Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Catherine, could you give a brief introduction to your experience at IKEA?

I have spent all my career at IKEA – working 31 years for that fantastic company – at different positions in four countries, finishing as the CEO of IKEA Belgium and Luxembourg.

When you managed your first store in Bordeaux in the early 2000s, can you paint a picture of the size of it, the square footage, turnover and employee count, so we can get a sense of what it's like to run an IKEA store?

That was considered a medium store when I arrived at IKEA, but we enlarged it and ended up with 20,000 square meters which equates to 270,000 square feet. There were 350 co-workers and a healthy turnover of over €110 million.

Was there click and collect or online at that time or was it only in-store?

It was only in-store at that time. Click and collect started during the pandemic.

How were the stores structured into warehouse and showroom sections?

There is a showroom with furniture, a market hall, a self-serve and the cash line. There is also a restaurant and Swedish cafe to relax after a long day shopping at IKEA.

Can you briefly explain how the IKEA franchise model works?

The store manager is a fantastic position because you have a strong concept delivered to you as a franchisee. The range has a strong identity with all the goods, and when you sell one item, it is replenished, but you don't only sell one item. You have to manage 350 people with a management team who perform different functions, and you have to monitor your P&L, develop turnover and reach development goals.

The Supply business is the manufacturing assets IKEA owns, which deals with all suppliers, meaning they procure all the products supplied to franchisees?

Exactly, you don't care that you are working in a store. The goods arrive and you simply take care of merchandising, choosing how and where to present furniture and accessories.

So you have an order management system linked to the supply business which automatically replenishes inventory?

Exactly, yes.

Does the Range business deal with launching new product ranges?

Yes. All products are designed by IKEA of Sweden. Each time they design a product they ask the different trade offices globally for quantity and quality concerning that product. They launch that offer to all trading markets, one of which will win the deal and one country or supplier will produce it, which makes it very efficient.

What percentage of suppliers work exclusively for IKEA or also with other furniture retailers?

Both exist; some factories are dedicated and owned by IKEA, mainly for furniture. PAX and METOD in the kitchen space are produced by an IKEA factory in Poland, whereas small objects or accessories are produced globally, with 60% of the range made in Europe. There are both small and big suppliers, and often several suppliers for the same product, to ensure IKEA has the required volumes.

Why is so much of the inventory produced in Europe?

Each country is an expert for certain items. Portugal is expert in ceramic whereas with France it's glass. Customs exportation is important, especially today where it is difficult to import goods from China and Asia in general.

But it’s obviously cheaper to source from Vietnam or Taiwan.

For some products, yes. All accessories made with bamboo are better sourced from Asia, because that is where the raw material is. Most items made with cotton are produced in India for the same reason; the raw material is there, not in Europe. IKEA produce where the raw material is or where they have expertise on specific products.

Could you compare IKEA’s franchise model, with three different businesses, to traditional furniture retailers?

IKEA is stronger than traditional retailers because almost everything they produce or source involves huge volumes, and they distribute to consumers. That means there are no intermediates so they are able to produce from A to Z, and deliver A to Z. It is a really interesting business model because you don't have to pay intermediates as you do in food hypermarkets.

Is there any advantage in having three distinct Range, Supply and Franchise businesses?

Until now yes, but it might be challenging in future because it's difficult to excel at each step of the supply, from factory to customer.

Why?

Last mile delivery is a challenge to all retailers in general, but IKEA has to transport both small objects and large furniture, which is more costly. They are trying to find solutions but it's not easy because it's a complex issue.

How did you optimize in-store inventory, given you never buy anything?

You optimize in the way you present the range. You also optimize by focusing more on one range than another, depending on local markets, which have different consumer habits. People are key to your operation because a good store can only deliver good turnover when they take care of their staff.

Can you describe the difference between French and German consumers?

French consumers prefer furniture with light colors, whereas Germans want darker colors. It's the same range, but Germans prefer dark kitchens and the French light. Quilt covers produced for Germany have different dimensions than those made for France. The US uses larger mattresses and have queen and king size, whereas France does not.

Did you see material differences in the way French and German customers adopted online or wanted to change their in-store shopping experiences?

