Furniture retailer Ikea said it plans to integrate more of its stores into larger mixed-use developments encompassing hotels, homes and offices, concurrently shifting its strategic focus to more urban areas, The Wall Street Journal reports. The company owns 66 shopping centers and retail parks in 15 countries.
Ikea also announced Wednesday a 20% rise in fiscal 2016 net income to €4.2 billion (about $4.46 billion U.S.), thanks to healthy sales growth in most markets, in particular China, Canada, Poland and Australia.
Total fiscal year revenue for the Ikea Group (Ingka Holding B.V. and its controlled entities) during the company's 2016 financial year reached €35.1 billion, up 7.4% from last year. Ikea Group stores had 783 million visits during the year.
Ikea is at a crossroad, in search of paths to growth amid a somewhat troubled retail landscape and increasingly stiffer competition. Admittedly late to e-commerce and increasingly hamstrung by its reputation for inexpensive, lower-quality (if well-designed) merchandise, the company in recent months has said that it’s taking steps to elevate its quality standards.
“Customers expect us to do more,” Ikea CEO Peter Agnefjall said earlier this year. “And nowadays you can't really make products that are throwaway: When you buy a sofa table, it needs to be built to last.” In addition, Ikea's signature Euro aesthetic is increasingly available at other retailers, including lower-priced options from the likes of Target, which recently announced a collaboration with design house Dwell.
So in addition to boosting its quality (which comes with its own set of challenges), Ikea says it will begin to operate in more urban areas, which even in the U.S. have seen a population and income surge as more millennials settle in cities.
“The recipe for success so far has been we build quite big stores out in the potato fields, whereas we see by 2050 [that] 70% of the world’s population will live in cities,” Agnefjall said in an interview with the Wall Street Journal. “And there are not so many potato fields in the center of London, so obviously we need to do something to keep Ikea accessible.” Mixed-use developments like its Copenhagen project, which will have a retail store and hotel as well as residential and office space, “will make it possible to buy this normally quite expensive piece of land and allow us to keep offering low prices."
Ikea is also simplifying its convoluted corporate structure with the sale of its production, branding, and supply chain units. "We have been a little bit protected in the home furnishing business, in margin pressure in my view, if I compare with supermarkets or do-it-yourself businesses," Torbjorn Loof, CEO of Inter Ikea Systems, told Reuters in April.
According to plans announced earlier this year, Ikea Group in August sold Ikea of Sweden AB (which oversees product development), Ikea Supply AG (its supply chain unit), and Ikea Industry AB (its production unit), as well as other connected businesses, for €5.2 billion ($5.58 billion) to Inter Ikea Holding.
Ikea Group and Inter Ikea were already two companies, with Ikea Group dealing with retail activities and Inter Ikea focused on branding. Now Inter Ikea Systems is the owner of the Ikea Concept (the worldwide Ikea franchisor), Ikea Range & Supply (which develops, designs, produces and supplies stores with home furnishing solutions) and Ikea Industry (the world’s largest producer of wood furniture, with 42 production units in 10 countries) units. The new arrangement simplifies responsibilities, Toof said a statement, adding it will also help jumpstart Ikea’s lagging e-commerce efforts.