How Ikea Works

The world of Ikea furnishings is filled with names like Aneboda, Akurum and Anordna. But consumers seem to care less what the products are called (most are named after Swedish towns) and more about how much they cost. With couches retailing for $399, wine glasses going for $2.99 for a pack of six and desks selling for $69, Ikea furniture is a beacon for bargain hunters. Ikea's furnishings come in a range of styles and colors, but the products are generally known for a sleek, minimalist look.

In creating these items, Ikea comes up with a price tag first. The designer is told that a chair must sell for $200, and it's the designer's job to meet that goal. Everything, from the raw materials to the way the product will be delivered, has to be analyzed to meet that bottom line. Production takes place at 1,350 suppliers located in Europe, Asia and North America, with China and Poland leading the way in creating Ikea products in 2006 [source: Ikea].

The furniture comes to the store in flat packs that are cheaper to transport. The furniture stays put in that flat pack because Ikea expects some work on the part of the customer to keep the prices low. Customers assemble the furniture at home, though they can arrange for help from Ikea for a small fee.

Ikea also keeps costs low by using minimal staff in the stores, but sometimes the cost just depends on the location. In 2003, statistician Gabriel Thulin created the Ikea index to compare the prices of Ikea items around the world. He found that people in the United States paid the least for Ikea products, while consumers in Finland paid the most [source: Sylvers]. Don't rejoice yet, Americans; the dollar's fall in value against the euro played a role in the goods being cheaper here, but other factors include local competition, wages and taxes. The United States is currently Ikea's second biggest sales market behind Germany.

Despite the price differences, however, Ikea furnishings tend to sell well in all locations, with the Billy bookcase, Lack side table and Ivar storage system ranking as some of the biggest worldwide sellers [source: Capell]. The average each customer spends in a visit -- about $85 -- is also the same in all countries. [source: Crampton].

Does all this talk about affordable furniture make you want to take a little shopping trip? On the next page we'll peek into Ikea's stores.

In 2007, 450 million people around the world visited the store's Web sites, and the 2007 Ikea catalog had a print run of 175 million copies in 27 languages [source: Ikea]. The catalog, which made its way to 100 million households in 30 countries, is allegedly printed more than the Bible [source: Capell]. For shopping at Ikea though, nothing compares to an in-store visit, a trip that over 500 million people make in one year, with some driving hours to the nearest store.

If you've ever popped into Ikea for one thing only to emerge hours later, bewildered and loaded down with things you didn't expect to buy, that's no accident. While all retailers try to cultivate such an experience, Ikea seems to have a true knack for it. This is largely due to the setup of the stores and the amenities offered; with restaurants and daycare, it becomes easy to stay the entire day, and the store flow is set up so that you see and try almost all Ikea products. One executive has even suggested that Ikea is quality family time on par with going to the zoo or a theme park [source: Bartlett and Nanda].

For those of you that have never braved the traffic and the bargain hunters of an Ikea store, we'll take a virtual shopping trip. If you brought the kids along, feel free to drop them in Smaland, a children's play area named for the southern part of Sweden where Ikea started. You might pick them up for lunch in the cafeteria-style restaurant, where Swedish meatballs and lingonberry mousse keep hungry shoppers going.

Of course, they're welcome to accompany you on a trip through the showroom, which will be guided by arrows on the floor, taking you in turn through all of Ikea's major departments. There are shortcuts, but if you do the entire thing, you'll be escorted through sections of living rooms, kitchens, bedrooms and bathrooms, as well as sections of office furniture, shelving units and children's decorations. All of the products, from couches to beds, are out for you to try and test. There are also mock rooms set up, so that you can see just how great an Ikea lamp would look with your new Ikea bedroom set.

As you make your way through the showroom, you can ask for help from the staff located at information towers around the store, but you're largely on your own, equipped only with a pencil and paper so that you can make notes about what you want. You'll need these notes in the self-serve furniture area, where bookcases and coffee tables are waiting in flat packs. Before you get there, though, you'll wander through the marketplace, which is full of the home furnishings that can fill those new kitchen cabinets or accessorize your new couch. The marketplace includes cooking and eating items, textiles and rugs, lighting, prints and frames, and bathroom accessories.

Once you have what you need, it's off to the checkout. If you've burned off those meatballs, there's another chance for a snack at the bistro located near the checkouts where you could enjoy a hot dog or a cinnamon roll for a dollar or a less. If you can't get enough of Ikea's cooking, there's also a food market in many stores, so that you can take a little taste of Sweden home with you.

Ikea stores are about 300,000 square feet (27,871 square meters) on average, or about five football fields. Can such a big store be good for the environment in any way? Turn the page to find out.

In walking through an Ikea store, you may think that such a large store can't be very energy efficient. But when you get to the checkout, you'll be asked if you want to purchase a plastic bag for a nickel. While paying for disposable shopping bags is nothing new to residents of some countries, it's not typical yet in the United States. That's one part of Ikea's plan to reduce waste and help the environment. A quick look around the checkout area might reveal other clues to Ikea's environmental stewardship; recycling bins are present for customers to drop off used batteries, light bulbs and even the packaging that their purchases came in.

While Ikea does build huge stores, the company tries to do so in a sustainable and environmentally responsible manner. For example, the store in Stoughton, Mass., received Leadership in Energy and Environmental Design (LEED) certification for its green status. The roof of the store is covered with 37,000 square feet (6,968 square meters) of plants, which regulate the store's temperature while absorbing rainwater.

