1 IKEA: An investigation into the world of how The ... - BAT-kartellet

IKEA: An investigation into the world of how The IKEA Group is organised, its
activities and how IKEA has developed its business strategy.
Introduction
By
Gunde Odgaard, BAT-Kartellet, Denmark.
The IKEA Group is a key actor within the global wood and furniture sector. IKEA is
thus an actor that we, as trade unions, must get to understand and relate to.
In this paper it is the aim to show how IKEA, through various forms of vertical integration
in the wood and furniture sector, is able to exercise a great deal of market
control over price setting and competition conditions for the entire industry.
We also try to look into how IKEA’s suppliers and other manufacturers regard IKEA
as a business partner, and examine precisely where IKEA’s control of a supplier
stops.
From the analysis of IKEA it is evident that the company is a very dominant actor
within the industry. This is mainly due to its enormous sales volume and its purchases.
Further more IKEA is directly involved at every stage of the value added
chain within the manufacturing of wood and furniture products. IKEA is always trying
to get higher market shares, and Eastern and Central Europe is now at the centre of
IKEA’s business strategy both regarding opening new stores and establishing new
manufacturing units.
Generally on the relationship between retailers and manufacturers.
Traditionally the relationship between manufacturers and retailers has been characterised
by a high degree of mutual dependence. Each participant’s prospect of
survival and success depends on the other part’s ability and will to preserve the relationship.
At the same time, the relationship between the manufacturer and the retail trade has
opposite interests. The conflict of interests is simple. The manufacturer wants as
high profit as possible on his products. On the other side we have the retailers, who
also want maximum profit, which means that the cost price must be kept as low as
possible, which reduces the profit of the manufacturer.
The large retail chains have the strength and capacity to pass the wholesaler and go
directly to the manufacturers. The chains have the capacity to handle the functions,
which the intermediate links handled before. However, this does not mean that the
functions of the intermediate links disappear, just that the retail chains handle these
tasks themselves, or that they are assigned to the manufacturer.
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Often the large chains take control of a whole production and/or distribution chain.
Thus, the retail trade get a direct influence on what and how the manufacturerer produces,
stores and delivers. The retail chain can because of its size, market coverage,
and thus influence, direct the manufacturers according to their own wishes.
Thus, the retail chains often “liquidate” manufacturers, who are not co-operative. If
the chains do not receive advantages with the manufacturers that smaller retailers
cannot achieve, the order intake of the manufacturer and thus his possible survival is
in danger.
Through an expansion of the number of businesses nationally as well as internationally
it is the objective of the chain to win market shares. This leads to an increase in
the concentration in the retail trade. The manufacturers feel this development by
there being fewer retailers to whom they can sell their products, because the number
of demand makers decreases. In a situation where the market has few large demand
makers and many small suppliers, the profit of the suppliers is inevitably pressed by
the retail trade, as there is a large supply of suppliers to choose from.
Vertical integration and market control *1
The production of any good usually involves a series of stages in which raw materials
are first extracted, then processed into intermediate goods, assembled, finished,
and eventually distributed and sold as final products. For example, wood goes
through a lot of different stages before it is sold as furniture.
Vertical integration joins two or more of these successive stages. In practice, virtually
all firms combine some of these successive operations, but they also buy inputs
from other firms.
Vertical integration can also be a matter of degrees and shadings, rather than strict
yes or no conditions. The integrating company’s market transactions can be tight
long-term contracts that provide nearly as much control as does direct ownership.
The controls actually applied under vertical integration can be on a highly delegated
basis with little actual exertion of authority.
By vertical integration firms try to extend market control to the next levels in the
value added chain. Market control is designed to restrict or simply eliminate competition
for a company’s products. This can often happen by price fixing enforced by
specific contracts.
IKEA is no exemption from this business concept. It seems that IKEA itself, is trying
to cover all stages in the value added wood and furniture chain. And at the same
time to tie in suppliers with price fixing contracts.
