA store and use IKEA’s systems and methods.
That said, the agreement between the IKEA parent company and the franchisee dictates that the franchisee pay an annual fee of 3% over their net sales to the Inter IKEA Group.
In exchange, the franchisee gets access to IKEA trademarks and uses the brand name to operate as a subsidiary of the parent company.
Currently, all IKEA stores, except the IKEA Delft store in the Netherlands, operate as franchises.
In comparison, the IKEA Delft store in the Netherlands is owned and operated by Inter IKEA Systems B.V.
What Is Unique About The IKEA Business Model?
IKEA’s business model of setting up franchises is unique because it has created a global presence that generates substantial annual returns.
For example, with business operations in more than 420 stores spread across 50 countries, IKEA has become one of the most recognizable furniture brands globally.
Ideally, to maintain the success created by the IKEA parent company, the franchisees have to commit to IKEA’s concept of supplying consumers with high-quality furniture at affordable prices.
To achieve this, the franchisees have to maintain IKEA’s modern and minimalist designs and sell them at low prices as stipulated by the parent company.
Ultimately, this strategy makes it possible for the company to keep its prices low and reach more people hailing from across the world.
How Is IKEA’s Business Model Successful?
IKEA’s franchise business model has emerged successful due to the strict adherence to IKEA’s concept, which entails providing high-quality ready-to-assemble furniture at affordable prices.
Through the franchise system, IKEA has witnessed a steady growth in business created by developing concepts and laying a solid foundation on IKEA’s mission and vision.
Moreover, all retailers operating under IKEA’s brand name offer customers a wide selection of furniture and houseware at discounted prices and provide delivery services to maximize customer satisfaction.
With great interest in customer satisfaction, IKEA franchisees have helped customers furnish their homes according to individual preferences supported by IKEA’s different styles.
Most importantly, the IKEA franchising system encourages everyone under the brand name to collaborate and contribute valuable information as per its consumer and market insights.
Further, other factors that have contributed to the success of IKEA’s business model include:
IKEA’s Pricing Strategy
IKEA is currently a household name due to the uniqueness in its pricing strategy.
That said, the designers play an essential role by working around the price of a product to maintain the affordability of IKEA furniture.
So, even though IKEA prioritizes furniture prices, it doesn’t compromise on quality, design, and sustainability.
In most instances, companies decide on the price of an item after producing it.
However, for IKEA to maintain its promise of affordability, it fixes the price of an item before production and assesses whether it’s feasible to produce.
The Type Of Material Used In IKEA Furniture
To maintain affordability for its customers, IKEA uses lightweight and durable materials.
That said, the company uses sheets of wood layered over a honeycomb core to make its furniture lightweight and durable.
Furthermore, the continuous innovation of furniture designs helps IKEA control the products’ prices.
For instance, the Ektorp sofa design change in 2010 led to a retail price reduction of 14%.
Also, IKEA uses hybrid materials such as laminated medium density fiberboards, enabling the furniture to bear strong structure at reduced prices.
Overall, the business strategy to use cost-effective and environmental-friendly materials helps IKEA maintain its low-price strategy.
Achievement Of Economies Of Scale Due To Bulk Production
IKEA’s strategy on bulk production helps the company minimize costs and ultimately increase the net profit.
To achieve economies of scale, IKEA produces furniture in bulk to help keep the production costs low.
With that, the mass production by IKEA is evident by the fact that the company claims approximately 1% of the world’s total commercial wood consumption.
Due to this strategy, most popular products in IKEA exhibit a price decline rather than an increase in the face of high demand.
Even at lower margins, the bulk production helps IKEA earn higher profits.
Reduced Costs Of Packing & Shipping
IKEA promotes sustainability by further managing its packaging costs.
That said, IKEA packs all its products flat, which reduces the storage and transportation costs that translate to a lower end price for consumers.
For example, the packaging of the products is identical to a flat-screen TV which allows IKEA to pack as much furniture as possible within a single shipment cost.
IKEA further introduced the “Assemble it Yourself” strategy to assemble its furniture to reduce prices further.
However, if you cannot assemble the furniture, you can hire someone to help you complete the task.
Venture Into The Food Industry
IKEA further enhances customer retention by introducing restaurants, bistros, and Swedish food markets in its stores.
With that, the idea behind the introduction of food joints was to intervene in the scenarios of hunger while shopping and further increase customer satisfaction.
However, according to IKEA’s analysis, about 30% of customers visited the eateries just to eat.
What Are The Key Capabilities IKEA Needs To Make Its Business Model Work?
The four capabilities that IKEA needs to make its business model work includes the affordability of furniture, sustainability, functionality, and good product design.
With these capabilities, IKEA will maintain the original IKEA concept being driven by all franchises.
In conclusion, IKEA runs a franchise business model that allows other companies to operate under its trademark and serve consumers in different markets.
That said, the business model has gone a long way in marking the company on international maps, ultimately increasing company profits.