Other environmental measures in construction included the use of recycled materials in construction, reusing 75 percent of construction waste, and energy-efficient lighting [source: Chain Store Age]. Ikea's long-term goal is to have all stores using renewable energy through solar or wind power where possible. In fiscal year 2006, a quarter of Ikea stores and distribution centers were achieving this goal [source: Ikea].

Ikea's environmental stewardship goes beyond the stores though; the products are evaluated not just for a price point, but for their environmental impact. Each phase of the product's life cycle is evaluated, including raw materials, manufacturing, use and end of life. Ikea's requirements for its suppliers and distributors are laid out in its codes of conduct, known as IWAY (the Ikea Way). These agreements outline Ikea's expectations on social and working conditions, including child labor, as well as environmental standards that must be met.

According to Ikea's 2006 Social and Environmental Responsibility Report, IWAY fulfillment had dropped from 90 percent to 85 percent, with the drop largely due to the performance of suppliers in Asia (Ikea does not immediately cease working with suppliers in the case of noncompliance, but tries to work with offenders to address the problems). Ikea explained the lowered rates as a result of increased unannounced audits and issues that could by solved at the legislative level.

Many of the IWAY regulations relate to Ikea's positions on product materials. Suppliers are expected to use wood from responsibly managed forests. Cotton is similarly expected to come from renewable sources, and the metal and plastic used in products is recyclable and recycled. By fiscal year 2009, Ikea's goal is to have 75 percent of raw materials in all products be renewable; products were at 72 percent in fiscal year 2006 [source: Ikea]. Transport suppliers must also meet IWAY codes of conduct related to reducing carbon emissions in distribution, and Ikea strives to pack its products so that more things can fit in one load.

Ikea's other environmental goals cover everything from the Swedish food market (Ikea hopes to have 15 percent of the food products organically produced by 2009) to the catalog (the goal is to use certified forestries for 100 percent of the paper used by 2009) [source: Ikea]. It also partners with WWF, the global conservation organization, and has a program that plants trees in the rainforest.

Is Ikea always using its powers for good, though? We'll take a look at some criticisms of Ikea on the next page.

You may start criticizing Ikea as soon as you get home, when you try to assemble the chair or shelving unit you brought with you. A newspaper in New York followed an Ikea customer home to watch her assemble her new chest of drawers. Armed with a guide that provided pictures as instructions, the customer felt that an engineering degree would have been helpful, with assembly taking about two hours and two people [source: Weichelbaum and Paddock]. Ikea's reputation for furniture quality is also not stellar, with the disposable quality of some items likened by analysts to inexpensive fashion retailers like H&M and Old Navy [source: Elliott].

Other people start griping about Ikea before a store even shows up nearby. While many citizens have started blogs and online petitions to bring the store to their area, those who face an Ikea in their neighborhood aren't always thrilled about the traffic and neighborhood transformation that a big box store brings. Ikea often faces local activists' protests when store plans are announced. When the company opened a store in Moscow, the city government even blocked completion of an overpass that would direct customers to the store [source: Fuerbringer].

Denmark also has a bone to pick with Ikea. One prominent newspaper accused the company of bullying Denmark because the names of Danish towns were used for doormats, rugs and carpets, while Swedish and Norwegian names were used for slightly higher-class furnishings. Ikea claimed it was just a coincidence that the names were Danish, but that didn't stop Denmark from feeling that the Swedish company was walking all over them [source: O'Mahony].

Some are suspicious of Ikea's corporate setup. To avoid Sweden's high inheritance taxes, founder Ingvar Kamprad created a nonprofit foundation in Amsterdam and transferred Ikea ownership to the foundation. Essentially Ikea is a nonprofit, one that may have an even larger endowment than the Bill & Melinda Gates Foundation [source: The Economist]. The Economist valued the nonprofit Stichting Ingka Foundation at 28 billion euros ($36 billion) in 2006, comparing it to the 21.4 billion euros ($26.9 billion) reported by the Gates Foundation.

These numbers should be taken with a grain of salt; as a Dutch nonprofit, the group doesn't have to make its accounts public. Ikea releases sales figures each year, but not profits, so the most recent numbers related to profit are from 2004. These numbers revealed a profit of 1.4 billion euros ($1.7 billion) [source: The Economist]. It's estimated that despite the low prices in stores, Ikea generally makes an 11 to 18 percent profit on its sales [sources: Crampton, The Economist].

The nonprofit's mission is to support "innovation in the field of architectural and interior design," but because it doesn't release financial information, it's unclear how the foundation supports that goal [source: The Economist]. Many other aspects of Ikea, such as the trademark, are wrapped up into various holding groups in Luxembourg that don't seem to pay very many taxes. In 2004, two holding groups paid 19 million euros ($23.6 million) in taxes on profits of 553 million euros ($686.9 million) [source: The Economist]. Most of the profits are believed to be diverted to the Kamprads.

Still, it's interesting to consider Kamprad's lifestyle against the millions he must earn each year. While he is estimated to be one of the richest men in the world, he lives like one of Ikea's cost-conscious shoppers. He's known for taking the subway and driving around to find the best bargain hotels. He also insists that Ikea executives take economy class flights and stay at budget hotels when traveling [sources: Stevenson, Bartlett and Nanda].

While the range doesn't match Ikea's product line, there are plenty of cool links and related stories on the next page.