The furniture sector
In the furniture sector it is the assumption that the development has taken a direction
of a centralisation among the buyers. This increasing concentration and organisation
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in the retail trade means that the furniture manufacturers increasingly will be pressured
on the price from a retail trade that in the future, if the present development
continues, will be in an ever stronger position in the negotiations with the manufacturers.
IKEA is the paramount of this development, but there are many other retail
chains and department stores that uses similar business methods as IKEA when
purchasing furniture.
Traditionally the manufacturers had the largest market information about their products.
This is not the case anymore. As the retail trade has cash registers that with
the help of e.g. the bar code of the product can register everything about the sold
product (colour, model, time of sale, form of payment, delivery etc.), the chain have
through correlation of the data achieved a considerable degree of market information
about the products and the customers’ preferences. Information is power and the
chains have now surpassed the manufacturers as regards possession of this valuable
market information.
All things considered the large retail chains by virtue of their strength and power put
the small manufacturers in a state of dependence that is no longer mutual. The
change in the balance of power has at the same time increased the conflict of interests
considerably between the retail chains and the manufacturers, often with the
manufacturers in the role of the looser.
IKEA’s organisational structure and the company’s activities *2
IKEA is a conglomerate consisting of legally independent companies that are controlled
by one management, or rather one man, Ingvar Kamprad (72), originally a
Swedish, but now more a Swiss citizen. The holding companies are registered in the
Netherlands, and the international administrative headquarters for the companies’
activities is situated in Humlebæk, Denmark, with IKEA International A/S, which is
the top administrative management for almost all IKEA companies (see appendix A,
group overview per 1 September 1995). In Älmhult Sweden lies IKEA AB which is
the strategic decision centre from where IKEA develop their business strategies.
In the top of the hierarchy is Stichtung INGKA Foundation (NL) and INGKA Holding
B.V., Amsterdam, NL. Below these are further three holding companies that cover
different geographical regions. They are INGKA Holding Europe B.V., Haag, NL,
INGKA Holding Overseas B.V., NL, and INGKA Holding Scandinavia B.V., NL, these
three companies again have a number of subsidiary companies.
This structure makes it difficult to make a precise picture of the group. Information is
either not available or IKEA is very selective with the information that reaches the
public. IKEA’s accounts are thus very cautious of giving detailed information about
the economic conditions of the company. The account contain only a minimum of
information. Thus it may seem that IKEA in its company construction and reluctance
about providing information seek to camouflage the financial activities of the group.
According to a report made by EURO-FIET in 1993 the company construction is an
attempt to circumvent various account demands and at the same time receive tax
benefits.
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It is estimated that Ingvar Kamprad’s total businesses that besides interests in the
furniture sector also consist of banks and franchise companies is worth more than 5
billion £.
Activities
IKEA is not a retail chain out of the ordinary. Its business concept is now based on
five key areas:
- product development and design of standard products for the use of suppliers
- buying
- logistics (as small stock as possible)
- sales
- manufacturing
Furniture retailing is the most important of the company’s activities. IKEA has 139
stores spread over 28 countries, and are planning for more in new markets for example
in China and Russia. The stores gave an estimated turnover of 3.4 billion £ in
1996, and this turnover can be expected to grow as new stores are being opened.
IKEA is now one of the fastest growing retail chains in the world, and among its suppliers
is occupied more than 700,000 people *3. Most of these jobs are in North
America, Western and Eastern Europe and Asia.
Besides furniture IKEA retails, carpets, electrical equipment, household equipment,
flowers and plants, etc.
IKEA differentiates itself from other furniture retailers by not only focusing on selling
furniture. Thus IKEA has always been active in areas as design, sub-supplying, organisation
of the flow of products, logistics etc.
The five areas of activity is controlled by IKEA International A/S in Humlebæk. IKEA
is not a traditional manufacturing company, even though IKEA through its contracts
with the suppliers has a powerful production management tool. Thus IKEA has opted
out of the risks but kept the possibilities that normally lie in having your own production.
This situation IKEA has achieved by having the company’s products manufactured
by independent furniture manufacturers, while IKEA delivers the entire complete
concept. IKEA finances the production plant of some companies, especially in
Eastern Europe, but the company’s own tangible production has traditionally been
kept at a necessary minimum.
