IVEY Publishing

W27342
IKEA: BECOMING A CIRCULAR BUSINESS
Professors Matthew Wilson and Merstin Heilgenberg wrote this case solely to provide material
for class discussion. The authors do not intend to Wustrate either effective or ineffective
handling of s managerial situation. The authors may have disguised certain names and other
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Version: 2023-06-06
Global furniture giant Inter IKEA Systems B.. (IKEA), based in the Dutch city of Delf, had the
vision of creating "a better everyday life for many people for customers, but also for our
co-workers and the people who work at our suppliers.? Part of the company's plan to realize this
vision included becoming a circular and climate-positive business by the year 2030 Though
some progress had been made, achieving this ambitious goal would involve overcoming many
challenges. In early 2023, the comparry needed to determine how best to become a circular
business. Was it possible for a retailer known for selling low-cost and disposable products to
accomplish such a feat?*
IKEA HISTORY
In 1943, Swedish entrepreneur Ingvar Kamprad established a company that sold household
items, such as pens and picture frames: he named the company IKEA after his first two initials
and the first letter of the Swedish farm (Elmtaryd) and village (Agunnaryd) he grew up in
Kamprad added furniture to the IKEA portfolio in 1948, and by the 1950s, the company had
achieved considerable success, so much so that a number of rival furniture retailers began
putting pressure on suppliers to end their relationship with the company, an effort those rivals
buttressed by lobbying organizers to prevent IKEA from exhibiting its offerings at furniture fairs
around the country. Faced with these obstacles and the challenge of being located in a remote
area of Sweden Kamprad sought new ways to connect with customers. In 1951, he launched
the KEA catalog and opened the company's first showroom, a place where people could see
and touch IKEA products before buying them.
Until the 1950s, IKEA furniture, like most furniture that consumers bought in Sweden, was sold
pre-assembled? However, Kamprad found that transporting fully assembled furniture came with
a number of problems, most importantly the high shipping costs and damage rates. 10 In 1953,
to resolve these issues, Kamprad transitioned to flat-pack (unassembled) furniture that could be
put together after purchase.! This decision proved to be hugely important to IKEA's success,
and it remained a part of the company's approach even in 2023.12
Over the years, Kamprad continued to seek improvements and innovations to incorporate in his
strategy; for instance, he noticed that many customers left the store mid-visit so they could have
lunch at nearby restaurants, and he speculated that people who were hungry bought less. ! In
1960, to keep hungry shoppers in the store, IKEA opened its first in-house restaurant, offering
coffee and cold dishes 14 This quickly expanded to include hot meals, which became popular
among people visiting the showrooms. IS

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Over the years, the company continued to grow. In 1963, it expanded internationally, opening its
first store in Norway; in the 1970s, it opened stores in Switzerland and Germany and began
exporting to Japan." By 2023, it had 460 franchises in 62 countries, and it was the largest player
in the global furniture industry, which was valued at US$566 billion and was predicted to grow to
5650 billion by 2027 17 Despite being the largest furniture retailer in the world, bowerer, IKEA
captured only 7 percent of the $68.6 billion market in the United States.* The majority of the
company's sales about 79 per cent came from Europe, with only about 16 per cent and 11 per
cent coming from North America and Asia, respectively (see Exhibit 1 for the company's
2017-2022 revenues and net income, Exhibit 2 for its 2012-22 consolidated meone statements,
and Exhibit 3 for its 2021-22 consolated balance sheet). 19
THE IKEA APPROACH
IKEA's value proposition tas"to offer a wide range of well-designed, functional home furnishing
products at prices so low that as many people as possible will be able to afford them.*" In 1976,
Kamprad articulated a plan for realizing this vision, noting that "the first rule is to maintain an
extremely low level of prices and that *there shall always be a substantial price difference
compared to our competitors, and we shall always have the best value for-money offers for
every function." Kamprad saw low prices as a key value driver for customers, and be saw
finding the right balance between price, quality, and functionality as critically important. adding
that "products must be functional and well-made. But quality must never be an end in itself it
must be adjusted to the consumer's needs. A tabletop, for example, needs a harder-wearing
surface than a shelf in a bookcase. In the first example, a more expensive finish offers the
consumer long-lasting utility, whereas in the latter it just hurts the customer by adding to the
price.?
Other core elements of IKEA's approach involved achieving big things with few resources
Kamprad said
that "wasting resources is a mortal sin at IKFA"
-as well as continuously evaluating new and better ways of
doing things. Kamprad also referred to IKE.A's product range as care to the business, and he
said that products should be created with the goals of being well designed, functional, and
affordable. "Throw-away*" products," he declared, "are not IKRA.** In 2022, his vision remained
central to IKEA's culture and values, S Over the years, IKEA had become well known for
providing a combination of simple and affordable furniture. The company's product mix included
pieces for bedrooms, dining rooms, living rooms, offices, kitchens, bathrooms, and more? In
addition to furniture. IKEA sold textiles, cookware, dinnerware, appliances, decorations, and
lighting products." While it offered a wide range of products, it achieved economies of scale by
keeping the options within product categories limited; for example, most of its furniture came in
standard Finishes: black, white, or unfinished wood."
IKEA displayed its furniture in showrooms around the world, with each venne typically holding
more than 9,500 products. These items were arranged along a path that would take customers
in one direction through a series of mock rooms in which furniture was set up alongside decor,
allowing customers to visualize what the products might look like in their homes." The
company's ability to stock so many items was largely due to its flat-pack approach, which
allowed inventory to take up litle space in warehouses and therefore allowed showrooms to
beep high levels of in stock items.? IKEA showrooms had warehouses on the premises in which
items were packed only as high as a typical customer could reach, allowing people to find their
own products, another cost-reducing strategy." IKEA showrooms also employed in-store
logistics managers who used the company's minimum and maximum settings to guide their
reordering process: the minimum setting dictated when inventories had to be restocked, and the
maximmma setting dictated the maximum amount of a product a manager could order at one
time.

