IKEA (Audio)

Ben Gilbert 0:00 I also got a flat-packed chocolate mousse. [chuckles]

David Rosenthal 0:03 Ooh, hoo, hoo!

Ben Gilbert 0:04 I put it together this morning. It's very easy. It's three pieces.

David Rosenthal 0:07 Oh, moose like an animal, not chocolate mousse like the pudding.

Ben Gilbert 0:10 Yeah, that's correct. It looked really good at first, but, like, the sun rays came in my window, and within, like, ten minutes, it was melted and broke on the kitchen table. [laughing]

David Rosenthal 0:20 Oh, boy. Is there an analogy about IKEA furniture in there?

Ben Gilbert 0:23 I hope not. It was funny, though.

David Rosenthal 0:25 No, I don't think so.

Ben Gilbert 0:26 I'm ready if you are.

David Rosenthal 0:27 I'm ready. Let's do it.

Speaker 0:29 Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Hmm. Is it you? Is it you? Is it you? Sit me down, say it straight, another story on the way. Who got the truth?

Ben Gilbert 0:46 Welcome to the Fall 2024 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 0:54 I'm David Rosenthal.

Ben Gilbert 0:55 And we are your hosts. When you're running an in-person retail establishment, you know one thing for sure: If people are gonna buy your products, they have to be in your store, and more time in your store generally means they buy more product. So what is a great way to increase time in store? Meatballs, David.

David Rosenthal 1:15 Meatballs.

Ben Gilbert 1:17 Meatballs.

David Rosenthal 1:17 Meatballs and hot dogs. [chuckles]

Ben Gilbert 1:20 And hot dogs. We'll get there. So, listeners, today we dive into IKEA, the company that sells over a billion Swedish meatballs a year and a lot of furniture and homewares to go with it. IKEA is an eighty-one-year-old company. People visit their stores nearly nine hundred million times a year, and it's quirky as hell. If you've ever shopped there, you're familiar with the crazy maze of showrooms. David, I spent five hours inside the Seattle store last weekend. I went there to prepare for this episode. I didn't realize that I was gonna spend the whole day there, but that's what happens when you go to IKEA.

David Rosenthal 1:56 God bless you. Did you, uh, make use of Småland?

Ben Gilbert 1:59 Uh, I went with a friend who had a kid old enough to take advantage of Småland, so yes.

David Rosenthal 2:05 Nice.

Ben Gilbert 2:06 Perhaps you know the relationship test of: Can you make it through IKEA together? And that's just at the store. Then you get home, and you have to assemble all that flat-packed furniture you just bought. But the furniture, it does look good. Even though it's extremely inexpensive and you do have to build it yourself using the funny diagrams with the funny little man and the funny labels, it ends up looking pretty good.

David Rosenthal 2:28 Hell yeah, it does.

Ben Gilbert 2:30 And the results of this crazy stew of ingredients is that IKEA has become the world's largest furniture retailer and one of the largest retailers, period. Today, we'll examine why it has worked so well, how its founder became the eighth wealthiest person in the world before shifting his ownership into a foundation, and how all the little innovations have just added up and refined the concept along the way. So whether it's the Poäng chair, the LACK shelf, the BILLY bookcase, it is very likely that you have something from IKEA in your house right now. This is the story of a mission to create simple, well-designed, low-cost furniture accessible to as many people as possible, taken to its absolute logical extreme.

David Rosenthal 3:14 Totally.

Ben Gilbert 3:15 Well, listeners, after this episode, come discuss it with us on Slack and check out ACQ2, our second show, where we just had Luis von Ahn as a guest, the CEO of Duolingo. His company story is pretty unlikely, given most investors assumed you could not build a large business in either the education or language learning market specifically, and Luis has some of the most practical advice I've ever heard for anyone building a consumer startup and have sent it already to a bunch of friends who are building consumer companies. So go check it out, ACQ2, available in any podcast player. And if you haven't taken the Acquired 2024 survey yet, please do. It is open for another week, and we would greatly appreciate your feedback. Click the link in the show notes or go to acquired.fm/survey for your chance to win some sweet Meta Ray-Bans or an ACQ dad hat.

David Rosenthal 4:02 Ooh, we might need to add a, uh, Poäng chair or something to that.

Ben Gilbert 4:05 Actually, that'd be extremely economical [chuckles] for us to offer.

David Rosenthal 4:09 Yes, it would be cheaper than the Ray-Bans.

Ben Gilbert 4:10 Maybe we'll even throw in some at-home assembly for you and really gross it up.

David Rosenthal 4:14 Well, as we will discuss later in the episode, including, you know, delivery and everything that comes with e-commerce, I don't know if it'll be cheaper, or it will certainly be impacting IKEA's margins.

Ben Gilbert 4:25 It's true. Well, before we dive in, we want to briefly thank our presenting partner, J.P. Morgan Payments.

David Rosenthal 4:31 Yes, just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments is a part of so many of their journeys, from seed to IPO and beyond.

Ben Gilbert 4:42 So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

David Rosenthal 4:51 Unfortunately, there is literally no possible way for us to have investments or for any human being- [chuckles] ... to have investments in the companies that we discuss here. [chuckles] But we start in the small town of Älmhult, Sweden, which is in the province of Småland, which, despite its name, is not so small, but rather a large rural area in the south of Sweden, not too far from Denmark. And Småland, again, despite its sort of cutesy, friendly, IKEA-like sounding name, it's a pretty tough place. It's rural. It's agrarian. The soil is pretty barren. It's really rocky. There's a lot of forests and timber, and, uh, timber, wood, foreshadowing maybe one day what will-

Ben Gilbert 5:41 [chuckles]

David Rosenthal 5:41 ... come out of this province in Sweden.

Ben Gilbert 5:43 It's also cold.

David Rosenthal 5:44 Yeah. [chuckles] Yeah, I mean, it's Sweden. It's really cold.

Ben Gilbert 5:47 Tough place to grow up.

David Rosenthal 5:48 Totally. The farmers in Småland, though, they really have to work hard to scrape out their existence, and there's actually a word in Småland called lista.... which means making do with an absolute minimum of resources-

Ben Gilbert 6:06 Mm.

David Rosenthal 6:06 -appropriate to the province and, uh, appropriate to IKEA, as we shall see. And so it is there on a farm in Småland in March of 1926, when our protagonist, Feodor Ingvar Kamprad, or just Ingvar as he is known, is born. And he's born, where else for the region? On a family farm named Elmtaryd, in an area about 20 kilometers outside of Älmhult called Agunnaryd. Which, apologies to all of our Swedish friends- [chuckles] -if we butchered those. I listened to a lot of pronunciations to try to get this right. [laughs] Now, to give you even more of a sense of this land that we're talking about, Älmhult, the, you know, bustling local metropolis, I don't know what the population was in 1926, but in 2010, the population of Älmhult, the big city, was 9,000 people, and that is including IKEA's major, major presence there in that town today, including the first store, the IKEA museum, the IKEA hotel, et cetera, et cetera. I'm imagining maybe 1,000 people lived there at this time.

Ben Gilbert 7:19 Maybe.

David Rosenthal 7:19 And Agunnaryd, the, uh, area where the farm is, in 2010, do you know what its total population is?

Ben Gilbert 7:27 Low hundreds?

David Rosenthal 7:28 Two hundred and twenty people. [laughing]

Ben Gilbert 7:31 [laughing] All right, so he's in the sticks.

David Rosenthal 7:32 This is the sticks. So how did the Kamprad family come to Småland? Well, if you're perceptive and know your sort of northern and central European family names, you might say Kamprad is not a Swedish name, it's German. And actually, do you know what IKEA's largest market is still to this day? It is not Sweden, it's not the US, it's not China.

Ben Gilbert 7:55 It's Germany?

David Rosenthal 7:55 It's Germany.

Ben Gilbert 7:56 Ah.

David Rosenthal 7:57 So Ingvar's grandmother and grandfather had immigrated there to Småland from Germany only 30 years before Ingvar was born, so in 1896, and unfortunately, it's not a happy story. So they bought the farm, Elmtaryd, sight unseen, when they were in Germany, from an advertisement in a local hunting magazine. And, uh, people would sort of joke later that this was IKEA's first mail order purchase, was the farm and moving to Sweden. [chuckles]

Ben Gilbert 8:25 Heyo!

David Rosenthal 8:26 Heyo.

Ben Gilbert 8:27 So wait, why would you buy a sight-unseen farm in Sweden?

David Rosenthal 8:32 Especially a not very attractive place to farm in Sweden.

Ben Gilbert 8:35 This is, like, pre-World War I Germany, too.

David Rosenthal 8:37 Yes. So more to the story here. The stated purpose and idea was that they were going to convert the farm from, like, a agricultural farm into a timber farm, into a timber forest. Ingvar's grandfather, Heim, had been connected to the timber trade in Germany, so idea makes sense on paper. Unfortunately, though, it doesn't work out, and the next year after they immigrate, in 1897, Ingvar's grandfather, Heim, commits suicide.

Ben Gilbert 9:09 Oof.

David Rosenthal 9:10 So that leaves his grandmother, Franziska, alone to raise three kids, one of which was just born, and manage this farm. She knows nothing about how to farm. It's a really difficult farm to operate in a rural, isolated part of a country that she's not from, doesn't speak the language.

Ben Gilbert 9:31 Totally rough.

David Rosenthal 9:33 Really, really rough.

Ben Gilbert 9:34 And I don't know if this came up in the stuff you were reading. Something I read alluded to the idea that Ingvar's grandfather committed suicide basically out of poverty. Like, his life was so miserable from being totally impoverished that he was clinically depressed, and yeah.

David Rosenthal 9:51 Well, yes. So there's a little more to the story. Turns out, the actual reason for the family's immigration from Germany was more about Franziska and Heim's marriage and Franziska's family. So Heim had been from a noble family in Germany, or at least a family with historically, you know, ties to the nobility. Franziska was a commoner, and I think an illegitimate child born out of wedlock. So Heim's parents, and particularly his mother, was not happy about this, didn't approve of the marriage, and so part of, or really probably the whole reason for their immigration from Germany to Sweden, was to escape this. This is, uh, tough.

Ben Gilbert 10:37 So to plant a seed here, there is a strong cultural thing in this family of "Don't be poor. Figure out a way to earn a keep, make wealth," deeply ingrained from this.

David Rosenthal 10:50 Yes, really, really bad situation. Nonetheless, the family perseveres, and by the time these children grow up, Franziska has turned Elmtaryd into, like, a real functional farm. They're getting by. It's not gonna make them rich, which, again, like, nobody in Småland is rich. Like, they're making it work, and they've built themselves into a respected family in the area. Now, the eldest of these children, the eldest son, Frans Feodor, grows up and marries the daughter of the biggest merchant in Älmhult, so bringing, you know, now some merchant blood into the family. When he's 25, Franziska asks him, and I, I don't think she asked, to come help manage the farm. So Frans Feodor and his new wife, Berta, they have two young sons, the elder of whom is Feodor Ingvar Kamprad, our protagonist here. They arrive at the farm, and this is where Ingvar Kamprad, the founder, purveyor, janitor, sole embodiment- [chuckles] ... of IKEA, grows up. I mean, really, we say this on a lot of episodes, but Ingvar is IKEA, as we shall see.

Ben Gilbert 12:00 Yeah.

David Rosenthal 12:01 He is like Jensen and Mark Zuckerberg all in one.

Ben Gilbert 12:05 Singular founder-... the company wouldn't exist, but for his exact personality, magnified and multiplied into this huge behemoth. You already see the frugality, the- we're about to get to the, like, cleverness of being a merchant.

David Rosenthal 12:21 The adversity, the chip on his shoulder. I mean, all of it.

Ben Gilbert 12:23 Yes. Yep.

David Rosenthal 12:25 So when Ingvar is super young, like five years old, this merchant side of his DNA starts to come through and blossom. His aunt, the youngest child, the third child of Fransiska, helps young Ingvar buy bulk sets of matchboxes, mail order from Stockholm, the capital of Sweden. Ingvar, little Ingvar, a five-year-old, [chuckles] then goes around the countryside selling individual matchboxes to other farms and other families in the area at, like, a three X markup from what he got them unit price in the bulk package from Stockholm. So he writes later, "My aunt didn't accept payment for the postage, so then I sold the boxes at two to three ore each." Ore is like a penny to a krona at the time in Sweden, so, like, two to three cents each, "sometimes even five. The whole mail order package of one hundred cost eighty-eight cents. Talk about profit margins! "

Ben Gilbert 13:20 [laughing]

David Rosenthal 13:20 "I still remember the lovely feeling. From that time, selling things became somewhat of an obsession for me."