There are a lot of commonalities on that, but some countries are more advanced. Ecommerce is normal and accounts for a large percent of turnover for IKEA in the UK, as opposed to Belgium or other countries who are developing ecommerce slower than the UK.

How were logistics set up in IKEA?

Products are stocked in central warehouses in Europe, the US or China. There are smaller warehouses by country, which contain the goods that country needs. There are also warehouses closer to big cities such as Paris in France. It depends on the size of the country and sales volumes.

Is there one big centralized warehouse in both Europe and the US, where the product first goes for that region or continent?

No, there are more than two big warehouses.

How many warehouses are in France and Germany?

France currently has three big warehouses, some of which also provide goods to Italy, Spain or other close countries; it is logical in terms of efficiency of distributing the goods.

Do distribution centers fulfill online orders or does inventory go to stores?

They are struggling with the last mile delivery. They receive huge volume of goods and distribute those to stores for offline sales. Online sales are different and consists of click and collect and delivery. During the pandemic, they prepared goods from the store because the last mile delivery was closer to the end consumer. There has been a huge change because stores are not equipped or built like a warehouse, even though they have a small warehouse in-store. Most of the time when you pick goods for customers, it occurs in-store. Picking small accessories in the market hall is challenging without original packaging and sometimes items break, so it's difficult to implement that way of providing goods to end consumers.

Products are not packaged correctly to ship them from the store warehouse section, which makes it difficult to use the store as an online fulfillment center?

Yes, because you use the same packaging for a physical store to deliver. You could have strong packaging on the pallet which is good to deliver one pallet to the store, but it's not the same packaging to deliver one glass to a customer, so it's a huge challenge.

Could you not set up packaging lines or units in the in-store warehouse?

It's a small machine and there is not always space for it, but they do have that. There are different sizes and forms and you need more industrial machines to make it happen. You might have several in-store, but they don't do everything so the work is still manual.

Is this for smaller rather than bulky products like sofas, which probably come from the central warehouse?

Yes, accessories are more difficult, whereas furniture is flat packed or already has special packaging for each piece. That is not the case for a vase or glass items, which arrive on one pallet or in a big box, so it's difficult to do for only one glass or quilt cover.

Is the PAX wardrobe packaging the same in-store as it is delivered?

That is easier.

What are the potential packaging solutions for accessories if you want to use IKEA stores as fulfillment centers?

They did that during the pandemic as some stores were closed in some countries, and they used all their square meters to organize deliveries to the customer. Now we are returning to normal, and again, you don't have a lot of space to operate, so it remains a challenge. I am not sure how they will do that in future, because they haven't fully cracked the code yet.

Could they make the restaurant or entrance smaller in large stores?

You want to inspire customers and maintain space for the showroom and market hall. Restaurants are very profitable so if you use that space for packing, it will be less profitable. Customers appreciate a space to sit and eat while reflecting on their purchase, so I don't think IKEA would stop food.

What about reducing warehouse space and moving that to another distribution center, to make space for packaging?

They already do that because some space is dedicated to packaging, but due to the volume, it's difficult to balance packaging space and stock required and not be short. If you have exceptional sales, you need a mandatory buffer, which applies to all other retailers. It's slightly easier when selling clothes because you when you sell one, you receive another, but when you sell furniture it's a challenge. If you only sold accessories, you could easily find a solution, but by definition, furniture takes space, so the warehouse is never empty.

Stores are very expensive and you need to drive volume through them, so you need availability of inventory and range to inspire the customers. Stores are also very valuable for last mile delivery, so getting that balance right seems to be tricky?

It is tricky but it depends on what your share of ecommerce is. Ecommerce used to account for 1% to 5% of turnover, but that reached almost 50% during the pandemic. If there is a clear direction towards ecommerce, you can make a decision, but with a mix of physical and digital, the balance frequently changing, you don't know if ecommerce will reach 50%.

What do you think it will be?

Looking at early adopter countries like the UK or China, close to or over 50%.

Their recent annual report stated 26%; does that include click and collect?

Yes.

So both delivery and click and collect accounts for 26% of IKEA sales.

Ordered online, you could say.

What percentage of that is purely online and includes last mile delivery?

Some countries are almost 20%, whereas others will have a maximum of 5%.

Which countries are the highest or lowest?