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SUSTAINABILITY AT IKEA
Despite Kamprad's insistence that IKEA. did not traffic in throw-away products, the company
earned a reputation for selling disposable items that were cheaply made and did not last. In
addition, critics had been maligning the compauy for its negative impacts on the environment. In
2019, IKE.A contributed to 0.1 per cent of the world's ersenhouse eas emissions, wbich
amounted to 24.9 million tonnes of carbon dioxide 38 Ram-material extraction and processing
accounted for 42 per cent of the company's greenhouse gas emissions, with consumer product
use accounting for 20 per cent and production and consumer travel accounting for 11 per cent
each. 9T
IKEA undertook several efforts, to reduce its emironmental impact. It committed to seaking ways
of remoring carbon from the struasphere by storing it undereround and by collaborating with
customers and suppliers to belp them reduce their emissions. It also announced its intention to
phase out the use of plastics in consumer packaging by 2028. stating that going forward from
then, plastic used in food items for safer purposes would come from recycled or renewable
sources only. Additionally, since 2020, IKEA had been offering free spare and replacement parts
to consumers to help them extend the lives of they products.* Further, the company was
transitioning to fleets of-lectric delivery vehicles.* Perhaps the most significant sustainability
goal, however, was becoming an entirely circular business.
IKEA's Circular Future
Malin Nordin, the company's head of circular development, said that the future of IKEA and of all
furniture businesses, involved implementing a circular model:
We want to be circular in every aspect of our business. We want to make it easier for customers
to acquire, care for and pass on products in circular ways, such as repairing, reusing, resellie,
and recycling them. To do this, we are committed to designing all of our products to be 100%
circular from the beginning, using only renewable or recycled materials, and to developing
circular capabilities in our supply chain. But we can't do this alone. To get there, we are building
new partnerships and cooperations with others. Our ambition is to be 100% circular by 2030.4
IKEA's plan for achieving a circular business involved four bey pillars: a commitment to enabling
customers to obtain and pass on products in circular ways; a commitment to producing 100 per
cent circular products (e g. products that were recycled, refurbished, or remanufactured); a
commitment to using only renewable and recycled materials; and a commitment to entering into
partnerships that would drive it journey to becoming a truly circular business.*
The company began using careful planning and circular thinking throughout the entire process
through which furniture was developed and sold. One bey undertaking was the use of a strategy
known as Design for X in which X could stand for any specific objective. IKFA had 10 Design for
X objectives organized around its Democratic Design dimensions of form, price, sustainability;
quality, and function (see Exhibit 4).**
The compamy also partnered with organizations that specialized in third-party logistics,
including Optoro, Inc (Optora)e Optoro specialized in software for reverse logistics and had
worked with other mayor retailers, such as Target Corporation and Staples Inc. * Optore
conducted real-time analyses of returned products to determine the optimal route said products
should take based on value * The software also provided pricing guidance far returned goods by
analyzing product returns based on market demand.* in performing these analyses, Optoro
belped IKEA streamline its return process and maximize the value captured in product returns.*

