How did IKEA transform the furniture industry?
What makes IKEA so different from other furniture stores?
- IKEA is not just furniture. It also includes a wide range of complimentary home furnishings related products.
- A simple minimalist modern styling ties all of the products together in a unified lifestyle concept.
Cheap furniture was not a new concept in the 1950s when IKEA first appeared.
- Low cost plastic and particle board copies of traditional wood furniture styles could be found in all furniture stores selling lower priced furniture.
- One of IKEA's innovations was their use of low cost materials to create simple, aesthetically pleasing, modern furniture designs.
- Before IKEA, furniture retailers selling low end products carefully avoided descriptions of the plastics, engineered woods and other cheap materials.
- IKEA’s successful marketing strategy included prominent displays and signage that fully described and emphasized the features and benefits of the low cost materials used.
- The company also introduced product testing. This reassured customers that the inexpensive products they were buying would not immediately fall apart.
IKEA’s designs emphasize smaller scale pieces. This was a major niche market in Europe where large concentrations of small size older homes existed.
- It also filled a significant market void in the U.S. where most furniture was larger scale.
- The trend towards even larger furniture (and a lack of smaller scaled styles) continued to grow in the U.S. for several more decades.
IKEA's furniture designs unified style, production, distribution and marketing functions. That had never been done before.
- The lowest cost production was located thousands of miles away from customer markets.
- Designs were restricted to simple products that could be mass produced in huge quantities with minimal low cost labor.
- Transportation accounted for a major part of overall expenses. Minimizing transportation costs was key to reducing product prices.
To understand how this works, look at IKEA's boxes.
Prior to IKEA, furniture manufacturers purchased boxes to fit their furniture.
- IKEA's boxes are not designed to fit the furniture. The furniture is designed to fit the boxes.
- The flat boxes are specifically designed to minimize shipping and storage costs.
- Flat pack boxes minimize shipping and storage costs by allowing the most products to be packed onto a single container ship and onto warehouse racks.
IKEA understood that shipping furniture unassembled reduces costs in virtually every aspect of manufacturing, transportation, storage and retailing operations.
- In its earliest days labor costs were a major factor affecting IKEA’s furniture pricing structure. The cheapest labor at that time could be found in China.
- Costs were also controlled through the use of simple designs that could be quickly and easily stamped out on high speed machinery.
- Over time, as the efficiency of the machinery (and distribution technology) increased, the cost of labor has become less significant.
- Most Americans still believe that cheap furniture is made overseas primarily because of lower labor costs. That is no longer the case.
- Asian labor costs have risen in many places to levels close to those found in the U.S.
- Tariffs imposed on Chinese products forced a massive exodus of furniture producers to Vietnam and other Asian sources.
- More recently, Tariffs are being extended to other Asian sources. Production is constantly moving to take advantage of lower tariffs.
- Some are coming to the U.S., but the majority are migrating to other Asian countries.
- Over the past 30 years Asian manufacturers (with government support) have followed a long term growth strategy, investing in expensive advanced production technology.
- U.S. competitors, following shorter term profit strategies, (and without government partnerships) have been reluctant to make the same type of major financial commitments for future growth.
How much of a cost advantage does RTA (Ready to Assemble) furniture have over conventional pre-assembled furniture?
- High speed production in massive quantities is only one cost advantage of RTA type furniture.
- It also drastically reduces shipping costs. The cost of shipping a single pre-assembled sofa from one U.S. location to another can run anywhere from $100 - $500+ each.
- The actual cost depends on distance traveled, the size and weight of the piece and the quantity being shipped.
- Prior to the Covid crisis, the cost of shipping container loads of RTA furniture from Asian to U.S. ports was less than $20.
- More recently, container costs from Asia have tripled, but a $60 shipping charge for an Asian made sofa is still far below the cost of shipping a pre-assembled sofa across the U.S.
- Individual items can usually be shipped by FedEX, UPS and other low cost small package carriers at rates that are far lower than those charged by other shippers.
- RTA furniture also saves warehouse costs by requiring less than half of the warehouse space needed for pre-assembled furniture of similar size.
- This advantage is even more important since the advent of Covid.
- With major delays and shortages throughout the international furniture industry, companies that can maintain stock for immediate purchases have an advantage.
The obvious consumer market for IKEA is low priced furniture that is less expensive than its competition.
- That market includes first time home owners or renters, students, military families, etc.
- A subcategory is furniture purchased for temporary or short term use that will be left behind when the owner moves.
But that is not the only market the company has targeted.
IKEA’s minimalist modern styling appeals to many customers who could afford more expensive products.
- One significant niche market is for historic or vintage homes/apartments built prior to the introduction of strict building codes.
- Older homes and apartments frequently have narrow entrance ways that are too small for conventional pre-assembled furniture.
- This is a major reason for IKEA's popularity in Europe among all income groups.
- Even in the U.S., it is not unusual to see IKEA furniture in the basements of older townhomes or brownstones valued at $1 million or more, owned by individuals with 6 figure incomes. Nothing else would fit down the stairs.