Ben Gilbert 13:27 Yeah, the seeds are sown of one of the greatest retailers of all time, right here at age five.

David Rosenthal 13:32 Totally. I mean, Sam Walton, Jim Sinegal, Sol Price, Jeff Bezos, Ingvar Kamprad.

Ben Gilbert 13:39 Absolutely. Yep.

David Rosenthal 13:41 So young Ingvar, he gets a taste of this, he's hooked. He goes on... All throughout his childhood, he's ordering bulk items, mail order from elsewhere in the country, selling all kinds of stuff out to the residents out in the Småland countrysides, like Christmas cards, wall decorations, garden seeds. You know, just, like, random small goods. Ultimately, he finds a niche and a good business importing and selling fountain pens from other countries in Europe. Uh, he's, like, ten, twelve years old at this point. He's selling these fountain pens so fast that he decides, like: "Oh, hey, I wish I had some financing to be able to buy some more of these pens. I know I could make money."

Ben Gilbert 14:21 I have product market fit, I should raise money.

David Rosenthal 14:23 I should raise money. So he goes to the village at Älmhult, and he takes out a five hundred krona loan from the bank there, Swedish krona. This is, like, sixty-three dollars about, at the time. This is in nineteen thirty-eight.

Ben Gilbert 14:36 And in nineteen thirty-eight dollars, sixty-three dollars is hundreds of dollars today.

David Rosenthal 14:41 Yeah, especially for a twelve-year-old.

Ben Gilbert 14:43 So imagine your kid walking down the street and going, and somehow going back with five hundred dollars. [chuckles]

David Rosenthal 14:47 Right. That's also part of the story here. He finagles- like, I don't think his, you know, grandmother or his parents were helping him with this.

Ben Gilbert 14:53 Right.

David Rosenthal 14:54 So he uses that to import five hundred fountain pens from Paris, and then I think, you know, they sell quickly. He, like, repays back, you know, the, the, the loan pretty quickly. And that, listeners, is the only- [chuckles]

Ben Gilbert 15:10 [laughing]

David Rosenthal 15:10 ... capital that ever goes into IKEA. That is the only money that Ingvar would ever raise. [chuckles]

Ben Gilbert 15:17 We will flash all the way forward to modern day. Ingvar always owned a hundred percent of IKEA. He built it into the world's largest furniture store and one of the world's largest retailers, period, without anybody else owning a single share of the company. No outside financing, no debt financing, nothing.

David Rosenthal 15:41 Nothing. They own, I think, all of their real estate today. They own all this stuff. I'm sure they probably use construction financing today, but, you know, they have twenty-five billion euros in the bank. Like, this is it, this is the background, this is what he comes from. Five hundred krona loan in nineteen thirty-eight, paid back immediately, only capital that ever goes into the business.

Ben Gilbert 16:02 Yeah.

David Rosenthal 16:03 Freaking wild. [chuckles]

Ben Gilbert 16:04 Totally crazy.

David Rosenthal 16:04 Totally wild. I don't recall exactly like the Walmart story, but, I mean, even that, I think Sam was, like, from family and banks and other folks, taking money.

Ben Gilbert 16:13 Yeah, his wife's family, I believe, invested.

David Rosenthal 16:16 That's right, his wife's family.

Ben Gilbert 16:17 The whole thing gets financed off of cash flow from pens.

David Rosenthal 16:21 Yes. He literally trades matchboxes to Christmas cards, to pens, to furniture, to IKEA.

Ben Gilbert 16:28 Nuts.

David Rosenthal 16:28 It's like the story of the guy who starts with a paperclip and ends up with not just a house, but, like, a city.

Ben Gilbert 16:33 It's not, though... It's not really trading, it's he generates positive cash flow off of the sale of each of those items, then reinvests that positive cash flow in buying the inventory for the next thing. It's just this, like... Thank God, he's had eighty-one years to do it, otherwise, you could never grow to something this large, financing your future growth only on the cash flows you've generated so far.

David Rosenthal 16:58 Right. It's a good point. Although he is a trader for a very long time, I think that is how he would think of himself, it's not like he's getting the better of other folks. Like, he's creating value. He's-

Ben Gilbert 17:08 Right

David Rosenthal 17:09 ... creating value for suppliers. He's creating value for buyers. He's performing capitalism here.

Ben Gilbert 17:14 Right. That's just the definition of capitalism. You sell something, you have excess cash flows in the form of profit margin, you reinvest that in growing your business, and he just did that over and over and over again.

David Rosenthal 17:26 Okay, so in nineteen forty-three, when Ingvar is seventeen, he's about to go off to the equivalent of college at the School of Commerce in Gothenburg, which is a much bigger city in Sweden. Like, it's actually a city [chuckles] in Sweden. And, uh, Ingvar decides that before he goes, he wants to officially start a company, like a firm, to formalize all of his trading activities that he's been doing, 'cause he intends to expand it while he's in Gothenburg at school, his sort of import-export business, shall we say?

Ben Gilbert 18:00 And there is one other thing happening during this period of time in Ingvar's life. We will come back to that later.

David Rosenthal 18:06 So before he leaves, he registers an official trading firm with the county of Småland and names it, very creatively,... The natural thing that comes to mind, very descriptive term, he names it his name and his mailing address: Ingvar Kamprad Elmtaryd Agunnaryd. I-K-E-A, IKEA.

Ben Gilbert 18:32 Ah, I never put together it was like his mailing address. I always knew it was the two initials of his name, and the farm, and the city.

David Rosenthal 18:39 Well, I think that was his mailing address.

Ben Gilbert 18:40 Ah, that makes sense.

David Rosenthal 18:42 You know, this is the countryside here. It's not like there's any more to the address than like-

Ben Gilbert 18:45 [laughing]

David Rosenthal 18:46 ... Elmtaryd Agunnaryd. He doesn't have a house number.

Ben Gilbert 18:49 So cool.

David Rosenthal 18:49 So that's IKEA! That's Ingvar Kamprad's trading firm. This is it.

Ben Gilbert 18:54 And he does put the first IKEA logo sign on, like, a little shed on the property. It's simultaneously labeling the property by address then, in addition to saying, "This is where IKEA does business."

David Rosenthal 19:07 Yes, which is all part of the lore. I'm not sure how much actually happens in the shed, besides he puts the sign up there.

Ben Gilbert 19:14 I think he just stores inventory there-

David Rosenthal 19:15 Yeah [laughing]

Ben Gilbert 19:17 -before.

David Rosenthal 19:18 Well, let's talk about inventory. So Ingvar goes off to the School of Commerce, and for the first time there, he's able to do what I think he intended, which was get access in the school library to real, actual trade publications, import-export trade papers, and trade publications. So he starts writing to the suppliers all over Europe who are listed in these trade publications and asks if he can become a selling agent of theirs in Sweden. Now, I say "agent," at this point, he's running an actually incredibly capital-light business. Most things, I think he is not taking inventory. Some of it, he is. He's storing some pens and stuff, small goods under his bed while he's at college, but a lot of it, what he's doing is he's finding and aggregating demand in Sweden and sending purchase orders directly to the manufacturers, wherever they are, in Sweden or elsewhere, and they just fulfill the orders directly to the customers by mail. It's pretty awesome.

Ben Gilbert 20:21 So, like, the first drop shipper? [chuckles]

David Rosenthal 20:23 Yeah, he's not doing the shipping. I mean, he's just an aggregator for demand. He's an agent.

Ben Gilbert 20:27 And he never takes possession of the inventory? It's, uh, fulfilled in real time. As he gets the order, the supplier puts it in the mail. It's great.

David Rosenthal 20:35 Yep, and again, not always, you know, sometimes he gets a box of five hundred pens or whatever. Like, he's doing whatever is gonna make him the most money and be the right arrangement, but being an agent is the best way to do this. So he starts off ... You know, naturally, he continues the pen business. He goes from fountain pens to ballpoints. That's a big hit. Then he gets into wallets, cigarette lighters, file folders, you know, all sorts of small goods, and at first, he's mostly just kind of doing what a lot of other people are doing at this point in time, who are trader agent types. He's a traveling salesman. He's going back and forth to Gothenburg and to Småland, and he's selling to customers that he meets mostly out in the countryside. It's, you know, hand-to-hand combat. It's ringing doors. It's calling on his network. Then, though, he gets the idea. He's like: Well, I'm getting all my supplier relationships through trade magazines and corresponding by mail, and then a lot of times, when I'm the agent, they're fulfilling the orders by mail. What if I just get into the mail order business myself? These trade publications are a pretty good way to get business for the suppliers. What if I do that? So he starts a product catalog, and he advertises it in publications all around Sweden with the idea being that, like, "Oh, rather than just what I'm limited to doing myself, I can now scale across the whole country, and I can aggregate a lot more demand. It actually doesn't matter if I don't know these people or I don't go to these parts of Sweden." The suppliers don't know him either. It's all gonna work the same.

Ben Gilbert 22:08 Yep.

David Rosenthal 22:09 And he's also learned at this point that if he can aggregate more and more demand and get higher order volumes, he's for sure gonna get better prices from these suppliers. Now, here in the, call it mid-1940s, this is not a new innovation [chuckles] that young Ingvar is coming up with. I mean, it's basically the story of the Sears, Roebuck catalog, you know, 50 years earlier in America. This is happening all over the world, and there's plenty of other people doing the same thing in Sweden at the time.

Ben Gilbert 22:38 Once you had enough scale to say, "Hey, I've aggregated a bunch of interesting products," you've started making a catalog, and you mailed out to everyone, and that was your sort of client base.

David Rosenthal 22:49 I mean, it was the e-commerce industry before the e-commerce industry.

Ben Gilbert 22:54 Yep.

David Rosenthal 22:54 Anybody could do it. It was just about aggregating demand.

Ben Gilbert 22:58 Yep.

David Rosenthal 22:59 So Ingvar creates a s- you know, catalog of his wares called IKEA News. Eventually, he publishes IKEA News on its own with its own subscriber base, but at first, he's just inserting it as an advertising supplement in local farming publications all around Sweden. So by the end of college, end of the war, like I said, he's doing really well. [chuckles] Like, he's doing way better than probably anybody back in Småland.

David Rosenthal 23:29 So after school, he returns to the farm, to Elmtaryd, and he recruits his family to also start helping him with the business and fulfilling these orders and running all the mail and all that stuff, and they're still just running it on the farm. And then in 1948, Ingvar makes a fateful but, again, not unique decision, which is that he decides to add furniture to his catalog. Now, other competitors of his, other rural-focused mail order businesses and dealers, offered furniture at the time, and that's actually why Ingvar starts [chuckles] doing it, too. He had been shopping the competition, doing the Sam Walton thing. He's reading all the advertising supplements of all his competitors, and he notices that they start offering furniture. It seems to be working for them. They're promoting it more and more, and he says, "Well, hey-... I should try that, too. And he would joke later, it was like, it was an accident that he found his life's calling in the furniture business.

Ben Gilbert 24:30 Yep.

David Rosenthal 24:31 So he does with furniture what he's doing with all IKEA products at this time, which is he goes around, he sources some suppliers, and he asks them if IKEA can be their agent to sell their furniture. Now, furniture isn't exactly like, uh, fountain pens or-

Ben Gilbert 24:50 [chuckles]

David Rosenthal 24:50 -wallets. It's big. You can't just order a box of five hundred armchairs and stuff it under your bed or put it in your little shed on the farm. Really, what you need to run this model is you need local suppliers, or at least domestic suppliers within Sweden.

Ben Gilbert 25:04 Yep.

David Rosenthal 25:05 Well, fortunately, as we discussed, Småland is full of timber, and it just so happens that probably because of that, there are a number of furniture makers right there in the province. So Ingvar goes around to local Småland furniture makers and asks if he can be their agent. Like: "Hey, can I bring you more business?" And they're all like: "Well, sure." He's like: "There's one condition, which is you'll have to deliver the furniture yourselves. Is that okay?" And they're like, "Well, that's what we do anyway. It's part of our business. Sure, yeah." Now, famously, and this is part of the lore about Ingvar and probably is, uh, somewhat exaggerated, he loved to tell people that he's dyslexic, and it, it totally serves this lore of like, oh, here's this hard-scrabble country retailer. I don't know how dyslexic he really was.

