How IKEA lowers prices and still maintains margins

After another record year, IKEA is reducing prices – meaning its Retail Operations Manager, Tolga Öncü, needs to find savings elsewhere. Still, he firmly chooses to continue investing in new store formats, solutions and experiences. “Luckily, we are not a listed company.”

27 % market share in Belgium

IKEA ended its previous fiscal year with a sales growth of 5.7 % to 41.7 billion euros. Öncü is also proud of the increase in market share: Ikea reached a 6 % global average. In Belgium the company even reached 27 % market share, in the Netherlands 12 %.

After the supply chain issues in 2022, the availability has improved worldwide. This enabled Ikea to launch commercial activations again, such as campaigns and deal offers. “In times like these IKEA acquires new visitors and attracts people who once shopped at Ikea but had gone elsewhere over the last 5 to 10 years. We now see customers returning, just like we did in 2008.”

In the year ending in August, Öncü saw an increase in all channels: stores, web, app and also remote selling. The latter is fairly new, but has been continuing to grow, and means that customers can have video calls with IKEA advisers on appointment. “Investments in our services strongly contributed: we have lowered last mile prices, invested in shorter lead times and improved accuracy, which lead to more convenience for customers.”

Innovation increases performance

IKEA accelerated investments in new shop formats in the city centres, close to where people either work or socialise. Over the last two years, the retailer opened a number of city-centre locations and “now they are paying off”, Öncü says. Often, the company reaches a whole new clientele through these stores. In some countries (like Germany and Belgium), however, there is no clear demand for city stores yet. A lack of mobility issues, one could say: “The need is bigger in cities where it is more complex to move between neighbourhoods.”

The ‘plan and order points’ or ‘planning studios’ are even smaller in size, down to just a couple of 100 square meters. Yet, consumers can buy anything from the full IKEA range thanks to screens and employees helping visitors pick. “When we go to smaller formats, we need to get even more creative and figure out new ways of displaying 9,500 articles in a very small space. As such, the ‘immersive room’ was developed for small format stores in France, but now the big stores are also asking for this solution. We will see it being used in most of the countries where we operate, to complement the existing IKEA experience.”

Öncü strongly believes that his formats complement each other: that is why IKEA also keeps expanding LIVAT, through which it manages large malls and often massive mixed-function real estate projects. Two new openings were recently announced in China – a bold move, as the Chinese economy appears on the verge of a downturn. “Concept innovation always continues. We keep looking for new formats and ways to create an even better IKEA experience. We also keep investing in our existing stores. Innovation is not tied to the day-to-day performance or operations, because otherwise we would constantly start, stop, start innovation and that would become a very difficult way of leading it.”

Automation to reduce prices

Automation continues to be another big priority: in Zagreb, a logistical solution was installed in an existing store without taking any square meter from the commercial space, and thanks to that investment, one single store can do the parcel process for the whole of Croatia. “We are now doing the same in Portugal: lead times will shorten quite dramatically. The main idea is that existing stores become part of the omnichannel distribution network: instead of building new external or central warehouses, we can use our existing stores.”

Cutting operational costs has become even more important, now that IKEA announced price reductions. Some product prices have been lowered since 1 September: “It was the right thing to do. But obviously, it is cutting into the product margins, so we need to continue our investments in other parts of the profit and loss. Luckily, we are not a listed company. It means we can take these kinds of decisions, even if it comes with a lot of responsibility.”

Öncü is convinced that it was the right decision, as the response has been very positive, both in sales volume development and visitor numbers. “Our vision is very clear: to create a better everyday life for the many people. And now, especially at times like these, where for many people it is becoming more challenging to reach the end of the month, we have an opportunity to use the savings we just talked about. We pass the savings from the supply chain onto the customers by lowering the prices.”

Never mind long-term, invest in flexibility

What are IKEA’s plans for next year? After five years as Retail Operations Manager, Öncü has learned not to think in the long term too much. “Especially in the last three years, the world keeps surprising us, so we are more focused on short term ambitions, goals and plans. We are especially investing in staying flexible. So, I prefer to be very careful in promising any numbers. However, our product focus on storage solutions across the home last year was very successful, so we are continuing this into the new year.”

In Belgium, IKEA recently launched lockers to collect online orders outside the store. The company needed to develop its own locker system, Öncü explains, as there is no industry standard the company can just plug into for its big-ticket items. Unfortunately, as it is “both more cost-efficient and more sustainable to use an existing setup”.

For now, the lockers are installed on the store parking lots, but Öncü does not exclude any opportunity to expand elsewhere. For instance, in Denmark, IKEA developed a lorry that drives around town. When the truck is coming to a customer’s neighbourhood, they get a text message: consumers can go there and collect their goods. “Every market has its own needs and innovations, and that is what makes it so interesting.”