However, IKEA has lately bought especially Swedish furniture companies, which
must be said to be a reorientation for the group, and IKEA “owns” 700-800 actual
production jobs in Sweden.
This trend has continued after IKEA in October 1997 announced that the IKEA group
will invest in establishing 20 new manufacturing sites in Eastern and Central Europe.
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IKEA’s own production must, according to the company, expand at the same pace as
IKEA opens new stores. But still IKEA argues that their own production will amount
to no more than 10 % of the stores total sales *4.
The expansion in the manufacturing sector in Eastern Europe is caused by IKEA’s
objective to lower production costs, and because we are talking about labour intensive
manufacturing, wages are a cost that IKEA wants to reduce. Another reason for
these heavy investments is that IKEA wants local fabrics in its local stores in this
part of Europe.
IKEA’s most important manufacturing company is Swedwood AB. It has a turnover
of 1.6 billion Swedish Kroner from its 27 manufacturing companies with approximately
5,000 people employed (see appendix B). Together with two other manufacturing
units Swedspan and Karlit, IKEA manufactures for a total of DKK 2.0 billion.
This amounts to 10 % of IKEA’s total purchases *5.
As a company with a vertical integration strategy, IKEA is an exceptional case. IKEA
owns companies at every single stage from sawmills to retail stores. This provides
IKEA with the possibility of creating an internal price transferring system, where the
company takes home its profit where taxation is at its lowest.
Also by being an active manufacturing company IKEA is deeply involved in setting
the international price level and thereby creating fierce competition for products in
the different wood and furniture industry segments. By being directly active in all
stages of the wood and furniture value added chain, IKEA becomes a key determinant
of the business and competition conditions within the entire wood and furniture
sector.
At the same time IKEA exercises vertical integration and market control through their
supplier contracts and supplier networks.
IKEA’s relationship with the suppliers.
It has been of crucial importance to IKEA’s success that it has created a direct contact
with its outside manufacturing suppliers. Many manufacturers have through a
long selection process entered into long-term partnerships as suppliers for IKEA,
and this vertical relationship is a cornerstone in the total activities of the group. IKEA
typically uses 3 different suppliers for the same standard product. One main supplier
and two secondary suppliers. The main supplier is mostly Swedish, which in the
trade is explained as tradition. Besides this, IKEA is trying to create a supplier network
consisting of fewer, but larger, suppliers. In the future IKEA will not do business
with the small and medium sized manufacturers. Only manufacturers with a considerable
volume can expect to keep their position.
IKEA itself has until recently not had any real ambition about becoming further integrated
in the manufacturer part.
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Approximately 50 of the 1800 suppliers make up the core of manufacturers that IKEA
rely mostly on. To be core supplier means that you are secured contracts of longer
duration (18-36 months).
IKEA provides its manufacturers with services that enables the manufacturer to deliver
exactly the item IKEA wants. The manufacturers receive design, material descriptions
etc. about standard products from IKEA, and IKEA monitors the production
process. The manufacturers no longer have the same need of their own product development
units etc. At worst the furniture manufacturers go from being proactive
and innovative to being reactive and passive towards the international style and design
flows.
With an order IKEA very quickly becomes a large customer for a typical furniture
company. It is a problem that a contract with IKEA often brings the company into dependence
of IKEA and removes a lot of a company’s independence. When a company
is manufacturing IKEA’s products, and no longer concentrates on its own products,
the company is vulnerable to changes in IKEA’s conduct and price policy. The
companies will have to realise this risk before entering into a contract with IKEA, and
the companies must therefore, at the same time, hold on to their own products and
develop other markets.
With IKEA the primary business strategy is cost minimisation. The vertical market
control over the product in the production of standard goods secures a high degree
of flexibility and possibility of changing supplier, and as several companies at the
same time manufacture the same product, there is a very good possibility for IKEA to
move their order to the cheapest manufacturer. This of course contributes to reducing
the profit of the suppliers and thus bring down IKEA’s cost level. IKEA’s activities
often go much further than what is generally connected with the business concept of
a retail chain, and the company’s market control through contracts with suppliers is
yet another key to IKEA’s dominating position within the wood and furniture industry.
