The IKEA effect: How to survive disruption?

Arhi Kivilahti, Ada Insights' retail analyst, is writing for Inderes about the Nordic Retail Industry. His views do not represent the view of Inderes, and should not be interpreted as an investment recommendation.

Furniture retailing is probably one of the most transformed retail sectors in the world. This is because IKEA is one of the most transformative and differentiated retailers. Since the 1990s, IKEA has relentlessly grown throughout the world. And in almost all countries, traditional furniture retailers have been unable to stop that growth. IKEA has managed to stand out fantastically with its concept and irresistibly take it to 61 countries worldwide (Wikipedia).

The power of IKEAs concept is illustrated by the fact that a) traditional players have not been able to stop IKEA and b) how few competitors it has spurred.

However, some companies are growing in the shadow of IKEA. Some differentiate in the bricks-and-mortar space, but maybe even more potent long-term challenges could arise from online. These are all illustrated in Finnish furniture retailing.

Finnish furniture retailing as an illustration of the IKEA effect

At the turn of the millennium, Isku and Indoor Group were the country's largest furniture retail chains (at least of those operating today). Isku was 40% larger than Indoor, about 50 % bigger than Kodin Ykkönen. In the early 2000s, Kodin Ykkönen (Anttila) by Kesko was a significant retailer that grew strongly. The company overtook Indoor Group (2005) and Isku (2009) with the growth.

Since then, Kodin Ykkönen ran into difficulties alongside the problems of the parent company Anttila. In the 2010s, the revenue reporting of Kodin Ykkönen in the annual reports of Kesko was moved under Anttila. Thus, there is no information about the revenues of Kodin Ykkönen after 2012. Kesko sold Anttila in the spring of 2015.

Finding information about the chains that disappeared along the way is more difficult.

The competition arrives in Finland

However, the Nordic challengers who have arrived in Finland have changed the market situation significantly. Jysk from Denmark opened its first store in Finland already in 1995. IKEA came the following year. However, IKEA had purchased the lot from Espoo already in 1967. It had run into problems with authorities with regard to different zoning permits.

Both of these had a strong influence on the competitive landscape of the domestic furniture trade. Of the two, IKEA grew faster.

In just a little over 10 years, in 2009, the company became Finland's largest furniture retailer.

IKEA's strong growth to become the market leader resulted in the stagnation of sales growth for local retailers. Isku's sales grew until 2007, after which they fell sharply. The exact reason is not reported in the financial statements either.

Along with Isku, the revenues of Kodin Ykkönen were disrupted by the economic crisis. Of the big local players, Indoor Group has recovered better from the economic crisis. From 2015 until 2021, the company managed to grow continuously. On the other hand, last year, the company saw the second biggest decline in sales after Masku.

Jysk and Finnish Design Shop were the two companies with the strongest growth. Both growing with different strengths. They also illustrate how one can grow under the shadow of IKEA.

Profitability and efficiency separate operators

When furniture retailers are compared from the perspective of profitability, the international retailers stand out strongly. In particular, Jysk's sales margin and profitability are on the level of their own.

Over the last 20+ years, Jysk has grown a little slower than IKEA. However, it is beginning to challenge the position of the second-largest furniture store in the country. During the last five years, Jysk has had the fastest growth among store operators in the furniture trade.

From the perspective of absolute growth, Finnish Design Shop is on a different level from others. The company does start from a small base. It has grown from €20 million to €65 million in the last five years. With similar growth, Finnish Design Shop will challenge the furniture industry's traditional Finnish incumbents during this decade.

Finnish Design Shop's growth is a great example for all Finnish specialty retailers. In order to grow in the fierce international competition, domestic operators should look abroad.

This was also visible in the outdoor store, which was discussed recently Varuste.net and Varusteleka (LINK).

IKEA & Finnish Design Shop as the most efficient

The online-only nature of operations highlights the efficiency of the Finnish Design Shop. When the retailers are compared in terms of cost efficiency, Finnish Design Shop is on its own level. For them, the share of personnel costs is only about 10% of turnover, while for the others the figure is between 15% and 23%.

In other words, the store-based retailers have 50% to 100% more staffing costs per revenue than Finnish Design Shop.

In terms of other costs, IKEA's efficiency rises above the Finnish Design Shop. These two are the only ones with a share of less than 20%.

Among the store operators, IKEA is the most efficient, with its handful of massive stores that generate 10 to 30 times more revenue than the competitors. That is a great testament to the power of this unique retail brand.

A few are missing from the lists. This listing includes the largest companies focused on furniture retailing. However, it lacks two domestic retailing giants: K-Citymarket and Prisma. Their importance in the sale of furniture is huge, especially in interior design products. It is possible that Prisma is even bigger than IKEA.

Jysk and Finnish Design Shop succeed by differentiating from IKEA

To summarise the long and winding analysis of the furniture trade. IKEA is a force of nature that is very difficult to stop. Thus, Jysk and Finnish Design Shop are the only have that succeeded in the wake of the giant. There will always be room for many players, even after the entry of a difficult competitor like IKEA. However, the remaining market will become smaller and thus create more “red ocean” competition that tends to focus only on price and rely on promotions.

Jysk has been able to differentiate with a discounter-like approach with a low-price image coupled with higher-margin products. Jysk has a surprisingly high-cost base that has increased over the last five years as the Other costs have grown faster than the revenue.

Finnish Design Shop is quite dissimilar as it sells branded products with surprisingly low margins. This is countered by high efficiencies from an efficient warehouse and by not having stores. The online channel also enables rapid expansion to any country in the world. The unique brand of selling Finnish designed products certainly has a big enough audience for the company sustain strong growth long into the future.

Arhi Kivilahti