IKEA To Rehash Its Organisational Blueprint, Eyes Space In Mumbai

The decision to kick in the biggest overhaul was taken at a secret meeting just outside Copenhagen in late 2014.

The IKEA logo is seen outside IKEA Concept Center, a furniture store and headquarters of the IKEA brand owner Inter IKEA, in Delft, the Netherlands 16 March 2016. (Photo: Reuters)

The IKEA Group announced the plan to transfer ownership of some operating entities to a small Delft–based company which owns the IKEA brand last June. However, the 250-word statement attracted little attention.

What’s Cooking At IKEA

• The IKEA Group announced the plan to transfer ownership of some operating entities.
  
• It will be transferred to a small Delft–based company which owns the IKEA brand last June.
  
• In effect, the organizational blueprint drawn up by founder Ingvar Kamprad in the 1980s will be overwritten.
  
• The decision was taken by a board of Inter IKEA in a secret meeting outside Copenhagen in late 2014.
  

The World’s Largest Furniture Maker Has Mega Plans For India

• IKEA was one of the first off the block when India approved 100% foreign direct investments in single brand retailing.
  
• The company is planning to invest Rs 10,500 crore to open 25 stores in the country.
  
• IKEA India to focus on Mumbai, Delhi, Hyderabad and Bengaluru.
  
• The chain purchased a 13-acre plot in Hyderabad in 2015 for its maiden outlet in the country.
  

The decision to rip up an organizational blueprint drawn up by founder Ingvar Kamprad in the 1980s was taken at a secret meeting just outside Copenhagen in late 2014.

The meeting gathered the board of Inter IKEA, which is chaired by Kamprad’s youngest son Mathias and owned by a Liechtenstein foundation. The little known company currently plays a small operational role in the IKEA universe, employing 1,500 people, compared to 160,000 at the IKEA Group, which is technically a Leiden-based company called INGKA Holding.

The IKEA logo is seen on flags outside the IKEA Concept Center, a furniture store and headquarters of the IKEA brand owner Inter IKEA, in Delft, the Netherlands 16 March 2016. (Photo: Reuters)

INGKA currently manages almost everything that most customers see as IKEA – the stores, furniture design, manufacturing, procurement and logistics. But Inter IKEA owns the rights to the IKEA brand, patents and business processes – collectively considered to be the IKEA ‘concept’.

It is responsible for developing the concept but its leaders acknowledge this hasn’t changed much in decades and former executives said the unit’s main role was to reduce the overall IKEA tax bill by charging INGKA for the use of the IKEA brand.

At their 2014 meeting, the directors of Inter IKEA unanimously agreed to massively expand its role and take control of design, manufacturing, procurement and logistics from INGKA. Since it owned the rights to the IKEA concept, it could do this. The aim, it says, is to protect IKEA for the future.

“It has been a pretty static concept,” said Torbjorn Loof, Chief Executive of Inter IKEA Systems B.V., the unit that will, in September this year, take on the design and other functions.

(There) is always also the risk that you keep that concept, you protect that and make it better and better and better, and things in the world around you happen, and suddenly you stand and say, you know what, this is maybe not relevant.

Torbjorn Loof, Chief Executive of Inter IKEA Systems B.V.

As the Swedish-Italian executive told this to Reuters, his boss, Inter IKEA Group CEO, Soren Hansen looked on, nodding.

INGKA Holding’s CEO Peter Agnefjall poses for a photograph at the IKEA Group headquarters in Leiden, the Netherlands 14 March 2016. (Photo: Reuters)

But the IKEA concept needs to change more fundamentally if it is to satisfy the growing number of customers who are requesting IKEA stores in city centers and the ability to buy online and pick up from drop-off points. Loof says he can’t redesign the business concept without control over key functions like logistics.

Over the past five years, INGKA’s margins have been 14 percent, and Inter IKEA’s have been even higher. Supermarket groups like Germany’s Metro AG and do-it-yourself groups like Home Retail Group (HOME.L) and Kingfisher Plc (KGF.L) have typically enjoyed margins under 5 percent. Amazon’s (AMZN.O) margin has been under 2 percent.

The Ikea Concept store, run by Inter Ikea brand and concept, is seen in Delft, the Netherlands March 16, 2016. (Photo: Reuters)

The restructuring also brings operational risks.

The business relationship Inter IKEA sees in future with INGKA is that of franchiser to franchisee. If other such relations are a model, this could lead to new tensions in the IKEA system. “There is a healthy tension between the franchisee and the franchiser, and the demands on each other in the business relations will also be stronger, in what we are contemplating to do now,” said Hansen. No other franchiser has ever tried to manage a franchisee as big as INGKA, which has sales of over 32 billion euros a year. Also, some academics say a less integrated business model may not work at an organization which lists “togetherness” as one of its core values. “IKEA has always really, really thrived on the fact that they integrate and connect all the pieces,” said Professor Enrico Baraldi at Uppsala University. But Anna Jonsson, Associate Professor at Lund University, said the restructuring could accelerate growth by making it easier for Inter IKEA to recruit partners to run franchised stores in new markets. Loof and Hansen declined to say if that was their plan although the overall aim was growth.

We’re still pretty small, and people’s need for home furnishings is there.

Torbjorn Loof, Chief Executive of Inter IKEA Systems B.V.

IKEA’S Designs On The Indian Market

Meanwhile, reports say that the Swedish furniture retailing giant is in talks with Oberoi Realty to buy a built-to-suit retail space for over Rs 900 crore in the Borivali suburb of Mumbai.

The company is buying retail space spread over 3.5 lakh sq ft and this will be the largest space to be occupied by any single furniture brand anywhere across the country, reports Economic Times.

IKEA India, Swedish home furnishings company has expressed interest in buying the first land parcel in Mumbai, Maharashtra. As of now, we are awaiting approvals from relevant authorities before the final sign off and will comment once the process is complete.

IKEA India to Economic Times in a mail query

Last month, a Tata Group company Rallis India announced on Bombay Stock Exchange that the company has signed an agreement with IKEA India. The agreement was for assignment of its leasehold rights for 26-acre land at MIDC Industrial Area in Navi Mumbai’s Turbhe locality for Rs 214 crore.

(With inputs from Reuters)