Ben Gilbert 26:01 Really? This was, like, a thing that I almost thought I was gonna stump you. I was-- 'cause it comes up later in a key moment of IKEA that he's dyslexic, and it's why some... I don't want to spoil it yet, but obviously, not only do you know he was dyslexic, you're proposing he may not have been that dyslexic? [chuckles]

David Rosenthal 26:16 Well, I read some stuff from some former employees that suggested that it was more part of the legend that he cultivated than reality, but I actually don't know what you're referring to. I'm excited to be surprised.

Ben Gilbert 26:29 So it's why the products are named the way they are. Rather than having model numbers-

David Rosenthal 26:36 Oh, this is exactly what I was gonna say.

Ben Gilbert 26:37 Okay. Yeah.

David Rosenthal 26:38 [laughing]

Ben Gilbert 26:39 It's, like, part of the, "Hey, I, I need to have a word for each of these things, and not only-

David Rosenthal 26:43 Oh, yeah, yeah. This is exactly what I was about to say.

Ben Gilbert 26:45 All right. All right.

David Rosenthal 26:45 [laughing] I thought that was like, "Oh, is there another point later?"

Ben Gilbert 26:48 No, no. Okay, so where are we going here, David?

David Rosenthal 26:52 Well, regardless of its veracity or not, Ingvar does not like remembering product numbers and codes in catalog, so he decides that he's going to give a name and not a product code or number to all these furniture pieces. And yes, this is the beginning of IKEA product naming conventions. Do you know, though, I actually had no idea until I started researching what these sort of general naming conventions are within IKEA today.

Ben Gilbert 27:23 I think so. I think different product categories are named after different things, like rivers and-

David Rosenthal 27:29 Yes.

Ben Gilbert 27:30 Certain furniture is named after a certain... It's almost like conference room naming at companies.

David Rosenthal 27:34 Yes. So products are usually named after Scandinavian locations. I think Swedish locations are used for sofas and coffee tables, like the core part of the line. Norwegian locations, I think, are used for beds, Danish locations for textiles, and then some of the smaller goods, like lamps, are seas and lakes.

Ben Gilbert 27:57 Mm.

David Rosenthal 27:57 And, um, outdoor furniture is islands, I think.

Ben Gilbert 28:01 Ah, [chuckles] clever.

David Rosenthal 28:02 They got the whole, you know, schema here with names. So Ingvar, if he truly was dyslexic, would now be having a tough time with all of this. [laughing]

Ben Gilbert 28:10 [laughing]

David Rosenthal 28:11 So anyway, Ingvar decides that he's gonna start all this off with his, you know, named pieces of furniture in the IKEA catalog that, again, are not his furniture. He's just sourcing them from local furniture makers like other people are doing. He's gonna start with a test, and he puts three pieces from Småland in the catalog. Two armchairs, one of which is a armless armchair, or so I guess just a chair, that is intended for baby nursing.

Ben Gilbert 28:38 Dude, an armless chair for baby nursing sounds awful. Sounds like torture. Like, that's the time when you need the arm the most!

David Rosenthal 28:44 Hey, man, different era. [chuckles]

Ben Gilbert 28:46 Yeah.

David Rosenthal 28:46 Different era. So he writes: "The response was unambiguous. We sold a huge amount of this, quote, unquote, "test furniture." And Ingvar, of course, he's a trader. He has a nose for business. He's like: "Great, what more can we add?" So he quickly sources a sofa bed to add to the catalog.

Ben Gilbert 29:04 Mm.

David Rosenthal 29:05 Famous, you know, IKEA sofa bed. There it is, right in the beginning. Then a chandelier and, and all sorts of other stuff, and it's off to the races. Pretty much any piece of furniture or furniture-like home goods that he can get his hands on and advertise in the catalog, it sells like hotcakes ... or maybe meatballs. [laughing]

Ben Gilbert 29:25 [laughing]

David Rosenthal 29:27 Is that too much? That's too much. [laughing] Anyway, so now, why is it selling like meatballs here? Why is there a huge demand? Before mail order, the only way that people out in the countryside could get furniture that wasn't locally made right there or passed down from generations, but still it had to get made and bought at some point in time, was through dealers like Ingvar used to be, like, you know, traveling salesman-type people, and they had very limited access to inventory. They were sourcing, like, individual pieces, probably more often than not, you know, second-hand estate stuff, or maybe they're from a distributor or a third-party middleman. I mean, either way, we're talking super limited scale, very sparse and unreliable product offerings. Like, you need a baby nursing chair, [chuckles] an armless baby nurse, whatever you need, a dining table, like, the likelihood that your guy had that-... in his stock was low, and so that's just availability. But then also the pricing, I mean, again, we're talking about how everybody here is just basically eking out a living. The traveling salesman agent types, you know, they're trying to eke out a living, too. They're trying to make as much money as they can. They're not trying to build scale. They don't get like, "Oh, hey, volume drives prices down. Low prices drive volume." It's like, no, no, no.

Ben Gilbert 30:52 No, it's, "What's the maximum margin I can extract for this very one-off, random, special sale I'm making?"

David Rosenthal 30:59 Totally. Ingvar, though, because of his history in small goods and as a importer, he's got a very different mindset. He knows that, oh, selling goods in bulk, in bulk orders, like, it's all the way back to the matchboxes. That's how he's approaching the problem. He's also young. He doesn't have a family. Like, he can just operate in a very different mindset than everyone else here. So scale doesn't bother him. He's happy to try and drive prices down as low as possible, pass that savings along to buyers, undercut everyone else, get more demand. Like, this is how he operates. And even more than that, he realizes furniture is way better than these small goods because even though, you know, I could sell cheaper, these are still large-ticket purchases for people. The absolute number of dollars or, you know, kroner that I'm gonna make on any given piece of furniture, even if I'm selling it at a low margin, is, like, way more than ballpoint pens here. [chuckles]

Ben Gilbert 31:56 Right.

David Rosenthal 31:57 And not only that, but it's also selling quickly, even though these are high-priced items, 'cause there's this huge unmet demand in the countryside. People are starving for this stuff.

Ben Gilbert 32:07 Hmm.

David Rosenthal 32:08 And even better, the logistics and distribution for us, for IKEA, is just as easy as ever. The furniture makers are handling it all themselves. This is great! Let's pour resources into this.

Ben Gilbert 32:21 It is crazy. He managed to aggregate demand for something that is very difficult to manage and take inventory of, and he managed to sell to those customers without having to deal with the really tough inventory problems. I mean, it truly is like the first drop shipper.

David Rosenthal 32:38 Well, as we'll see, it works for a while, [laughing]

Ben Gilbert 32:41 [laughing]

David Rosenthal 32:41 ... and then it doesn't. But for the moment in time, the furniture makers love it. Ingvar and the other folks who are doing this has just expanded their market. This is the golden early days for this whole catalog drop shipping industry.

Ben Gilbert 32:56 Hmm.

David Rosenthal 32:57 So within a couple months, Ingvar is getting so many orders from customers and so many furniture makers who wanna be in the catalog, that he's like: Okay, we gotta just focus on furniture. He starts hiring a handful more of other folks beyond just his family to help out, but it's still, like, a fairly lean operation. We're talking ten people or so through the '40s. They're still running it out of the farm at Elmtaryd. And then in 1949, Ingvar decides to go really big. He starts buying regularly, every week, a supplement in the big national farmers' paper in Sweden, which has a circulation of two hundred and eighty-five thousand copies.

Ben Gilbert 33:42 Hmm.

David Rosenthal 33:43 And I guess we should have talked about this earlier. You know, I'm talking about supplements, you know, advertising, you know, [chuckles] I'm realizing that, uh, I bet a lot of our audience has no idea what I'm talking about.

Ben Gilbert 33:53 Like a supplement to a, a newspaper?

David Rosenthal 33:55 Yes. This is, here in America, going back to the Best Buy circular in the Sunday paper, or the Target circular, or the Sears circular.

Ben Gilbert 34:05 I don't get a newspaper anymore, but I'm pretty sure this still happens. I think this is still a very common advertising channel.

David Rosenthal 34:10 Totally. Anyway, back to 1949, Ingvar goes big. He commits to regular weekly publication as a supplement in the national farmers' paper.

Ben Gilbert 34:22 So before this, when we said people were subscribed to his catalog, how did that work?

David Rosenthal 34:27 It worked like all these businesses I think did at the time, which was, if you were a customer, you saw something in this advertisement circular in a paper or somehow got exposed to it, you then place an order, you then get placed on the customer list. So I think once Ingvar's got your address and knows who you are, you're in his CRM, so to speak.

Ben Gilbert 34:47 [chuckles]

David Rosenthal 34:47 Now, I think you're getting his catalog directly.

Ben Gilbert 34:51 Hmm.

David Rosenthal 34:53 So in this first weekly supplement, he specifically appeals to what he ultimately terms this idea of the many, and we'll keep coming back to this. This is super critical to IKEA. So in this first national circular that goes out, he writes: "You may have noticed that it is not easy to make ends meet. Why is this? You yourself produce goods of various kinds: milk, grain, potatoes, et cetera, and I suppose you do not receive too much payment for them. No, I'm sure you don't, and yet everything is so fantastically expensive. To a great extent, that is due to middlemen. Compare what you receive for a kilo of pork with what the shops ask for it. In several areas, it is unfortunately true that goods that may cost one or two krona to manufacture cost five, six, or more to buy. In this price list, we have taken a step in the right direction by offering you goods at the same price your dealer buys for, in some cases, lower."

Ben Gilbert 35:54 I mean, this is it. We'll make it up in volume. This is thinnest margins possible for the many people with an obsession in cutting out middlemen.

David Rosenthal 36:05 Yep, and what's interesting here is I think this is the first time where he's, by instinct, appealing specifically to the low price aspect. Like again, almost everybody else was appealing to the selection, the availability of like, "Oh, you can finally get furniture." He's now saying, like: "No, no, I know it's hard for you out there. I know you're struggling to make ends meet. I'm gonna give you the absolute lowest prices on this stuff."

Ben Gilbert 36:30 Oh, yeah, this is worth a pause. Harken back to our Walmart episode. What's the, uh, sort of perfect triangle of delivering a retail product? It's convenience, price, and selection, and what he's basically saying is price, price, price.

David Rosenthal 36:45 ... Yes, and way better selection than you had in the old model. Convenience, probably not as good, but price. I know you care about price. You are struggling to make ends meet.

Ben Gilbert 36:56 Yep.

David Rosenthal 36:57 A little later, we're gonna talk about this amazing document that Ingvar writes in nineteen seventy-six, called The Testament of a Furniture Dealer. [chuckles] He's so folksy. But the very beginning of it, the very first thing reads that, "The mission of the company is to create a better everyday life for the many people," the many, "by offering 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."

Ben Gilbert 37:26 I mean, that's it. It's all right there in that sentence.

David Rosenthal 37:29 Yep. Now, the interesting question, though, here, and for the rest of the episode is, like we said, Ingvar is not the only mail order furniture company at this point. He has plenty of competitors who are doing the same things and probably catching on to this same idea that low prices are also important, but none of them become IKEA. And the next reason why none of them become IKEA is none of them have a showroom.

Ben Gilbert 37:59 Oh, yes.

David Rosenthal 38:00 But before we tell the showroom chapter of IKEA, now is a great time to tell you about our presenting partner this season, J.P. Morgan Payments. We've been talking about how IKEA brought simplicity to a complex and fragmented customer experience. This is exactly what J.P. Morgan is doing for payments. Businesses don't want complexity or to have to rely on connecting multiple third-party hardware and software vendors together, or to sacrifice stability and security in order to grow their top line. This is why J.P. Morgan invests over seventeen billion dollars a year in technology as the end-to-end seamless payment solution to handle everything from payment acceptance and processing, to security, to reconciliation, so you can focus on running your business.

Ben Gilbert 38:45 Exactly, and since we're in IKEA land, let's zoom in today on retailers, and specifically on a product that most of you are very, very familiar with: tap to pay. Obviously, there's been a massive shift in the last few years in how consumers expect to seamlessly use their phones to check out. Well, J.P. Morgan Payments enables this as part of their omni-channel solution. That's likely been running under the hood in many of the in-person checkout experiences that you've had. We've reached this tipping point where fifty percent of global in-person transactions are now contactless, and it's totally essential for companies to offer a great tap-to-pay experience.

David Rosenthal 39:22 I honestly love this, and I've been preaching the virtues of tap to pay for years now.

