The IKEA Effect

Introduction

Today, we will go through an 80-year old company that is so popular that when it opened a new store in Saudi Arabia and started offering vouchers on day 1, it caused a stampede. The company is so huge that even the number of catalogues it prints far exceeds the number of the Bible published every year.

It was founded by Ingvar Kamprad in 1943 when he was only 17! Imagine that. He started this business from Elmtaryd, a family-owned farm in a small village called Agunnaryd. If all the nouns sound confusing to you, let’s merge them and make an acronym out of it as we would be referring to them continuously in this episode. How about the acronym be IKEA?

Background

Until 1958, IKEA didn’t even own a store and used to sell products through mail order. Whenever someone refers to IKEA, the furniture comes to mind. However, IKEA did not use to sell furniture until 1948. It used to sell fish at the time.

In 1958, IKEA opened its first retail store in Sweden. As with every other business, this too faced severe backlash from the competitors. In the early 1960s, Sweden’s National Association of Furniture Dealers announced a complete boycott of IKEA and denied selling raw products to Kamprad. The primary reason cited by the association was that IKEA was selling the furniture at a lower price than the others, causing a dip in sales for the rest. This was primarily for the fact that one had to assemble the furniture themselves if they buy from IKEA. IKEA wasn’t selling at a lower profit margin, by the way. Because the furniture came in flat boxes for IKEA, IKEA could save a considerable percentage of logistics costs. It also means that IKEA could buy more quantity per batch, bringing in savings in the price for raw materials. As the boycott continued, IKEA decided to purchase raw materials from Poland. Eventually, IKEA made it through the boycott era and seeing themselves losing, the association’s members resumed their business with IKEA.

As of the financial year 2020, IKEA had a revenue of 48 Billion Dollars, courtesy of sales through 450+ stores, online shopping and Meatballs. It is estimated that 5% of the revenue IKEA makes comes from the cafeteria, and restaurants IKEA has inside their stores and Swedish Meatballs are a significant chunk of it. IKEA’s Swedish Meatballs are surprisingly famous to the extent that Pizza Hut in Hong Kong collaborated with IKEA to introduce Swedish Meatballs Pizza in March 2020.

IKEA Effect + Layout

With the flat-pack boxes of furniture, IKEA had cracked the code of earning more money per dollar spent. But what does that mean to the end customer? Of course, he’ll get it at a significantly lower price than a pre-built one, but that also means that he will spend the next 4–8 hours assembling one. Partially making an item themselves increases the person’s liking of the furniture, making them spend more money. Researchers have found that people are willing to pay 63% more for products that require assembly than a pre-built item. There is a term to describe this exact scenario called “the IKEA effect.” In the words of the researchers, “labour alone can be sufficient to induce greater liking for the fruits of one’s labour: even constructing a standardized bureau, an arduous, solitary task, can lead people to overvalue their creations.” Some psychologists have now started recommending couples coming for therapy sessions to spend a day assembling IKEA furniture. A California-based psychologist named Ramani Durvasula introduced this concept as she believed this could help resolve relationship issues.

From the moment you step in, IKEA stores are designed for you to spend more time inside and want you to see as much of their catalogue as you can. All the stores follow a maze-like store layout, and IKEA wants you to follow a specific path. Through the data collected on user movement over the years, IKEA nearly perfected this layout. There are some shortcuts in some of their stores, but going by IKEA’s planning in design, it is hard to tell if they added extra paths to shorten the walking time or had to have one due to fire safety regulations. To even further increase the time you are spending inside, they have Smaland, kids play area, so that you can shop and look around without worrying about kids. The catalogue is showcased in prepared rooms, making you think about how you want your room to look, increasing the time you are spending. All the extra time you are consuming in the store translates to revenue for IKEA. Even if you do not buy any furniture from the store, you ought to get tired of walking around the 300,000 square feet complex and buy yourself a lunch or snacks from the in-house cafeteria.

General

The company has intentionally created a complex corporate structure, primarily to evade taxes. It is a combination of for-profit and non-profit organizations, and it would take an entire episode of its own to explain this complexity.

Ingvar Kamprad wanted the store to depict its roots. IKEA does it to the extent that no other company has done before. IKEA uses the same two colours to paint their stores with as that of the national flag of Sweden. All the items are named after one or the other Swedish word. The first message you read at the entrance, written on the walls of IKEA, is Hej, a Swedish greeting. And, of course, the Swedish Meatballs, which we have brought up quite a several times in this episode.

Opening up a new store is always an event for IKEA and the people alike. When IKEA opened the new outlet in Amsterdam, IKEA called for a hide-and-seek event inside the store, which over 19,000 people attended! When IKEA first launched in India with its first store in Hyderabad, it was visited by 40,000 people on the opening day itself. The city officials had to send in extra police to manage traffic near the IKEA store.

Previous

Previously, IKEA tried smaller store sizes in different parts of the world, but those stores weren’t as flourishing as the larger ones and had to shut these stores. From 2015, IKEA restarted the smaller outlets with a test drive in Kitchener, Ontario, where they did not showcase any catalogue, but instead, people could order online and have it delivered to this store and collect from the store once available. This technique goes the opposite direction of what IKEA does best, but it believes that this would help them grow faster and reach more customers.

They are definitely going to make some more giant outlets, as they are building their largest store ever in the Philippines. They were planning to have 25 stores in India by 2025. However, the timeline under which they were planning to open stores is now drifted, courtesy of the pandemic. There is a bright future for the company, and it will be interesting to see how they play from here on.

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