MY GOODNESS: MY IKEA

Would it be accurate to describe IKEA as the most successful retailer of all time? As of yearend 2015 it generated global sales of £35 billion in global sales. It operates 298 stores in 26 countries. Conspicuously it is not a retailer that “floods” markets with stores: in the UK it has only opened 19 of its “sheds” in the UK in 29 years.

It is simplistic in the extreme to make such a bold statement about any retailer. However it has enjoyed enormous success and continues to drive sales increases despite the changes that have taken place in the retail arena globally.

How then has IKEA continued to succeed and prosper? In this blog we consider the key factors for its success and assess how it has responded to the technology developments.

It has been around since 1943, when it was founded by Ingvar Kamparad and opened its first US store in 1985. A recent article (Shouldberg, 2015; “Is IKEA the most influential retailers of the past 25 years?) identifies a number of its key success factors.

Firstly he argues that IKEA has transformed the way in which we think about household furniture and how we buy it. While previously people saw furniture items as expensive purchase items that were made to last for around twenty year, IKEA debunked that perception and marketed a broad range of items that were seen as clean and simple and most importantly good value. While furniture items can be purchased more cheaply in deep discount retailers, they tend to lack the focus on design and trendiness that IKEA are famous for.

Its vertically integrated approach to sourcing and manufacturing items is also identified as a key strength of the business.

Can this model continue to thrive and prosper? Many giants of the retail firmament have disappeared off the radar in recent years. In the UK the most recent casualty was British Home Stores (BHS).

How is IKEA responding to this so-called “new era for retailing?

I have noticed a couple of initiatives over the past year or so that are worthy of mention and discussion.

IKEA is quickly re-defining the concept of physical space. Once derided by the critics for erecting hideous sheds the size of two football pitches and destroying the environment, it can be argued that IKEA has made a virtue out of the relatively small number of such trading outlets. Similar global retailers are furiously trying to rationalise their store portfolio as more and more shoppers shop online, IKEA has not had the same problem. The small number of large outlets continue to be destination targets for shoppers.

In the last year or so IKEA has introduced a new physical format to its operations: the order and collection point (google IKEA you can see a brief clip which outlines this concept).

In the most recent one at Westfield Stratford City Shopping Centre we can see some of its features.

The store is hidden away near the food area in the centre. The front of the IKEA operation is minimal: with floor to ceiling glass and a steel frame network. It is contained within a 9,500 square feet retail space.

It has a number of display rooms: two bedrooms, a functional kitchen area and a dining room.

The most noticeable feature is that it looks like an Apple store. The majority of the space is made up of Apple computers and IPads. These allow shoppers to browse through the very large number of items on the IKEA catalogue.

Shoppers can order what they want online, pay for the order and pick it up on the next day. Alternatively they can elect to pay a £35 fee to have it delivered to their home.

IKEA advisors are available to provide guidance for the shoppers.

The order and collection point carried a minimum number of items: forty, which can be purchased and taken away by shoppers if they so desire.

IKEA argue that this is a new form of concept store and is meant to be a “point of inspiration” for shoppers. It allows shoppers to engage with the items, albeit on a “virtual” basis.

We should note that in the broad context this is not a new approach. IKEA is actually following the trends of similar retailers in terms of expanding the range of channels through which shoppers can engage with items, evaluate the items and make a purchase.

It can be argued that IKEA follows a logical approach to retail development with this initiative. It means that in existing markets, they need no longer worry about going through the time-consuming and costly process of developing new store locations. Instead they can sell a very large range of (in many cases) bulky items by making use of these much smaller semi physical / virtual retail spaces. The Westfield opening potentially gives IKEA access to over millions of shoppers who visit the shopping centre annually.

It has also embraced the concept of “retailtainment”. This is evidenced by its opening of a pop-up do-it-yourself restaurant and food store in London (Shoreditch) at the beginning of September 2016. This creates the combined concept of a shopping and dining experience.

The pop-up outlet operates for three to four weeks and then closes down.

It combines a Swedish food store, a virtual reality kitchen booth, a kitchenware store and a lecture theatre for workshops which address cookery-based themes. It opens from 10am to 10pm. It also contains a Dining Club, where members can book the venue to host a brunch, lunch or dinner party for up to twenty individuals. A sous-chef is available to prepare the meal. Typically Scandinavian dishes feature such as venison and wild mushrooms.

The motivation for this “innovative” initiative stemmed from a survey of 2,000 shoppers which revealed their passion and enthusiasm for celebrity chefs and TV programmes such as The Great British Bake-off.

In tandem with these initiatives, IKEA plans to open stores in India and Serbia in the coming months.

How do we assess this strategy?

IKEA clearly is integrating its physical and virtual channels in line with many similar operators. Overall it is following rather than driving a trend.

Its initiative with the pop-up store is imaginative and provides it with an opportunity to tap into the psych of the UK shopper. The “pop-up” concept is relatively inexpensive to set up. If it works it can be extended to other areas; if it flops it can be terminated without too much financial pain to the company.

In terms of overall performance IKEA is certainly hitting the numbers in terms of sales and profitability. Recent financial figures reveal that it has experienced an increase of over seven per cent in sales (£34.2 billion) year on year for 2016. It is on track to become the world’s leading multi-channel home furnishings retailer.

So it is full steam ahead for IKEA. Let’s monitor its performance over the next couple of years.

I leave you with one statistic. World-wide, it sells one of its Billy Bookcases every ten seconds.

My goodness: my IKEA!!