The negotiation strength of the manufacturers towards IKEA has continuously been
weakened due to the increasing concentration and professionalism in the retail
trade, where the large chains and specialist stores will dominate.
Even though a company is one of IKEA’s core suppliers, and thus the cornerstone in
IKEA’s supplier net, IKEA tries to pressure the company on the price, anyhow.
IKEA’s price policy towards the suppliers, however, can not be noticed to have any
effect on the consumer price index regarding furniture. One must therefore conclude
that IKEA is taking all the profit themselves.
IKEA’s selection of suppliers is closely connected to terms such as “quality in relation
to costs” and local manufacture in order to be easily accepted in the country, in
which you wish to establish stores as well as minimisation of transport costs. The
fact that approx. 500 (1995) of IKEA’s suppliers is situated in Eastern and Central
Europe was a contributory cause that IKEA relatively easy could establish itself with
stores in these countries.
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IKEA wants to secure the opportunity of supplies from Eastern and Central Europe.
In order to secure future supplies from these countries, IKEA now organises the
technological development as well at its suppliers. This operation takes place by
IKEA financing machinery and equipment for the manufacturers. Thus IKEA does not
enter into the actual production but takes a step further than they have previously
done, and thus keeps the suppliers in an even tighter grip than before. These companies
are not only dependent on orders from IKEA, they are also in direct financial
debt to IKEA, because IKEA has paid their assembly of machinery. All of it in order
to secure IKEA’s possibility of cheap supplies from Eastern Europe.
IKEA has been present as a purchaser of furniture on the Eastern European furniture
market for more than 30 years, and is thus very much aware of the conditions
under which there is being manufactured in this part of the world.
Lately IKEA has become notoriously famous for using suppliers in Eastern Europe
who have appalling working conditions for their employees.
When IKEA controls so many aspects of their Eastern and Central European suppliers’
manufacturing and economic conditions, it is difficult to understand why IKEA do
not at the same time see themselves capable of ensuring that their suppliers have
viable health and safety conditions and pays wages the workers’ families can get by
on. It cannot be that IKEA is the principal exponent for hazardous working conditions
in the wood and furniture industry.
IKEA’s reputation among manufacturers and suppliers *6
Many manufacturers do not have a positive view on IKEA. Thus the picture that is
made of IKEA by these company owners and leaders in the furniture sector is not
exactly flattering. IKEA is not a “good” customer, though it is a large customer. A
deep scepticism and great dissatisfaction with IKEA’s business methods is expressed.
The argument you hear from these companies is the fact that it is difficult to find a
more non-serious and faithless customer, who does not care about the suppliers and
set out dictates for how things should be. IKEA is thus seen as being without business
morals or ethics, and as a company one should not base a large part of the
business on such a customer. In brief, from the furniture companies the opportunity
of a more equal and long-term business relationship with IKEA is asked for.
Through the years IKEA has made greater and greater demands to the manufacturers
and paid them lower and lower prices. Furthermore, IKEA is only very rarely interested
in buying a company’s own products but always have their own design and
product specification, which many companies do not wish to commit themselves to.
These conditions have resulted in the fact that several furniture companies do not
want to be involved with IKEA, the companies are no longer giving IKEA a high priority
in their strategic planning and cultivation of markets.
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Some furniture manufacturers consider IKEA an “ordinary customer”, for whom they
do not wish to change the method of production or make special expansions. Other
companies have, in consequence of IKEA’s changing whims, fixed how much of their
turnover must come from IKEA.
Many companies deliberately try to keep down IKEA’s share of their turnover. It is
not a favourable market position if IKEA buys more than 25-30 % of the company’s
production. There are two ways the manufacturers try to make themselves invulnerable.
They can either choose to say no to the least profitable IKEA orders, and thus
bring down the turnover coming from IKEA orders, or they can try to expand their
market and customer basis. When using the latter model it is implied that the turnover
increases, which means that IKEA’s share becomes proportionately smaller.
