How IKEA Makes Money

Rarely does an executive with a major corporation seem to write off its most lucrative market, but IKEA is not like most major corporations. In 2016, the Swedish furniture giant’s chief sustainability officer articulated his commitment to keeping things sustained by saying that the Western world had reached “peak home furnishings.”

The phrase was a take on peak oil, by which world petroleum production over time is believed to take on the shape of a bell curve, and that the apex of the curve has passed. On its own, the quote from IKEA’s Steve Howard implied that more unassembled lap tables and other accoutrements of the 1970's living room have already been manufactured than will be manufactured, at least in the portion of the globe that extends from Scandinavia south to the Mediterranean and west to the Pacific. The implicit message seemed to be that IKEA ought to look elsewhere for sales or find another line of business. (For more, see: Industries That Benefit from Broke College Students.)

In 2018, Ikea announced its latest venture - "a collective energy switch that promises an exclusive 100% renewable electricity tariff." Partnering with the “Big Clean Switch” campaign, IKEA is promoting a collective switch to secure cheaper green power for households that subscribe to the scheme. The UK Guardian reported that the two companies claim that a typical UK household will save £300 a year in gas and electricity.

According to Hege Sæbjørnsen, Ikea’s sustainability manager, the aim is to "make switching to renewable electricity simple, accessible and affordable to everyone.” For each subscriber that switches, IKEA receives a commission, which the company will use to support local community initiatives within each store’s area. There are other green electricity suppliers that customers can also use, so IKEA faces significant competition. With such challenges, we look at how IKEA has made money in the past and how it will in the future.

IKEA is a privately-held company, one of the world’s largest. It’s also the world’s largest furniture retailer, selling $38.3 billion euro's-worth in 2017. The name is an acronym for Ingvar Kamprad Elmtaryd Agunnaryd, which are, respectively, the name of the founder, his family farm and his hometown. Kamprad also lent his name (or the first few letters of it, at least) to something called the INGKA Foundation. It is technically the sole owner of IKEA and is also one of the world’s largest charitable foundations. (For more, see: 5 Billionaires Who Live Below Their Means.)

Why would a charitable foundation own a multinational company? Most, if not all of the big charitable foundations, were founded by business titans who had more money remaining than time. But never does the charitable foundation actually operate the business. That is, until IKEA management discovered that transferring a Swedish company to the ownership of a charitable foundation registered in the Netherlands can minimize taxes, make a hostile takeover impossible and permit operation as a nonprofit. IKEA made $12.6 billion euros in gross profit in 2017.

INGKA Foundation’s website showcases hopeful-looking children playing soccer in impoverished countries, which contrasts with the foundation’s stated purpose of “supporting innovation in the field of architectural and interior design.” That purpose is legitimate, with a major qualification. The foundation supports innovation by operating a furniture empire. There are more layers to this scheme, including a separate holding company directly between IKEA and INGKA Foundation. The intellectual property is held in yet another company. The purpose behind all of this maneuvering remains to minimize taxes by the most effective if complicated means necessary. (For more, see: The World's Most Valuable Private Companies.)

And the system works. IKEA makes much of its money from franchising. Dozens of its stores around the world are franchised; the remainder are company-owned. Each store pays an annual franchise fee of 3% of sales, including the company-owned stores. A charitable foundation cannot fund itself, after all.

IKEA continues to rely on its commitment to sustainability to hold on to its customer loyalty. The company announced plans in June 2018 to use only renewable and recycled materials in its products by 2030. The move should reduce the climate impact of each product by two-thirds by the end of next decade. As of 2018, 60% of the IKEA range is based on renewable materials, and 10% contain recycled materials. The company is setting the benchmark for competitors, raw material suppliers, customers and partners. Also, Inter IKEA, owner of the IKEA Concept and the worldwide IKEA franchisor, has announced that it plans to eliminate all single-use plastic products from in-store restaurants by 2020 and that IKEA Group would roll out home solar solutions to 29 markets by 2025.

(For more, see: The Advent of the Ikea City: The Concept of Brand Evolution.)

IKEA, in its early days, made furniture shopping fun, populating its stores with bright colors, an airy layout, and even a quality cafeteria. The modular design of its particle-board chairs and tables were contemporary and inexpensive appealing to struggling college students and established professionals alike. While “peak home furnishings” has caused IKEA to double-down on sustainable initiatives, it is likely that there will continue to be a thriving market for home décor, and an even  larger one for sustainable home products. (For more, see: The Industry Handbook: The Retailing Industry).