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I’M NOT FATHER CHRISTMAS

Not my words. Rather a view expressed by Mike Ashley at a recent government enquiry into the running of the company which he founded in 1982: Sports Direct. It has specialised in selling sports apparel, footwear and equipment and as recently as 2014 it was valued at over £4 billion.

It’s key to success has revolved around the retailing of two categories of brands. Over the years it has bought out a number of so-called “heritage” brands such as Slazenger, Dunlop, Lonsdale and Donnay. Sports Direct refers to these products as group brands. In addition it sells a ranged of what it calls “3rd party brands” such as Nike and Adidas. In the case of the group brands it sells them at very low prices. Cynics would say that this is a clever way of luring shoppers into the stores or its online channels, only to tempt them with the higher-priced international brands.

It has not paid any great attention to the layout of its stores and the presentation of its merchandise. Working on the principle that any investment in such areas adds to the cost, the appearance of its outlets often resembles a jigsaw that has been disturbed. Indeed it recently encountered problems with one of its suppliers: Adidas, who were unhappy with the way in which their products were being displayed.

However the economic downturn in recent years presented an opportunity for Ashley. He slashed prices on his group brands and maintained a constant flow of shoppers through his stores as his competitors struggled.

Sports Direct is an interesting company to study. We often discuss the importance retail store and brand image (see chapters two and chapter six of the book). Central to much of the debate on branding is the importance of creating a favourable overall impression in the mind of the shopper and the ability to develop brand associations that resonate with the criteria which influence shoppers.

We also talk about the need for retailers to build the brand and achieve strong levels of brand equity.

How does Sports Direct stack up on these fronts?

In the past couple of years it has been the recipient of vitriolic comments, observations and assessment in the media. Let’s look briefly at some of the issues that have arisen.

Much of the negative commentary has revolved around the approach of Sports Direct to working conditions and human resource management.

Its large warehouse in the East Midlands of England in particular has featured prominently. It has been referred to as a “gulag”, Dickensian in both appearance and in its treatment of its workforce and all in all a hellish place to work.

Sports Direct prides itself on its ability to manage the logistics function in as cost-effective manner as possible in its attempts to move thousands of items to its stores and customers via a range of different channels. The key is to manage costs resolutely; some would say ruthlessly.

It employs a small number of individuals directly and the vast majority are recruited through the use of agencies. Zero hour contracts are an essential feature of the arrangement with the workers. This means that an individual does not know how many hours per week he/ she is likely to work. It raises questions about uncertainty over their respective positions in the company and even more critically can cause major problems for individuals over getting access to mortgages and bank loans. If people are sick there is no pay. Likewise of people want to take a holiday, they do so without any pay. In short such as situation provides no security for the individual worker.

Sports Direct does not engage with any unions and its critics argue that workers do not have any access to independent representation over working conditions or any on-going problems that may ensue at the workplace.

Lurid allegations feature in the media over the company’s relationship with the workforce. It has been accused of operating a “six strikes and you’re out” policy, with no mechanism for appealing such decisions. Such “strikes” applied in situations where workers spent too long in the toilets. CCTV cameras monitor workers. The concept of personal development of the workforce did not appear to exist. Workers faced being “named and shamed” by the supervisor over the tannoy system if they were not performing to expectations.

At a recent parliamentary enquiry into the practices of Sports Direct Mike Ashley appeared to acknowledge that much of this happened but that he was unaware of such practices. He suggested that he would do something about it.

In recent weeks the company has proposed to allow worker representation on the board and to ensure that minimum wages would be paid.

You might well ask if this sustained negative publicity has had any effect on the performance of Sports Direct. Do shoppers care? What has been the impact on financial performance?

In the latter case the EBITDA (earnings before interest, taxation, depreciation and amortization to you and me) is projected to be around £300 million, down from £318 million in 2015.

At a recent shareholders meeting there was widespread revolt against the chairman Keith Hellawell. However the owner; Mile Ashley who holds around 55% of the shares, supported him.

There is no real evidence (at least that I could find) to suggest that shoppers have deserted Sports Direct in their droves. As is the case with other issues such as the environment and unethical behaviour with suppliers, many people appear to selectively “screen out” such issues when it comes to making a purchase. If a deal can be had in a Sports Direct store or on its online channel, then many of us will make the purchase without any real consideration given to negative shoddy work practices or apparent evidence of bad behaviour.

On the contrary some commentators argue that in the current UK economy where there is a very low level of unemployment (around 4.9%, down from 5.6 in 2015) workers have a choice as to where they can work. If they are unhappy with working conditions then go elsewhere.

It can be further argued that if the government allows zero contracts then owners such as Mike Ashley are almost duty bound to deliver their value proposition through taking advantage of the prevailing market and work conditions.

In my view this is not a satisfactory response. Typically workers with low skill levels and education do not have the potential flexibility or job mobility. Many of the workers with Sports Direct are migrants who are dependent for their position on contractors or agents.

There is some evidence to suggest that Ashley is rethinking strategy. He has stated that he wants to open more up-market stores and focus more fully on the “flannels” range of merchandise which commands higher prices than much of his range. He has even begun to mention the concept of brand equity. Adidas and Nike have refused to allow their premium ranges to be stocked in Sports Direct. JD Sports, a main revival, is beginning to make inroads.

It will be interesting to see if Sports Direct can overcome this barrage of negative publicity and make some of the changes that might set it off on a more positive spiral.

While he may not be Father Christmas he does not want to be perceived as Mr Scrooge in the longer-term.