Ben Gilbert 39:26 Listeners, I can vouch for that. David was a very early adopter when we would go on morning runs, I think actually back when you lived in Seattle, and you'd only bring your watch even when we were gonna go get breakfast together afterwards, and I thought it's just crazy.

David Rosenthal 39:39 Yes! It's great. It's great for everyone. For merchants, they can easily accept debit and credit cards from the NFC-enabled digital wallets on smartphones. For employees, it's great because they can seamlessly complete payments from anywhere in the store. And of course, for customers like us, it's great since they get a transparent and secure transaction and pay more conveniently.

Ben Gilbert 39:57 Yep.

David Rosenthal 39:58 For anyone who was at our Chase Center show, this is the exact experience we used for the roaming hawkers selling the hats, so you got to experience this firsthand, and the results were pretty insane. We found out after that they sold fifteen hundred hats in under two hours with a one hundred percent success rate, which means zero declines.

Ben Gilbert 40:18 Yep. So any business, retail or otherwise, benefits from having a frictionless payment experience. Listeners can go to jpmorgan.com/acquired and learn more about tap to pay and check out other payment solutions driving growth for businesses. Our thanks to J.P. Morgan Payments. Okay, so David, how does the first IKEA showroom come to be?

David Rosenthal 40:40 So, as we alluded to earlier, in the early days of this mail order furniture, catalog, circular-type business model, it's the golden era. Everybody prospers, consumers are happy, furniture makers are happy, there's room for competition. Like, it's all greenfield. Everybody's going after new customers. Nobody's stepping on each other's turf. Inevitably, though, as we get into the early nineteen fifties, competition gets more intense among these mail order businesses like IKEA, and price wars start.

Ben Gilbert 41:17 Yep.

David Rosenthal 41:17 So this is the next chapter. And the thing about mail order was, yes, it enabled scale, which enabled selection, which enabled low prices, but there was no governor on quality. And what I mean by that is that anybody who had a mail order business could take attractive-looking photos of their furniture and home goods and stick it in their catalog or their circular advertisements and say, like, "Ooh, buy my beautiful-looking furniture at this really, really attractive price." And those photos may or may not have any sort of bearing on the reality of what the furniture actually was when it arrived.

Ben Gilbert 42:00 Not to mention, you basically had no recourse, 'cause at this point, there wasn't modern credit cards, so it's not like you could charge back. There wasn't twenty twenty-four style returns infrastructure, where you could just get your money back by sending something back weeks or months after it was delivered to you and get a full refund. Nobody was building these big sort of global brands that were trustworthy, and so it was just a matter of which small, local, circular brand convinced you that their picture was worth ordering.

David Rosenthal 42:27 Right. I actually don't know what their return policies are. I, I hope they're good, but it's like the Temu of nineteen fifties- [laughing] ... Sweden here, right? Like, the disconnect after a couple years of this between what you think you're getting and what you're actually getting-

Ben Gilbert 42:39 Right

David Rosenthal 42:40 - starts to widen.

Ben Gilbert 42:41 And so even though Ingvar is focused on quality furniture at the lowest possible prices, the fact that other people aren't is hurting him 'cause it's hurting consumer trust.

David Rosenthal 42:52 ... and I can just deliver low prices if I compromise on quality.

Ben Gilbert 42:55 Right.

David Rosenthal 42:56 So he's searching for a way out of what's starting to become a pretty brutal competitive landscape. And one night, as legend has it, he's working late with one of his early employees, a guy named Sven Gotth, and they come up with a crazy idea. And the crazy idea is: What if we had a showroom where people could come, and they could touch and see and feel the actual items that we are selling in our catalog, and then they could convince themselves like, "Yes, this is the quality, this is the item that I'm going to get at this price"? I think if we could just show people, they could see with their own eyes, touch with their own hands, they would see that the quality we're delivering at this price is way better than anyone else out there. And it just so happens, at this moment in time, that the local furniture joinery in Älmhult is about to close. He is going to buy the building for thirteen thousand krona, which is about twenty-five hundred dollars at the time. We're here in, like, early 1950s, so, you know, not cheap, but not that much money. And that twenty-five hundred dollar investment becomes the first IKEA showroom. [chuckles] I mean, we seriously kid you not, listeners, the only money this guy ever raised was that five hundred krona bank loan.

Ben Gilbert 44:18 Yeah, it's nuts. And the funny thing about this, it is a showroom. It's not like a store. Our business model continues to be this catalog thing, but we have a place where you can just kind of touch and feel the furniture.

David Rosenthal 44:30 I think Tesla does this today or has done it for a while.

Ben Gilbert 44:32 Or Bonobos or-

David Rosenthal 44:34 Yeah, yeah.

Ben Gilbert 44:34 Yeah.

David Rosenthal 44:34 There's a store in a mall that you can go see the cars or see the pants-

Ben Gilbert 44:37 Yeah

David Rosenthal 44:38 ... but you can't take it home.

Ben Gilbert 44:38 Right.

David Rosenthal 44:39 So let's illustrate why this is a completely nutty idea. A, there's the obvious, you can't take it home. B, [chuckles] the whole point of the mail order business was that buyers and sellers can now access each other across the whole country, all of Sweden as a market, all the rural areas everywhere in the country, and Sweden is a pretty big geographical country. What Ingvar is doing here, they're opening a showroom in one singular remote part of this country, you know, in a town with, like, a thousand people who live there, and their business model is to sell to the other towns of a thousand people all over the rest of the country. Why on earth would opening one showroom in one little town work? Here's the thing. I mean, by God, does it work. I don't know that the customer base in the town of Älmhult was that important to IKEA itself. People come from all over the country to go to the showroom! This is wild. So Ingvar advertises that they are opening this for months leading up to the actual opening, which is in March of 1953. So all of his customers and everybody getting the circular advertisements in the weekly paper all across the country, they're hearing about this showroom in Älmhult. On opening day, in March of 1953, there are over a thousand people from all over the country who show up and wait in line-

Ben Gilbert 46:00 Wow

David Rosenthal 46:00 ... to get in. They take the train, they somehow make their way to Älmhult to, to see the furniture. They're not even buying anything. It's crazy. Ingvar and the team, like, they're so worried about this that they don't know that the floorboards on the second floor of this old joinery are like... You know, it's like an old building here. They're like, gonna stand up to a thousand people being up there, plus all the furniture that they have-

Ben Gilbert 46:20 [chuckles]

David Rosenthal 46:20 ... as you know, the showroom. They had also advertised in the circulars that they were gonna offer free coffee and morning buns to anybody coming to shop.

Ben Gilbert 46:30 Yes. The very first time there's, uh, food at an IKEA is the very first time there's an IKEA.

David Rosenthal 46:35 That's right. It has always, always been part of the concept. But yeah, Ben, as you say, like, there's no warehouse, there's no flat-pack furniture. Everybody's just there to, like, see the stuff, and you could also fill out an order form while you're there to then buy it by mail later.

Ben Gilbert 46:51 So Ingvar has a quote about this: "At that moment, the basis of the modern IKEA concept was created, and in principle, it still applies. First and foremost, use a catalog to tempt people to come to an exhibition, which today is our store. 'Come and see us in Älmhult and convince yourself,' we wrote on the back of the first catalog." Two very important words there: convince, and the other one is exhibition. Already, they were seeing this idea, and the fact that he marketed to the whole country and offered food, I mean, we're not just offering you a store that you can walk into and buy something. We are creating an exhibition.

David Rosenthal 47:28 Yes, it is an experience. It's almost like you're getting a free ticket to this experience, this exhibition.

Ben Gilbert 47:34 Yes. Great retailers have more in common with P.T. Barnum than poor retailers.

David Rosenthal 47:39 Totally! Oh, my God. So this is, I think, and Ingvar thinks, and he writes this, this is the very first time anywhere in the world that a mail order business is combined with a physical showroom.

Ben Gilbert 47:54 Oh.

David Rosenthal 47:55 So you might think, "Oh, Sears in the US."

Ben Gilbert 47:57 Yeah.

David Rosenthal 47:57 "Obviously, that's a mail order business, and they have Sears stores." No, no, no, they're different. Like, the Sears stores, you buy the stuff at the stores, and you walk out. It's not a showroom. Here, with IKEA, for the first time, it is that concept you just described, Ben. It's like, we tempt you to come see this exhibition, and then you order by mail. I don't think anybody had ever done this before, 'cause again, it was a crazy freaking idea. But of course, it becomes an enormous success. So within the first couple of years of the Älmhult showroom, store, it's not a store, being open, a huge portion of IKEA's catalog subscriber base, they've now formalized it as the IKEA catalog. About half of their catalog subscriber base, which is hundreds of thousands of people now at this point in time, make the pilgrimage to Älmhult, and they visit the showroom. You know, this tiny little village, hundreds of thousands of people are now coming there.

Ben Gilbert 48:52 And you might ask yourself, "What's the big deal with the catalog? Like, why are people so interested in getting a catalog?"... It was really inspirational. I mean, it hadn't quite made the shift yet, but especially in the '60s, after Britta Lange took over from Ingvar, 'cause Ingvar is, like, everything right now. He's, like, art directing the photography. I think he might even be taking the pictures and writing the copy. But it turned into this thing with these vibrant, beautiful living room settings, and people are anticipating the arrival of the IKEA catalog. And it positioned IKEA as this brand, this lifestyle. It illustrated a life you could be living if you participated in the IKEA story.

David Rosenthal 49:30 Yep. That really, really becomes a thing in the '60s with modernity and when the target customer becomes the urban and suburban customer. But here, even with the rural customer, like, it still works. They lean into this model heavily. So they arrange for any IKEA customer to get discount tickets on Swedish Railways to make the pilgrimage to Älmhult, and then they also set up this program where customers who come from another location and commit to furnishing a whole house, they call these the setting-up-house customers. They get, [chuckles] they get free dinner- [laughing] ... at the hotel in Älmhult that night. Like, this is hokey stuff, but to your point, P.T. Barnum.

Ben Gilbert 50:14 Yeah.

David Rosenthal 50:14 That's what this is.

Ben Gilbert 50:15 Yep.

David Rosenthal 50:16 So within a year, they pass one million kronor in sales at this showroom, [chuckles] which has got to be, by multiples, the largest business ever built in Älmhult in, like, human history. In 1954, so the next year after this has been open, they passed three million kronor in sales. I think the exchange rate was about five to one at this point in time, of five kronor to one dollar. Nineteen fifty-five, they double again to six million in sales. The number of IKEA catalog subscribers around the country passes half a million, and all this is done with still less than thirty employees. The business still being run out of the combination of the family farm and this one showroom. It's wild, the scale they get to.

Ben Gilbert 51:05 It's amazing. Yeah, so it's one of these things that, you know, on the one hand, we are how many years into IKEA? It was founded in '43, and we're approximately in '53, '54 here, so we're ten, eleven years in. But the thing that is really working is this thing that just got started the previous year, which is the combo of the catalog and the showroom. That proves to be this, like, amazing winning combination that they just realize, "Oh, my God, we need to scale this."

David Rosenthal 51:35 Yep, totally. This is, and I would say, like, generation three of the IKEA business. You know, generation one is just small goods trading company.

Ben Gilbert 51:43 Matches and pens.

David Rosenthal 51:44 Generation two is furniture plus catalog. Now we're here in version three of, like, furniture catalog plus showroom, and that's what's really explosive.

Ben Gilbert 51:56 Yep.

David Rosenthal 51:57 But here in the '50s, though, the target customer base, we referenced this a minute ago, and the product mix is still geared towards these rural farmland families, like: "Hey, I'm outfitting my farmhouse."

Ben Gilbert 52:12 Yep, and when you look at the old catalogs, you can tell.

David Rosenthal 52:15 Totally.

Ben Gilbert 52:16 It's not this simple Swedish design that we think about as IKEA as today. It's, like, pretty rugged, robust, heavy furniture.

David Rosenthal 52:25 Yes. So when the 1960s come around, Sweden, like pretty much all of Europe, starts rapidly and inexorably urbanizing. The automobile becomes commonplace, farms are closing down, young people are moving into cities and suburbs. They're taking jobs in factories. They're taking white-collar jobs. Other blue-collar jobs. I think there was some stat in the IKEA story that during the decade between the mid-'50s and the mid-'60s, I think three-quarters of the farms in Sweden closed down.

Ben Gilbert 52:57 Whoa!

David Rosenthal 52:58 It's wild, but this is happening all over Europe.