Both strategies are followed by companies. The companies, who choose the first
model of not staking so hard on IKEA, do it because they are pressured by IKEA and
the marginal return on their products thus declines. They would rather accept a
lower turnover, with a higher marginal return, than dealing with IKEA without really
making a profit.
Other companies, however, have the strategy that they include a small marginal return,
if the number of items delivered is sufficiently large.
Volume and turnover decline can cost jobs. In return it must be assumed that the
jobs that are left are of a more stable character.
A couple of years ago IKEA made an anonymous study of the suppliers’ satisfaction
with IKEA. The study showed, from what we have learned, a great dissatisfaction
among the suppliers with IKEA’s business methods (the study has never been published
and is not accessible).
The condition that the suppliers find most frustrating is the fact that IKEA deliberately
plays off the companies against each other. The companies see no opportunity of
verifying the information IKEA gives about the price level of the competitors. IKEA’s
buyers have the opportunity of earning a 13 th monthly pay, if they do well. This
means that the companies feel unreasonably hard pressed in negotiations with
IKEA’s buyers. At the same time IKEA often changes buyer at the individual company.
For the suppliers this is unfortunate. It is of great importance to the furniture
manufacturers that a trusting relationship is made with a buyer through many years.
The quick changes of buyer thus strengthens IKEA towards the manufacturers, as
the suppliers do not have time to build up the relationship of trust they appreciate so
much.
However, in contrast to all this criticism of IKEA other manufacturers argue that IKEA
is a very dynamic business partner and customer, who by their super professional
behaviour rubs off on the manufacturers. These companies consider IKEA’s demands
as a positive input for the company’s development and productivity.
Summary
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From this paper we have learned that the IKEA Group is a very dominant actor at all
stages of the value added chain within the entire wood and furniture sector. IKEA
has its main activities in retail but has from its basis of stores and furniture sales
made a vertical integration downwards into other stages of the furniture sector. IKEA
is thus active in manufacturing the raw material, components and the tangible furniture
product. This together with IKEA’s widespread cobweb of contracts to external
suppliers gives the IKEA Group a considerable market power over the entire wood
and furniture industry and makes IKEA a key determinant of competition conditions
and price setting.
Besides the economic market control exerted by IKEA, it is also important to mention
that IKEA by being the leading retailer using their own designs and brand names is a
key actor when it comes to R&D and “fashion trends” within the furniture sector.
IKEA’s sales volume of 3 billion Pounds and rising makes IKEA products recognisable
in most homes across Europe and parts of North America.
IKEA is growing with a rapid pace. Especially the new market economies in Eastern
and Central Europe are at the centre of IKEA’s business focus. In this part of Europe
IKEA invests heavily in both stores and manufacturing units, and this development is
due to continue in the future. However it is IKEA policy not to be involved in manufacturing
by more than 10 % of its purchases, but these 10 % is also enough to ensure
an effective price competition between the manufacturers in the wood and furniture
industry.
IKEA has got a bad reputation by most manufacturers, and some of them do not
bother to do business with the IKEA Group - others do not really have any alternative.
IKEA is found to be an unreliable business partner, which goes right against
most manufacturers wish for certainty.
By controlling the entire manufacturing process just short of taking the financial responsibility
IKEA has the best of all worlds. IKEA does not care about working conditions,
wages, health and safety etc. at their suppliers as long as they deliver the
goods timely at the prescribed price and quality.
Notes:
*1: Uses contributions from:
M.A. Utton: Market dominance.... Edward Elgar Pub.... 1995.
Mackiewicz & Daniels: The succesful..The Economist intel..... 1994.
W.G. Shepard:The economics.... Prentice Hall 1997.
M. Casson: Multinationals and world trade, Gregg Revivals 1991.
*2: Information provided by IKEA.
*3: Newspaper articles from among other Børsen (DK) and Dagens Næring (S) and
information provided by IKEA.
*4 Ibid.
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*5 Dagens Næring (S).
*6 Based on more than 40 interviews with IKEA suppliers.
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