UK and China are the early adopters of ecommerce in general and IKEA follows the same trends. It will be lower in small countries which don't have high in-store traffic, and consumers prefer to visit the store to be inspired. Big cities and countries are more digital, either because they have huge traffic or consumers are further away from IKEA stores.

How do France and Germany compare to the UK?

Both countries were traditional, selling online with a low share of ecommerce, but they are now moving at the same pace as others. If France has 15% of sales online, Germany follows the same trend, but they start from different points.

If half of furniture is ordered online by 2030, what proportion will be click and collect versus full delivery?

Consumers will order online for heavy items like sofas, kitchens and mattresses, unless they have a big enough vehicle for transport. If the cost of transportation is low, they prefer delivery. Small furniture needs to be delivered quickly, because customer would rather collect small items than wait several weeks for delivery. The same is true for accessories, but it depends on the range. When you buy a large item of furniture and accessories, you will order online and choose for it to be delivered, which does cost more but it is more convenient.

So you believe the majority of bulky orders move online?

Yes.

And it's important to have inventory close to customers for last mile delivery.

It is important but IKEA are in a transition phase. In future, when 50% is online, they can organize stores to prepare goods. Today, it is at the store rather than country level. Some stores have 5% and others are as high as 25%, so it depends on local customer habits.

Which products are typically click and collect?

Small furniture such as chairs and tables which can easily fit in a vehicle.

So for small furnishings, customers go online to see if IKEA has a chair or lamp in stock at their nearest store, then pay for it online and immediately collect it?

That will be the case until IKEA can deliver within an hour or two.

Why does IKEA not run last mile delivery to deliver products themselves?

They are not doing the last mile delivery and use delivery companies to do it. Some stores use up to four different companies for that.

Can IKEA not run that delivery themselves?

No, an external company runs it.

Could it save IKEA money to do this themselves, as it does for Wayfair?

The business case needs to be studied because it is not the same initial job.

I ordered a wardrobe from IKEA last year and the cost of delivery was 9% of the total cost, which could deter people if it's expensive, especially for bulky products, which is not their target customer?

It is expensive to deliver a sofa or a PAX wardrobe because you need two men instead of one truck driver.

Will accessories also move to delivery or will they remain click and collect?

People will always visit the store to be inspired and to touch and feel products. IKEA noticed that people visit less frequently but they do still visit. A kitchen, sofa or mattress is a big investment and people want to test the product, and while doing that they are tempted to buy another accessory, so you need accessories available for in-store customers.

Will IKEA stores retain value in this industry, more than other retailers?

It is both inspiration to touch and feel products and a warehouse to prepare goods for last mile delivery. Big stores allow for fluctuation, but in-store inspiration is fundamental.

How do distribution centers differ from stores?

They have robots which allow them to be precise with preparation and have a single flow in and out. Stores have multiple flows in and out which makes it more complicated.

Do you place more bulky items and less accessories in distribution centers?

Everything is in these large warehouses.

IKEAs supply chain has been pioneered over 50 years for a great experience; how does their current structure compare to online retailers without a store base?

The challenge is for IKEA to become a multi-channel retailer. The operating model was developed without ecommerce and was a strong concept and business model. To be both digital and physical is challenging. Online players can start from a blank page and design the model to deliver quicker and provide the best product at the right time to their customers. They will have more agility because they do not have to change much to remain profitable, whereas IKEA has to change almost everything while continuing to serve their customers.

What's the most difficult thing to change for IKEA to shift to multi-channel?

They will need help from innovative companies such as startups. They will have to lose some control of a fantastic running business to invent new ways of providing goods. They need to let go, be creative and think out of the box. When you are disrupted, keeping things under control is the first reflex.

What specific problems would you target in the shift online if you were still running IKEA today?

I would focus on digital as a tool to improve the old in-store experience, as well as the old operation and last mile delivery. They are working hard on that, but too slowly.

What can they do for last mile delivery?

There are many fantastic startups working on last mile delivery in a profitable way, because they have expertise in that. They have solutions so why not use their solution?

But last mile is the same for every retailer; you need two guys to lift a big sofa and you can only take so many large items, meaning both offline and online retailers need the same assets for the journey. At what volume do retailers choose to do it themselves and give customers a 10-star delivery experience and remain profitable, or do they simply continue to outsource it to UPS and other large outsourced providers?