Ben Gilbert 53:00 Huh.

David Rosenthal 53:01 And so the customer base for IKEA and all their competitors starts to majorly, majorly shift. It's no longer families setting up their farms or taking over the farm from the elder generations. It's now, like, a whole new lifestyle of modernity in the cities, in the suburbs, smaller houses, modern houses, electricity, apartments.

Ben Gilbert 53:27 Not to mention, it's kind of impossible to do the traditional thing of just pass down the furniture to the next generation, which is how most people got their furniture up until this point, 'cause they were living very close to their parents or perhaps taking over the house [chuckles] from their parents.

David Rosenthal 53:41 Totally.

Ben Gilbert 53:42 This is, "Oh, I'm getting an apartment in Stockholm. I kinda need to start from scratch, and the furniture needs to be pretty easy to move or put together."

David Rosenthal 53:51 [chuckles] Yes, yes, indeed, it does. So on the one hand, this is, like, a total existential threat to IKEA's business. It's like, well, your customer base is shifting. The products that you are selling are no longer wanted. They're going away. On the other hand, there has never been a bigger opportunity in the history of furniture making and selling throughout all of human history than what is about to happen here. And IKEA, even though it's currently serving what is effectively the parent generation of these new customers, with a little bit of adaptation, has the perfect model for these new, young, urban, and suburban families.

Ben Gilbert 54:27 Yep.

David Rosenthal 54:28 But to get there, Ben, I know you're itching to tell this story. There's one more element of the IKEA model that needs to fall into place, and ironically, even though it is totally identified core part of the company today, it's a reaction to competition that drives it, and that is designing its own furniture and specifically flat packing.

Ben Gilbert 54:52 It is astonishing that so far in the story, they've been shipping, like, full-sized, fully assembled armchairs.... in order to get them to your house. [chuckles]

David Rosenthal 55:01 Well, remember, IKEA is not shipping it, the suppliers are shipping it.

Ben Gilbert 55:05 But that it's taking up a huge amount-- Think about a, a flat-packed chair that you're ordering versus a fully assembled chair, and how much room that takes up in the truck.

David Rosenthal 55:14 Yep. In the early days, this doesn't really matter to IKEA. Like: "Hey, it's all great, like, that's my supplier's problem." As the business is scaling, though, this becomes IKEA's problem because it's a limit to scaling.

Ben Gilbert 55:27 Yep. Okay, so where does flat packing come from?

David Rosenthal 55:30 So it's totally intertwined with IKEA taking on the furniture design itself, and I said it was driven by competition. It's not driven by competition because any of the other players do the same thing. It's actually the opposite problem. IKEA has become so dominant in Sweden at this point in time, that it's monopolizing, like, a huge portion of all the furniture makers' production output, and so the rest of the industry starts organizing against IKEA.

Ben Gilbert 56:02 And IKEA is philosophically trying to drive down prices. They want to create the furniture for the many, and their competitors are all trying to maximize margin and have kind of small businesses, because the whole furniture landscape, in fact, to this day, is very, very fragmented. It's tons of players serving niche, local use cases. And so you've got the whole Swedish furniture industry that's pissed at IKEA for going to the furniture manufacturers and saying, "What's the very best deal you can give me?" And then turning around to customers and saying, "I'm gonna make very little margin and sell you all of this manufacturer's capacity at extremely low cost." So the competitors are feeling it from both sides. They're saying: "Okay, the manufacturers have no capacity to manufacture for me, and no customers want my stuff because you're selling it cheaper."

David Rosenthal 56:50 It's freaking wild. IKEA does not have a direct competitor today, in 2024. There is not a single other globally scaled furniture business in the world.

Ben Gilbert 57:01 Put a pin in it. I have a thesis on why.

David Rosenthal 57:04 Ooh, okay. So what do the competitors do? They start locking IKEA out of trade fairs, trying to limit their access to suppliers. They start pressuring IKEA's existing suppliers into not selling to IKEA. They say, "Oh, we're all collectively gonna boycott other orders from you."

Ben Gilbert 57:20 And IKEA is not yet big enough where that fails. That actually works, and the manufacturers just come to IKEA and say, "Sorry, the collective leverage of all your competitors is too large, and we're not gonna serve you."

David Rosenthal 57:33 Yep. Competitors even go to the Swedish government, and they lobby the Swedish government to limit IKEA's ability to circulate its catalog. [chuckles] I don't know on what grounds.

Ben Gilbert 57:43 This is, like, the most European thing ever, that the regulation should, uh-

David Rosenthal 57:47 This is too good for consumers! [chuckles]

Ben Gilbert 57:49 Yes, exactly. [chuckles]

David Rosenthal 57:50 [chuckles] Oh, man, we could make a million jokes about European regulation.

Ben Gilbert 57:53 Yep.

David Rosenthal 57:53 Anyway, to your point, it starts to work, and this becomes a real problem for IKEA. So Ingvar, the company, they're like: "All right, well, how are we gonna design our way out of this one?" And turns out, design is the answer. So they start going to the suppliers, to the furniture makers, and they say, like: "Okay, we hear you, that our competition does not want you to give your pieces to us like you're also giving to them. What if we give you a new set of designs for different furniture, and you make those designs just for us? Separate line. Open up separate lines. Could you do that?" And most of them say, "Well, yeah, I think I could do that," and this is the beginning of IKEA in-house designed furniture. Now, the first, quote, unquote, "designer" who Ingvar sets to work on this is a former advertising draftsman named Gillis Lundgren, and Ingvar had hired him originally to help Ingvar do the set layout and the photo shoots for the catalog, as his, like, assistant. Lundgren starts cranking out sketches of furniture designs for the manufacturers, and so then, as legend has it, all this is going on, and then one night, the two of them, Lundgren and Ingvar, are taking down the set from a photo shoot, and Lundgren says, while he's putting a table away, he's like, "Oh, God! This thing is so heavy. And what a huge amount of space it takes up. Let's just take the legs off the table and put them under the tabletop, and then we can store all this stuff better." And Ingvar is like a bolt of lightning has hit him. He's like, "Oh, my God, I have just received, like, you know, the last commandment from God-

Ben Gilbert 59:41 [laughing]

David Rosenthal 59:41 ... about how to, [chuckles] how to run this business." Like, "Yes, we take the legs off, and it takes up a lot less space. My God, we can design these things to come off on purpose! And then when we have our manufacturers ship the tables to customers, they're gonna be able to fit a hell of a lot more of them in those trucks."

Ben Gilbert 1:00:02 Yep, and it's kind of apocryphal. I am sure something along the lines of this insight happened. There were many other companies that were doing flat-packed furniture before this, including the company we've talked about multiple times on this episode, Sears Roebuck, was flat packing in their catalog distribution in America. But certainly, the company that gets credit for popularizing and growing the volume of flat-packed furniture being shipped a hundred X, a thousand X around the world is IKEA.

David Rosenthal 1:00:31 And it's a nice little story, but I think what IKEA does is they go all in on this. So the first flat-pack product that they design is the Max table in the mid-1950s. But by the end of the 1950s, flat pack and then self-assembly by the customer is expanded across the entire range, like, all of IKEA's furniture. And obviously, some stuff you can't flat pack, but, like, as much as possible. And because they had, for separate reasons, started doing their own designs with manufacturers, they can do this.

Ben Gilbert 1:01:07 Yep.... So flashing forward a little bit to today, but it's interesting to look at all the downstream things that happen from flat packing. One, it enables this space saving in trucks. It enables you to do more volume for the same cost. Two, there's a cost reduction since customers can do the labor and transport. Before, you had to have someone at your company put the chair together, and that costs a lot of labor. Now you're putting that on the customer. You're also making it so the customer has the capability to transport the merchandise in a way that they couldn't before. They had to have a truck.

David Rosenthal 1:01:48 Right, mail order was the only way to make this happen. You're not gonna drive away or get on a bus with a table.

Ben Gilbert 1:01:54 Yep, absolutely. There's a further cost reduction since it decreases the broken merchandise in transit, so there's this third amazing benefit to flat packing. Ultimately, they pass all this along to the customers, meaning now their products are definitely the least expensive on the market for their quality, and psychologically, it gives this feeling of accomplishment and increases your fondness for whatever object you assembled because of the labor, the blood, sweat, and tears that you just put into it. You feel like, "I made this."

David Rosenthal 1:02:23 Yeah.

Ben Gilbert 1:02:24 We almost broke up, but we didn't, and four hours later, [chuckles] I have the, the, the cabinet together.

David Rosenthal 1:02:30 One of the articles I was reading for, uh, research called it the, uh, Lego for adults.

Ben Gilbert 1:02:35 Totally. That's totally right.

David Rosenthal 1:02:37 Yeah, another great Scandinavian company. We'll have to cover it someday.

Ben Gilbert 1:02:40 I have a fun story for you, David, on flat pack that I haven't told you yet.

David Rosenthal 1:02:43 Ooh! Lay it on me.

Ben Gilbert 1:02:44 So there's another word for this. Do you know what it is? Did you hear it anywhere? It's kind of an old school retailer merchant phrase.

David Rosenthal 1:02:51 Ooh, no, I don't think I did.

Ben Gilbert 1:02:52 Knockdown.

David Rosenthal 1:02:54 Ooh, no.

Ben Gilbert 1:02:55 And it was referred to as KD. So in preparation for this episode, I talked to Jim Sinegal, who's the co-founder of Costco, 'cause I was asking about IKEA and the similarities, and he said he used to love going to IKEA to look at the KD furniture that they stocked, and I thought this was, like, a brand. I was like, "Oh, maybe this was, like, a brand that IKEA used to stock." At, at some point, I realized and recall, "Oh, no, this is, like, what people used to call the flat packed is KD furniture."

David Rosenthal 1:03:18 [chuckles] That's amazing.

Ben Gilbert 1:03:21 Yeah. The interwovenness with Costco is really interesting. Another research call was with Björn Bailey, who ran IKEA in the US in the late '80s, and he mentioned that Ingvar always looked up to Costco and thought they were, like, the greatest retailer in the world. So there's a lot of shared admiration there.

David Rosenthal 1:03:36 Oh, man. We're gonna talk about hot dogs in, in a little bit here. [laughing] You think I'm joking? I'm not.

Ben Gilbert 1:03:42 All right, let's go.

David Rosenthal 1:03:43 Okay, before we get there, though, so KD, [chuckles] you know, this innovation, knockdown, flat pack. This is also, though, what enables this shift in the product mix for the new modern, young, urban, and suburban customer who doesn't want the same kind of furniture, can't use the same kind of furniture that their parents were using back on the farmlands. So legend has it that right around this time, as the whole IKEA range is shifting to flat pack, Ingvar goes on a trip to the Milan Furniture Show in Italy, and while he's there, one of the suppliers, a carpet supplier at the fair, offers to take him around the city, and, you know, Ingvar wants to see how people live, and he's like, "Sure, I'll, I'll ask a bunch of my employees who work in my urban, modern, mechanized factory here in Milan if you can just go into their homes." And so Ingvar goes into their apartments, and he's just appalled by, like, the furniture that he sees there and how different it is from the new modern city living designs he's seeing at the furniture fair. It's all the old rural farmhouse, big, heavy, dark furniture that takes up a lot of space and isn't practical in the city. And so supposedly, this is the moment when Ingvar really gets religion of like: Oh, this is our new customer, and this is our opportunity is to design the low-price, high-quality, affordable furniture for this target market. All these people that are moving to cities for the first time, this is modern middle-class living.

Ben Gilbert 1:05:23 Yep. So we're all familiar with the simple Scandinavian design that IKEA furniture is, and it's become extremely popular, basically universally adored.

David Rosenthal 1:05:35 I just accept it as, like, the standard of what modern furniture is.

Ben Gilbert 1:05:39 Right. The question is, is there something intrinsic to simple Scandinavian design that makes it universally applicable, or is it IKEA's success that now we all sort of look at it and have some reverence for it? 'Cause it really is beneficial to IKEA that we all like simple designs instead of ornate designs at this point, 'cause it makes it work much better for flat pack, for reducing cost, for making transportation easy. I mean, imagine chunky, ornate furniture with intricate hand-carved designs still being the crème de la crème of here's what you should have in your house, and it's basic and expected. It kinda makes the business model work, that it's these simple designs.

David Rosenthal 1:06:23 Yeah. I think these things are inextricable. I mean, I'm not a expert in design history, and people who are might contradict me here, but I don't think there was necessarily that much about Scandinavian or Swedish design that was particularly light, [chuckles] simple, minimal before IKEA.

