Investments reduce Ikea's profits

Ikea has had to admit a 10 % profit drop this year, due to higher prices of raw materials and investments in new concepts. Nevertheless, the Swedish retail chain wants to continue to maintain a high level of innovation in the future.

Expensive innovation

Investments and the price of raw materials have impact Ikea’s profits: Ingka Group, the branch that covers most of the group’s stores, saw its operating profit fall by 10 % to 2.03 billion euros in the past financial year (until August). At 36.7 billion euros, however, annual turnover was up 5 %.

Better sales figures and cost savings could not compensate for higher purchase costs and large investments, the company explains: “We’re investing more than ever in our business with new city stores, a stronger digital meeting and more affordable service offers to our customers”, CFO Juvencio Maeztu said in a statement.

Confidence boost

The profit drop was mainly due to lower margins: brand owner Inter Ikea, who is responsible for the supplies, has increased the prices it charges to Ikea stores during the past year, as a result of the rising costs of raw materials, such as wood. However, these price increases were not passed on to the consumer. On the contrary, Ikea even promised customers price reductions.

Results are therefore in line with expectations: “We are transforming and performing, and this is not easy to do at the same time”, Maeztu told Reuters. According to the CFO, the fact that the group is still growing is a confidence boost: “With all things going on in the retail industry, we feel good.”

Even greater investment in 2020

Moreover, Ikea has no intention of reducing its level of investment. Maeztu has even announced that it will be investing even more in the coming financial year, mainly in inner-city stores and so-called planning studios and in digital technology. The planning studios are physical showrooms, like the kitchen showroom that has just opened in Stockholm.

The furniture retailer also says to be on the lookout for takeovers: retail subsidiary Ingka has, for the first time, invested in external companies in recent years. One of those targets is British startup Winnow, which helps the restaurants to reduce food waste with its artificial intelligence technology.

Ikea also announced that it was buying 250 square kilometres of forest for sustainable timber management, bringing their total to over 2000 sqkm since 2015 – about the size of Leicestershire. These investments should boost revenue growth in the future, the Swedish company hopes.