That decision needs to take into account the overall global challenges. You need to improve last mile delivery while simultaneously continuing to be profitable and improving in-store customer experience. You need to digitize in-store preparation to be smarter in preparing goods from the store. Focusing on last mile delivery is one, but you also have to take care of the rest, so it's a matter of resources, expertise and investment. We are talking about huge volumes so it's a matter of priorities to focus on the right direction at the right time.

How would you improve the digital store experience?

IKEA need to continue inspiring in-store customers, but they use a lot of space. They could have digital tools to use less space and present the range using virtual reality, or do what made.com did by offering a bespoke store, so IKEA needs to rethink their presentation.

Many online furniture retailers have showrooms and are more efficient as products are shipped from a centralized warehouse instead of in-store inventory?

You can focus on a centralized warehouse and only use the store for inspiration, but it depends on your location, which is why it's difficult to build and will take time.

IKEA has both distribution warehouses and showrooms, whereas the online players seem to only have a showroom.

Maisons du Monde only have a showroom with some accessories you can take, but you order furniture online or in-store, which will also happen to IKEA. Up until recently, it was more important to offer customers the instant gratification of getting their goods immediately, but that has become less important for big furniture.

So receiving bulky products within two days from a centralized warehouse good enough?

Yes.

How do you see the structure and layout of IKEA stores changing? I know they have already experimented with some smaller ones.

The structure of traditional stores has already changed. The mandatory way of going upstairs, visiting the showroom, going downstairs and then to the self-serve, most of the time they are changing the layout and allowing you to go directly to the market, or if you only need one thing, you no longer have to do a tour of the store, because you waste a lot of time. They are progressively changing that which is important because people are fed up having to do that only to buy a spoon.

I get lost and confused every time I visit IKEA and would rather go straight to the warehouse or the bottom bit. What about the size of the stores?

They are currently trying different formats in cities to be closer to their customers.

Is that only a showroom?

Showroom and accessories, and in the UK, they have many which are themed, such as kitchen and wardrobe showroom where you can order your goods. Paris has two stores like that which also have some accessories available for pick up.

Is it a much smaller warehouse?

It is not a warehouse, only a small showroom and a place to collect small objects. We will see what the conclusions of that are in future, as it is currently a test.

They opened a smaller footprint showroom in Hammersmith, London, which is different to the huge IKEA in Tottenham, North London, which takes an hour to get through. What will a typical IKEA store look like 10 years from now?

It will have more of a free flow layout instead of mandatory for the customers. It is important to keep an area to eat something, and that could be a fast food or real restaurant. They will have a big warehouse to prepare goods on the outskirts of cities, with showrooms inside cities that have several items to allow for impulse purchases.

Wayfair are looking to own more of the supply chain and open showrooms; what advantages do online furniture retailers have over traditional retailers like IKEA?

They started with the most difficult business, which is inspiring online customers and delivering goods at home. To now expand their business offline is clever, because people still need stores. They are well-known online and people are happy to have their goods in a reasonable amount of time. Building showrooms without stock will still promote their brand.

Which products or customers can they not serve with a pure showroom?

They will miss out on older people, otherwise I don't see a hindrance to doing that.

The online players have built up their distribution centers and last mile logistics so moving to offline enables them to inspire with a showroom, where customers place an order online which is delivered by their centralized infrastructure.

Showroom staff make the difference because they advise and inspire customers. You need to have another experience in the store, and food could help because it's a good tool to create an emotional connection with customers.

What are the biggest challenges for online retailers?

I would only use one word – profitability. In order to make a business profitable you need to know which direction to go. If you dramatically increase online, it will require additional set up, which will affect profitability.

Why will ecommerce not become 50% of all furniture sales in 10 years?

It is possible but it will be connected to the price of delivery. If delivery is high, you will think twice, but if we crack the code on that I think ecommerce will reach 50%. We need to be clever and innovate at each step of the process, and all retailers are not there yet. Some of them are more advanced but you need to slice the elephant into different pieces and find a solution for each, to improve the profitability of your business.

I guess that is why Wayfair is building out and owning the last mile delivery.

Yes, exactly. And in the store, as well.