Ben Gilbert 1:06:45 Yeah, listeners, join us in the Slack. I'm curious if someone has traced the lineage of this sort of Scandinavian aesthetic in a pre-1950s world where this sort of comes from. Like, who are we all copying? 'Cause there's definitely some lineage of designers that all this is sort of trying to emulate.

David Rosenthal 1:07:01 Yep. So Ingvar writes to this. He says, "A design that was not just good," implied unlike what the-... Milan factory workers previously had in their homes, but also from the start, adapted to machine production, and thus cheap to produce, which, Ben, is exactly the point you are making. With a design of that kind and the innovation of self-assembly, we could save a great deal of money in the factories and on transport, and keep the price down to the customer. There it is. So entering into the 1960s here, and all the demographic change that's happening, IKEA is perfectly positioned, and it's just explosive growth for the company. And to capitalize on it, they obviously need to ramp supplier production significantly. So they've had these battles in Sweden with competition. They've gotten around that with their own designs, but now they need to ramp up so much. Sweden itself, even if they didn't have these problems, just doesn't have enough capacity for all this new furniture that IKEA needs to source.

Ben Gilbert 1:08:04 Yeah, just to illustrate your point about 1955, they did six million kroner. By '61, they did forty million kroner, so that's almost a seven X in six years.

David Rosenthal 1:08:15 Yes. So Ingvar starts looking around elsewhere in Europe to expand supplier production, and then in 1960, Ingvar reads in the Swedish newspaper that the foreign minister of Poland is coming to visit the Stockholm Chamber of Commerce with the express purpose of developing business relationships with Swedish companies. And you might be like, "Okay, you know, doesn't this kind of stuff happen all the time? What's the big deal?" [chuckles] Well, Poland, at the time, was a communist country [chuckles] behind the Iron Curtain.

Ben Gilbert 1:08:50 Yep.

David Rosenthal 1:08:50 So this was odd, and Ingvar is like, "Well, you know, if we could find a way to work with the communists, we could probably lock up a lot of production capacity- [chuckles]

Ben Gilbert 1:09:04 ... "

David Rosenthal 1:09:04 -that nobody else is gonna go through the trouble of getting."

Ben Gilbert 1:09:06 Yep.

David Rosenthal 1:09:07 "And I bet they can also produce things pretty cheaply over there and in pretty high volumes."

Ben Gilbert 1:09:13 Yep.

David Rosenthal 1:09:13 So in 1961, IKEA goes to Poland to help local manufacturers, state-sponsored manufacturers there, set up furniture production of the IKEA designs. And by the end of the decade, of the '60s, Poland is producing fifty percent of IKEA's furniture, including some of the first modern classics, like the BILLY bookcase, the AGLA cafe chair. It's the sort of wooden, sort of curved back-

Ben Gilbert 1:09:44 Oh, yeah

David Rosenthal 1:09:44 ... chair that you know, the iconic one. Yeah, that's, uh, I think if I have it right, I think that design is actually based on, like, a Polish chair design.

Ben Gilbert 1:09:53 Oh, interesting.

David Rosenthal 1:09:54 Becomes, yeah, one of the biggest-selling products for the company in history.

Ben Gilbert 1:09:58 The other thing that they're doing here is IKEA is investing in bringing up these factories. They're trying to build really close supplier relationships here and basically make sure that those factories are gonna be successful for the long run, so they can kinda bet their business on it.

David Rosenthal 1:10:14 Totally, and, I mean, they get really, really intertwined to the point where eventually in the... This is a little later in the '70s, after IKEA invests a ton in developing, uh, board-on-frame, quote, unquote, "technology or sandwich board construction," as it's called. This is the LACK table, so listeners, probably many of you know. For those of you who don't, you definitely have seen this thing. You've probably owned it, the LACK coffee table.

Ben Gilbert 1:10:42 Or LACK shelves or-

David Rosenthal 1:10:44 Yeah. Poland is where they produce this coffee table, that they use particleboard, you know, sandwich board construction, inspired by how doors are made, sort of more cheap, not solid wood doors. Today, in 2024, the LACK table retails for nine dollars and ninety-nine cents in America. This is a table that you can buy for less than ten bucks.

Ben Gilbert 1:11:10 It's astonishing how they've driven price down on some of these things.

David Rosenthal 1:11:13 Totally astonishing, and in fact, I think it's worth a little sidebar on the coffee table right now as an example. It perfectly illustrates the new consumer dynamic and demand explosion that IKEA is about to head into. The LACK coffee table is the first example of this idea that Ingvar starts to develop of the item with the breathtaking price, quote, unquote, "And every product that IKEA sells in its range should be high quality, great value, ideally way better on both dimensions than any competition."

Ben Gilbert 1:11:48 Have beautiful form. I think that's a part of it, too, is it's supposed to have the form and design. It's not just build quality, but actually, the form is, should be elegant to look at.

David Rosenthal 1:11:57 Yes, but over and above, just kinda like the standard products in the range, IKEA should always have a few products that are these breathtaking price-

Ben Gilbert 1:12:08 Mm

David Rosenthal 1:12:08 ... products, and these products should also be high quality, but they should be priced at least fifty percent below any competitive or substitutive products out there and ideally, like, well less than fifty percent. I mean, a ten-dollar table today, that's breathtaking. That's astonishing. And so Ingvar says, like: "It's our job to figure out-- You know, start with that end goal in mind, and then design backwards from that, of, like, how are we gonna make that happen?" And he would later write and describe, "The whole idea is based on the substantial price difference, the easily understood price by the consumer. We don't lose on the deal, nor do we make much profit, but at least we make a little, and in the end, that's what matters. We can't actually lose money on these products, and thus, we need to design, like, not just what the furniture looks like, the manufacturing process, the transport process, the raw material sourcing process, like, everything end to end about how are we gonna sell-

Ben Gilbert 1:13:07 The product is the whole supply chain.

David Rosenthal 1:13:10 Yes, a ten-dollar coffee table. And so the way they do it, at least in the case of the LACK, is like-... We're gonna wholesale reinvent the manufacturing technology process for this. We're not gonna make a solid wood coffee table. We're gonna use board-on-frame construction. And what are the raw inputs for that? Well, we can use the leftover scrap wood chips, and then eventually, now I think it's, like, pulp material from the timber. That's actually gonna be, like, ninety-plus percent of the material that goes into the product, is our waste products from our other [chuckles] things that we're making. A, that's super cheap. B, it's super lightweight, even though they're pretty solid and sturdy. And then, C, we can just scale this indefinitely. Today, IKEA sells almost twenty million LACK tables every year-

Ben Gilbert 1:14:01 Every year?

David Rosenthal 1:14:01 -and has been for decades. I mean, they've sold-

Ben Gilbert 1:14:04 Whoa!

David Rosenthal 1:14:04 ... hundreds of millions of these things. So, like, you can optimize the freaking crap out of your whole supply chain to do this.

Ben Gilbert 1:14:11 That is wild.

David Rosenthal 1:14:12 I think they have multiple SKUs at that scale. So later, once he, like Charlie Munger, got turned on to the virtues of Costco, Ingvar would hilariously formalize this idea, this manifesto, in 1995 as the Hot Dog Product Policy. [laughing] Because in 1995, they copied Costco, and they start selling hot dogs in the stores.

Ben Gilbert 1:14:39 Okay, so I brought this up with Jim when I was talking about similarities between Costco and IKEA. He did not believe that IKEA copied the Costco hot dog, and here is his rationale.

David Rosenthal 1:14:50 There's no way. It's a hundred percent a copy. I don't believe him.

Ben Gilbert 1:14:53 I know IKEA started doing it in 1995. There is a rich Swedish tradition in hot dogs. Swedish hot dog carts are freaking everywhere. I don't think you had to look at Costco to observe, "We could probably sell hot dogs at a Swedish store."

David Rosenthal 1:15:10 Jim is a very, um, [laughing]

Ben Gilbert 1:15:13 [laughing]

David Rosenthal 1:15:13 kind and, uh, generous soul, [chuckles] despite being one of the greatest retailers of all time. So I'm just gonna chalk this one up to that. The IKEA hot dogs today are priced at one dollar, which is cheaper than the buck fifty at Costco.

Ben Gilbert 1:15:28 Well, no, David, the buck fifty is a combo.

David Rosenthal 1:15:30 That's what I was gonna say. I think, though, you can only get the buck fifty combo at Costco.

Ben Gilbert 1:15:35 Yeah, I mean, I don't know if you could walk up and try to order a hot dog that's less than a dollar, but it is one dollar and fifty cents for a hot dog and a drink, and there's no menu item of just a hot dog.

David Rosenthal 1:15:49 Right. We talked about all this on the episode. Like, part of how they do this is including the drink.

Ben Gilbert 1:15:53 It's a bundling, yeah.

David Rosenthal 1:15:55 Anyway, I refuse to believe that the ability to buy just a hot dog at IKEA is not a nod to the Costco deal because IKEA also has the hot dog and drink combo for one fifty.

Ben Gilbert 1:16:08 And it's right after checkout, just like Costco's is, and it entered the store about a decade after Costco started selling the hot dog.

David Rosenthal 1:16:16 There's no way. [laughing]

Ben Gilbert 1:16:18 [laughing]

David Rosenthal 1:16:18 There's no freaking way that Ingvar wasn't just like, "All right, we gotta copy the hot dog." [laughing]

Ben Gilbert 1:16:23 Yeah.

David Rosenthal 1:16:24 The even more amazing thing is he codifies this into the official policy of the company, which is, we must have at least, at first, it's ten, quote, unquote, "hot dog products" across the range. He later ups it to twenty. And it's... Yes, it's like the LACK table. It's an impossible price for ideally one product in every category that we sell that is just, it's criminal not to buy this thing.

Ben Gilbert 1:16:51 Yeah, and the fact that they just keep whittling it down year over year over year. A great example of this is the POÄNG chair.

David Rosenthal 1:16:58 Yes, another hot dog product.

Ben Gilbert 1:17:01 Absolutely. I think they've sold thirty million of these since 1976. They've just been maniacal about optimizing. So the initial POÄNG chair, which was originally called the POÄNG, not the POÄNG-

David Rosenthal 1:17:13 Mm, I didn't know that.

Ben Gilbert 1:17:14 ... in inflation-adjusted dollars, was three hundred and fifty dollars in 1988. By 2016, they had it down below a hundred dollars, and it's effectively flattened out. It's now a hundred and thirty dollars, but with a little bit more inflation. It's astonishing you can get this chair, that is a living room chair, for a hundred and thirty dollars. Comparable chairs are, like, two to three thousand dollars.

David Rosenthal 1:17:37 Right. You're not gonna buy a POÄNG chair and have anybody mistake it for a Herman Miller recliner.

Ben Gilbert 1:17:43 No, but that's not what they're trying to be.

David Rosenthal 1:17:45 But it's pretty darn close for the delta in price. I mean, a Herman Miller recliner is, what, five thousand dollars, I think?

Ben Gilbert 1:17:53 Something like that. Yeah, maybe this performs the same function, but you're not gonna aesthetically mistake it for a Herman Miller chair.

David Rosenthal 1:18:00 Oh, I guess my point is, like, the delta in the design aesthetics is also way closer than four thousand seven hundred and seventy dollars. [chuckles]

Ben Gilbert 1:18:09 Yes, that's a great point. It has this wow price. When you drive home with it, and you set it up, you can marvel at the fact that it only cost you a hundred and thirty dollars.

David Rosenthal 1:18:16 Yes. Okay, which brings us to the other, I think, really uniquely IKEA piece of this hot dog policy that even Costco doesn't really have. [chuckles] I just love it, the hot dog policy. IKEA, thanks to the catalog, controls all parts of the demand and the supply chain. They control the supply chain, obviously, as we've been talking about, but the catalog, for decades, is the primary marketing and demand-driving channel. So it's not like they're having to buy advertising. They fully control the marketing channel, and so they can use these hot dog products strategically and promote them in each market in the catalog to then drive the visits to stores, drive the huge demands, position them with other products. Then they do the layouts in the showrooms. You know, it's just, it's genius. It all works together.

Ben Gilbert 1:19:14 It's kind of amazing that because, in many ways, they are their own customer acquisition channel with the catalog, that they never-... turned into a customer acquisition channel for other businesses. They should sell advertising. I mean, it's the Amazon play, right, of once you reach scale and you have enough customer eyeballs, you can staple on a near hundred percent margin advertising business for free. And I flipped through decades worth of IKEA catalogs. Unless I missed something, I'd never noticed, like, an emergent advertising business in there.