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IKEA Rentals and Sell Backs
IKEA's rental and sell-back poograms provided turd mess of reverss logistics through which
end-of-life product could be greed back to the compamy. The proccats sere therefore traportant
to the goal of becoming cucular.14
IKE.A's rental prograra bessa a= a pilot project in Suitouland, aloung custoners to lease
furniture instead of purchasing it.- Customers aould lease items for a designated perod of tine,
after slich they could return them, a coacept this was particularly arusetice to small Swiss
bustesses% The rental program expanded in 4949 to include 39 countrie-. taclading the United
States, China, and India, and it also included specific rental package: for university students S
Fast piloted in Canada in 2018, the sell-back progran allowed IKEA Family Members. the name
given to those unvolved in the company" s loyalty poogran- _ to retur their ased IKE A products
for store cragit.st To begin the process, a ku-tomer needed to submit an applicstion with at least
four photographs of the product, the applacation would be assessed, and the company would
determurne abether the in was approved for the sell-back program.79 For an application to be
approved. the product needed to be clean. unmodiFied. in re-slable condiion. Filly functional
correctly assembled, and on a but of eligible iners (see Eshibit 51. 5° Once approxed. the
product had to be talen to an IKE A store. where consumer could we their 1KB.A. Farily card
and apply an application code to receive IKE.A, store credit. In cases wbare s setura was
rejected. IKF.A offered to dispose ofthe item, ofen in conjunction with providing coupons to
ensure that a posite customer relationship was maintained. S
The pist program promed successful: within the first two months. IKFA received over $.009
applications from customers. with chairs. stools. and bookcases as the most popular returned
iterns. By 2022, the company expanded the program to 27 countries, includine France,
Germany, Italy, Russia, Australia. Japan. aad the Uruted States. and an 2021, the program
accepted 155,000 pieces of furmiture 59 As-new items were sold at 5Q per cent of the u original
price. Items in very good condition (i.e. those with only minor scratches) were sold at 40 per
cent of they original price. Well-used items, meanwhile. ware sold at up to 30 per cent of their
ongial prce.* All sucb items were sold in a separate section of IKFA stores or in online
marketplaces. Seventy per cent of all returns could be sold as is, and in 2020, this amounted to
30.5 million a-45 sales of returned furniture items 5 There was a wide range of options for
accepted items in non-sellable condition. inclading repar, recycling, and the reuse of parts.4
De-pit- this early success, the sell back program faced many challenges. Consumers were well
known to modily their IKFA products, a highl- creatine process in which they altered furniture to
express their indridualit of eneate new functionality "- Such itams were not eligible for the sell
back program. Another barnes was tht Euniture nesded to be returned to IKE.A stores fully
assembled, which was a potentially significact baner to Participating in the progran for
consumers with large or bulky tens, such as dining room tables
NEXT STEPS
Between 2019 and 2021, IKEA made significant steps toward becoming a eircular company.
One mueaningful achierement was that it was able to give 47 million products a second life, with
38 milhon resold in a=-i- condition and 9 million repackaged and refurned to IKEA
sbelves.%Flowever, the company's ambitions would require sustained efforts, as becoming fully
eircular and climate positive by 2030 were difficult goals to =chiene. 1/=s it possible for a retailer
of inexpensive furniture to become truly sustainable?

Exhibit 1 select ikea financial information in € millions

FY 2022 27.578 710

FY 2021 25.615 1433

FY 2020 23.613 1731

FY 2019 25.184 1485

FY 2018 24.919 1449

FY 2017 22.878 912

Exhibit 2 Consolidated income statement in € millions

FY 2021 FY 2022

Sales of goods 24282 26148

Franchise feels 1273 1285

Other income 60 145

Cost of goods sold 21137 23404

Gross profit 4478 4174

Operational cost 2622 3140

Total operating income 1856 1034

Financial income and -151 -103

Result before tax 1705 931

Income taxes -272 -221

Net Income 1433 710

Exhibit 3: consolidated balance sheet in € millions

Intangible fixed assets 9711 9369

Tangible fixed assets 1702 1661

Financial fixed assets 251 270

Total fixed assets 11664 11300

inventories 3752 6294

receivables 5831 6906

Cash and cash equivalents 160 184

Total current assets 9743 13384

Total assets 21407 24684

Group equity 10115 9847

provisions 255 124

Non current liabilities 5429 5533

Current liabilities 5608 9180

Equity and liabilities 24684 24684