David Rosenthal 1:19:47 Yeah, it's interesting. But that doesn't actually surprise me. I think Ingvar probably viewed that as a short-term optimization, and that is, like, antithetical to how he wants to run the business.

Ben Gilbert 1:19:59 Yep.

David Rosenthal 1:20:00 So now, what's also interesting, though, is, like, this element that I was just saying of they control the whole demand and supply chain is no longer true in the internet world. Like, in the catalog world, absolutely was true. In the internet world, no, and the company-

Ben Gilbert 1:20:16 Whoa, whoa, whoa, no spoilers. No spoilers. [chuckles]

David Rosenthal 1:20:18 Yeah. Okay, okay, we're getting way ahead of ourselves.

Ben Gilbert 1:20:21 So I'm gonna take us back to nineteen fifty-eight. There's a few more key pieces of the puzzle that needs to come together, but first, this is a great time to talk about friend of the show, Statsig. So as we've been talking about, IKEA's big innovation was finding a way to make high-quality, well-designed furniture available to anyone at crazy affordable prices, and you know the three ways they did this: sweating design and functionality, having a radically different delivery model, and offering great prices through crazy scale, which we are sort of getting to here in the story. Now, it might not seem this way at first, but Statsig is sort of doing the same thing for their category.

David Rosenthal 1:20:58 Hmm. Okay, lay it on me here.

Ben Gilbert 1:21:00 All right, and bear with me, listeners. You probably know the rough story of Statsig by now, but here's a quick refresher. They were founded by a team of engineers at Meta who wanted to build a complete set of data and engineering tools, like those that powered the growth at Facebook, and make all of those available to anyone at any company. Okay, so back to the IKEA similarities. Design and functionality. Statsig's tools were designed and built from the ground up for engineering, data science, and product teams by world-class people in the same functions. This means their tools come with things that aren't really available anywhere else, like advanced statistical treatments, over thirty high-performance SDKs, and the ability to deploy your own data warehouse. Now, the second piece, a radically different delivery model. Unlike legacy vendors, Statsig bundles all of their products, which means that when your team starts to use Statsig, they get access to everything: experimentation, feature flags, analytics, session replays, everything. And so rather than charging for seats or licenses, you just pay for what you use. This is super different than legacy vendors who are focused on maximizing revenue from just one product line, and because it's all sort of an interconnected set of tools, you can consolidate your spend and save time on configuration. So that's the second way. Third, Statsig makes their products super affordable because, like IKEA, they make it up on volume. They power companies like OpenAI, Atlassian, Microsoft, Figma, and they process over a trillion events per day, and they've got a great engineering blog on how they do this. This scale helps them basically give away their product for free to small companies and startups and help larger companies cut their SaaS spend.

David Rosenthal 1:22:39 [chuckles] I love it. I love it. I get where you're going now. Is, Statsig is the IKEA of product tools.

Ben Gilbert 1:22:45 Yes. So listeners, if this sounds interesting to you, there's a bunch of great ways to get started. Statsig has an insanely generous free tier for small companies, a startup program with a billion free events that's fifty thousand dollars in value, and significant discounts for enterprise customers, plus the team is just awesome.

David Rosenthal 1:23:02 They're so great.

Ben Gilbert 1:23:03 To get started, go to statsig.com/acquired, or click the link in the show notes, and just remember to tell them that Ben and David sent you. Okay, so David, I'm taking us back here to the late fifties, where we have a few more pieces of the puzzle of modern IKEA that kind of are coming together. So in nineteen fifty-eight, they expanded... Remember we said there was just, like, some cold food and coffee?

David Rosenthal 1:23:25 [chuckles] Yeah.

Ben Gilbert 1:23:26 They, uh, expanded that. They added hot food. They added self-service. It's more like you see today.

David Rosenthal 1:23:32 This is all at the showroom in Älmhult?

Ben Gilbert 1:23:34 Yep, exactly. And the philosophy behind this is the margin should never exceed ten percent at the restaurant. They wanna use it to attract customers, to retain and delight, but they wanna make their money on furniture. And it's kinda like, David, these hot dog items you're talking about. They don't wanna lose money. Just like Costco, they're sort of opposed to loss leaders. I don't know if it's as religious, but they are looking to make money on everything they sell.

David Rosenthal 1:23:57 I think it's equally religious for different reasons. I think Costco was about not insulting your customers. I think at IKEA, it's Ingvar, just his background in being religiously opposed to losing money. [chuckles]

Ben Gilbert 1:24:12 Right. He's unbelievably frugal.

David Rosenthal 1:24:14 Oh, man, we gotta tell that amazing story we heard in the research. He was doing a store visit somewhere in Europe.

Ben Gilbert 1:24:21 In Germany.

David Rosenthal 1:24:22 Yeah, I think it was in Germany, at night, and, uh, the store manager is like: "Okay, you know, come on in. I'm gonna turn the lights on." He's like: "Dear God, don't turn the lights on! Do you know how much that costs?"

Ben Gilbert 1:24:31 And it wasn't a store manager. It was, like, a really junior person.

David Rosenthal 1:24:33 Yeah, [chuckles] that's right. "Do you know how much it costs? I'm gonna use this flashlight," and they spend hours going through the store with flashlights.

Ben Gilbert 1:24:41 And because he's also, like, obsessive about details and a micromanager, he finds, like, thirty little things wrong, all with a flashlight, and, you know, asks for all of them to be fixed by morning.

David Rosenthal 1:24:51 Amazing.

Ben Gilbert 1:24:52 But this whole restaurant thing, they really find religion on, "This is here because we need to make it worth your while to come all the way to this store. It has to be an attraction." They developed this phrase, "It's tough to do business on an empty stomach," and so it's early days. It's not like prolonging time in store the way that it is today, but it is, "Hey, we wanna add a Disneyland effect and add perceived value to your trip here."

David Rosenthal 1:25:18 Yep.

Ben Gilbert 1:25:19 Today, restaurants, just to flash all the way forward, it is technically the world's sixth-largest restaurant chain, measured by number of customers. In twenty seventeen, they had seven hundred million people per year eat at their restaurants. Now, I think that's not deduplicated. Like, if I eat multiple times per year, that might be counting me. Otherwise, it's-... kind of unfathomable. Does 10% of the world really eat in IKEAs?

David Rosenthal 1:25:46 Even more wild, there are only 476 IKEAs in the world today.

Ben Gilbert 1:25:49 Right.

David Rosenthal 1:25:50 So whether that's de-duplicated or not, 700 million customers across only 476 locations is wild. [chuckles]

Ben Gilbert 1:25:58 Totally wild. 30% of people who visit IKEA do so just to eat. [laughing]

David Rosenthal 1:26:05 I love it.

Ben Gilbert 1:26:06 A lot of meatballs.

David Rosenthal 1:26:07 I have done that many times in my life. [laughing] Most recently in downtown San Francisco.

Ben Gilbert 1:26:13 I don't have many of these stories, and I was trying to figure out why. Like, I was talking to my wife, and she was talking about, "Oh, my God, I loved getting the catalog growing up," and, "Oh, I've furnished so many apartments in IKEA." And I was kind of thinking, like, actually, until the last few years, I haven't really. And like, I've never eaten at an IKEA just to eat lunch. And I kinda realized Ohio did not get an IKEA for a really long time. Like, I grew up without an IKEA near me, and even when I went to college in Columbus, they got one in Cincinnati, but it was until after I left Columbus that they got one there. So until I got to Seattle, I don't think I had ever experienced IKEA.

David Rosenthal 1:26:49 And the Seattle IKEA is so great.

Ben Gilbert 1:26:51 Yeah.

David Rosenthal 1:26:52 Well, I have a question for you then. What year did your family leave Delaware?

Ben Gilbert 1:26:55 '96.

David Rosenthal 1:26:57 [laughing] You grew up very close to an IKEA, and you just didn't realize it.

Ben Gilbert 1:27:02 Oh, really?

David Rosenthal 1:27:03 Because IKEA has been part of my life, pretty much my whole life, and again, I didn't realize why. The first US store was in Plymouth Meeting, Pennsylvania, right outside Philadelphia, which opened in 1985. I was born in 1984. I grew up with, you know, BILLY bookcases and all this stuff.

Ben Gilbert 1:27:21 Ah.

David Rosenthal 1:27:21 Like, it's just been a constant my entire life. I mean, I went to the Småland. I played in the ball pit, all this stuff. [chuckles]

Ben Gilbert 1:27:28 All right. It is funny how I've developed an appreciation as an adult, but it was not, like, a formative thing, like for you and so many others.

David Rosenthal 1:27:36 [laughing]

Ben Gilbert 1:27:36 All right, so into the 1960s, David, they open a bigger store where?

David Rosenthal 1:27:42 Yes. So they actually had opened a showroom in Norway, in Sweden's next-door neighbor country, to be able to sell in, in Norway, but that was, you know, same concept as the Älmhult showroom, not really a store. By the mid-'60s, though, all of this, you know, new urban consumer all really, really taking off. In June of 1965, IKEA opens its second showroom location, very different than the original. This one is almost 500,000 square feet.

Ben Gilbert 1:28:17 What?

David Rosenthal 1:28:17 Yeah.

Ben Gilbert 1:28:18 That's, like, even still probably their biggest store or among their biggest few.

David Rosenthal 1:28:22 I think it is still, I believe, the flagship IKEA store.

Ben Gilbert 1:28:26 'Cause even today, they're, like, three, four hundred thousand when they build new stores.

David Rosenthal 1:28:30 It is a circular building inspired by the Guggenheim Museum in New York City.

Ben Gilbert 1:28:35 Whoa!

David Rosenthal 1:28:36 I think even this one is no longer circular. That does not last in, in the IKEA playbook. It costs 17 million kroner to build or roughly $3 million, compared with the original Älmhult location that Ingvar bought for 13,000 kroner.

Ben Gilbert 1:28:53 God, they must have done so much business out of that catalog and that little... You know, those two tiny showrooms in order to leap to this and spend all that money on this store.

David Rosenthal 1:29:04 Well, by this time, the business was, call it, about 100 million kroner a year by the mid-'60s, when this second store is opening.

Ben Gilbert 1:29:15 So 20 million USD at the time.

David Rosenthal 1:29:18 So a $3 million USD investment in this store is, you know, a lot, 'cause I don't know what their profit margins were, but, like, a big investment, but they could handle it.

Ben Gilbert 1:29:27 So it's probably, like, a year or two of all of their profits go into this.

David Rosenthal 1:29:34 Yes. Most importantly, though, is the location. It is on the outskirts of Stockholm, the biggest and the capital city of Sweden, and for the first time, they actually stock items in the store. By now, flat-pack is really rocking and rolling. Like, they're trying to fit as much in the store for customers to buy, cash and carry out themselves, and this is the first real modern IKEA. On the first day that they open it in June of 1965, they have 18,000 customers [chuckles] come through, and then in that first year, that store alone does 70 million kroner in sales.

Ben Gilbert 1:30:19 Whoa!

David Rosenthal 1:30:19 So it doubles the company's revenue.

Ben Gilbert 1:30:21 They also, at this store, for the first time, now have the setup where customers fetch the products themselves from the warehouse.

David Rosenthal 1:30:30 Yes, and a few more elements of this Stockholm store that you might recognize if you are an IKEA customer today: it's located on the outskirts of the city, with good highways leading to it and lots and lots and lots of parking spaces. Its opening hours are 11:00 AM to 7:00 PM, so that both you, as the customer, and the employees, the coworkers there, are not battling morning rush hour to get there, when, you know, who's gonna be shopping at 9:00 AM in the outskirts of the city anyway? But it's open late after work, so you finish... You do your work, you finish your shift at the factory, you finish your white-collar job, whatever you're doing, great! Hop on the bus, hop in your car, go on over to IKEA, buy some furniture. And yes, Ben, as you say, you can buy and carry away the flat-packed furniture right there.

Ben Gilbert 1:31:19 The fact that you don't need employees to go and fetch things for you, you can just grab them off of shelf yourself after you kind of wind through showrooms, it's like further compounding their cost structure advantage.

David Rosenthal 1:31:31 Totally. So then, [chuckles] this is tragic but ends up being great for the company. Five years later, this beautiful-designed Guggenheim Museum-inspired store, in 1970, one night, the neon IKEA sign on top of the building-... catches fire, and the building burns down. [chuckles] I don't know if it totally burns down-

Ben Gilbert 1:31:50 Whoa!

David Rosenthal 1:31:50 -but it's, you know, uh, major, major damage. I believe the insurance claim resulting from this was, at the time, the largest insurance claim in Swedish national history.

Ben Gilbert 1:32:01 Oof.

David Rosenthal 1:32:01 But I think this is really part of the culture of IKEA, the company, and certainly Ingvar's mindset is, like, every challenge is an opportunity. When they reopen the store a year later, it's got the full customer self-service checkout that you know of-

Ben Gilbert 1:32:17 Mm.

David Rosenthal 1:32:18 -IKEA today, where, like, yes, there are, you know, coworkers there helping you check out, but, like, you're wheeling the stuff up, you're scanning the stuff, you're putting it through. It's got more capacity for more and larger flat-packed items in the warehouse, and this is really the beginning of the end of the mail order business here. I mean, it still exists, obviously, for a long time, but the share of the business that is mail order versus cash and carry in the stores goes way, way, way down.

Ben Gilbert 1:32:47 Mm.

David Rosenthal 1:32:48 Two, they add a children's playroom at the front of the store with a ball pit for kids to be entertained while your parents shop, because Lord knows, [chuckles] you know, how on earth are you gonna do your IKEA shopping with your crazy little kiddos running around?

Ben Gilbert 1:33:02 Which is also a genius way to prolong time in store. I mean, you're just gonna buy more stuff if your kids are looked after. I will say, the Småland at the Seattle store, the idea is a little bit better than the execution. It was a two-hour wait once you get there to get your kid into the Småland, and they only allowed five kids at a time. It was sort of this odd, like, I was all built up for, "Oh, Småland's gonna be this amazing thing."

David Rosenthal 1:33:28 I suspect this is something that, you know, hey, a different era when we were growing up, like, things were, uh ... It worked a little better and, uh, you can't get away with these days.

Ben Gilbert 1:33:36 Totally, like, one person watching 40 kids or something.

David Rosenthal 1:33:39 Yeah, drop your kid off, go knock yourself out, come back with 10 fingers, 10 toes.

Ben Gilbert 1:33:44 Yeah.

David Rosenthal 1:33:45 Can't do that today.

Ben Gilbert 1:33:46 Yep.

David Rosenthal 1:33:47 And then finally, number three in the newly redesigned Stockholm store, yes, they had opened a restaurant at Älmhult at the showroom a couple years ahead of time-

Ben Gilbert 1:33:57 But this was the real, like, cafeteria.

David Rosenthal 1:33:59 The real cafeteria like we know and love it today with the traditional Småland-style menu.

Ben Gilbert 1:34:06 Yes, and so this is basically it. There is a lot that happens after this, but the core concept of the store and why the business model works and all that is pretty baked here by the mid-'60s.

David Rosenthal 1:34:19 Yep, and certainly by 1971, in this sorta V2 of the Stockholm store.

Ben Gilbert 1:34:25 Yep, so across the '60s, they open more Denmark and Norway stores. In the '70s, they open in Japan, Australia, Austria, Canada, Germany, Hong Kong, and Singapore. In '75, they enter Japan for the first time. They try real hard for 12 years to make it work, but it fails, and they withdraw in 1986. A few of the reasons are the furniture is too big. They just didn't understand the needs of that market well. Self-assembly was kind of an anathema to Japanese culture, and the delivery industry hadn't really been built out in the way that they need it to be. There's, like, a necessary precondition to IKEA entering a market, which is there's robust delivery services to make it work if you're gonna rely on the catalog model. Otherwise, people have to be able to drive to the stores and use the store concept, where you grab it off the warehouse, put it in your big car, drive home. In these dense urban areas in Japan, that's not really possible, and so they pull out after 12 years. They did eventually go back in in 2006 and make a bunch of changes to make it work today. But I think Japan was kind of this ... After they saw success in all these other markets, it was a little bit of humble pie for them not seeing it work there, and I think it spooked them a little bit for further global expansion.

David Rosenthal 1:35:44 Yep. It is amazing, in the '70s, really until they go to Japan, [chuckles] I'm laughing using the word uh ... Well, we'll come back to another reason why I shouldn't be laughing using the word. It's almost like they did blitzscaling, you know, across Europe and even beyond Europe in the '70s. I mean, they went all throughout continental Europe. They expanded to Canada, Australia, Singapore. I mean, Ingvar totally got conviction that the newly redesigned store in Stockholm was it, and we were gonna copy-paste it and bring it everywhere.

Ben Gilbert 1:36:17 And they're rapidly scaling with profit dollars.

David Rosenthal 1:36:20 Right. They're not raising money to do this.

Ben Gilbert 1:36:22 Yeah. As we've talked about, they have very thin profit margins, and so what it means is they are just doing tons and tons and tons of volume to enable them to do their future growth with their current profit dollars.

David Rosenthal 1:36:33 Yep. It's hard to get consistent revenue data on the company 'cause it was a private company, still is a private company, but by the 1980s, they're doing $2 billion a year in revenue, so call it 15, 20 years to scale from 20 million to 2 billion. It's incredible.

Ben Gilbert 1:36:51 Yeah, it's interesting. It's a company that is rapidly scaling at the same time that, in their DNA, they're unbelievably thrifty. You kinda wouldn't expect both of these things to be true of the same company.

David Rosenthal 1:37:06 Totally.

Ben Gilbert 1:37:07 This is the same guy ... Like, just to quote the testament of a furniture dealer, this is, like, one of my favorite paragraphs. Ingvar writes, "It is not all that difficult to reach set targets if you do not have to count the cost. Any designer can design a desk that will cost 5,000 kronor, but only the most skilled can design a good, functional desk that will cost 100 kronor. Expensive solutions to any kind of problem are usually the work of mediocrity. We have no respect for the solution until we know what it costs. An IKEA product without a price tag is always wrong. It is just as wrong when a government does not tell the taxpayers what a free school lunch costs per portion. Before choosing a solution, set it in relation to the cost. Only then can you fully determine its worth."... It's amazing that this level of thriftiness and paying attention to the details is also the same company that is, in a decade, expanding all over the globe.

David Rosenthal 1:37:57 Yep, and it's totally what enables it to happen, because it's almost like Warren Buffett, you know, in the Berkshire Hathaway episodes, where as a young man, he's like, "I cannot spend any money, because any money that leaves my bank account will not compound." It's the same thing here with IKEA. They view all of the profits that they are making as, like, compounded value of future investment here.

Ben Gilbert 1:38:22 Mm, that's an interesting way to think about it.

David Rosenthal 1:38:24 So in the '70s, during this, you know, decade of blitzscaling, if you will, for IKEA, Ingvar is in his early 50s, and for a couple reasons, as the company is doing this massive scaling outside of Sweden, he starts to become really concerned about succession and what will happen to IKEA when he inevitably dies. Although he would live for another 40 years after this, he lives to be 91. Sweden, at the time, had high and rising wealth and inheritance taxes. So inheritance taxes for large estates, of which the Kamprad estate and IKEA as an asset would definitely be one, was over 60%. And on top of that, there was an annual wealth tax in Sweden at the time, which was 2.5% of your calculated wealth annually, and your calculated wealth included all of the working capital in any companies you owned.

Ben Gilbert 1:39:34 Whoa! Really? Like, it's the illiquid ownership of the company, plus the working capital in it?

David Rosenthal 1:39:40 Yes. Especially sitting there in the early '70s, knowing you're about to embark on this journey from, you know, call it a couple hundred million kroner revenue business to a multibillion-dollar revenue business.

Ben Gilbert 1:39:54 Oh, his net worth would eventually rise to something around $60 billion.

David Rosenthal 1:39:58 Yep. There-- It wasn't even just gonna be, like, enough capital to pay that 2.5% annual tax. Side note, by the way, in the mid-2000s, Sweden ended up abolishing completely both the wealth tax and the inheritance tax. So actually, at the end of his life-

Ben Gilbert 1:40:15 Huh.

David Rosenthal 1:40:16 ... Ingvar moves back to Småland, moves back to Sweden.

Ben Gilbert 1:40:18 Oh, wow. I didn't realize that was part of it.

David Rosenthal 1:40:21 Yeah, and he dies in Sweden. Anyway, this kicks off for Ingvar and the Kamprads, a whole saga of wealth, succession, corporate planning that ultimately has a huge impact on the company. So in 1973, which is the first year that IKEA expands outside of Scandinavia, Ingvar and his family emigrate to Denmark first to avoid the wealth tax, and then a couple years later, in 1978, they settle in Switzerland. Now, Ingvar actually has multiple goals here, though. It's not just avoiding taxes, although, I mean, he'll be the first to admit, taxes was the, like, first and primary motivation here. In addition to that, and I think this really, really was genuine, he's concerned with ensuring IKEA's continuity and survival, and there are multiple parts to that. One, he wanted IKEA to be completely independent from any one country's political fate. The political history of Europe that Ingvar lived through, and that we're gonna talk about later, is case in point here, right? Like, he has lived through not knowing that countries are going to continue to exist, and he doesn't want any of that to risk IKEA. Two, he also doesn't want anything that would happen within his family to risk IKEA. So by this point, he has three relatively young sons, and he doesn't want to set up a dynamic where the three of them are fighting over control or selling off IKEA or et cetera, et cetera, tearing it apart. And then I think, C, he also wants to ensure that IKEA keeps its focus on the long term and not the short term. And for him, that meant specifically having a huge fear of what would happen if it ever were a publicly traded company. [chuckles] He thought that, like, it was just, like, totally incompatible to be publicly traded and have shareholders and be long-term focused.

Ben Gilbert 1:42:24 I heard a funny quote indirectly from someone who told me that Ingvar once said, "Going public is a little like wetting your pants. It's warm and comfortable for a few minutes, but then after that..."" [laughing]

David Rosenthal 1:42:37 [laughing] Oh, my God. What a folksy dude.

Ben Gilbert 1:42:41 Yep.

David Rosenthal 1:42:41 [chuckles] Wow! So ultimately, after a lot of international lawyers get involved, they decide that what they're gonna do is set up a self-owned foundation based in the Netherlands, so this is like echoes of our Novo Nordisk episode here. And the reason they choose the Netherlands is that Dutch foundations are, at least according to the lawyers, the most bulletproof and hardest to change the bylaws of, and they're going to divide IKEA into two, quote, unquote, "spheres," one of which is going to be the physical sphere and company, and that is the actual stores.

Ben Gilbert 1:43:24 The operator of the stores.

David Rosenthal 1:43:25 Yep, operator of the stores. And the other one is going to be the, quote, unquote, "mental sphere," which is the brand and concept of IKEA. And this is where you end up with this crazy structure where IKEA is two companies today. It is Ingka Holdings, which is the physical sphere, the technically...... largest franchise operator of IKEA stores. They own and operate four hundred of the four hundred and seventy-six IKEA stores in the world today, and that is owned by the Dutch INGKA Foundation, which is a charitable foundation. It's an actual charitable foundation. And then you have the mental company, [chuckles] the brand company, which is Inter IKEA Systems. And Inter owns the IKEA brand, the concept, and then they license the IKEA brand and concept to everyone else who operates the stores as a franchise operator, of which today, INGKA is by far the largest. And in return for that licensing of the brand and concept, Inter IKEA gets a royalty of three percent of gross sales from every store.

Ben Gilbert 1:44:34 So I'm gonna say all of this again in different words, just because it is impossibly hard to parse the first time. You can essentially think of it as a franchisor-franchisee relationship. The franchisor, who owns the brand, the IP, all that, is Inter IKEA Systems. They work with a company called INGKA, who has the privilege of operating the stores and getting access to the intellectual property in exchange for a three percent royalty on their revenue. So every year, Inter IKEA Systems, and this changes a little bit over time, but Inter IKEA Systems, the parent company, designs furniture and works with manufacturers to have it made, and upkeeps the brand and all the corporate stuff.

David Rosenthal 1:45:20 Designs the catalog, et cetera, et cetera.

Ben Gilbert 1:45:23 Sells that furniture to INGKA or any of the other franchisees. And the reason there's other franchisees is because you want specialized franchisees in different markets where you don't understand the local culture. So that's kinda why there's INGKA for a lot of the, like, Western Europe and English-speaking world, and then there's specific franchisees that are not INGKA for other parts. But just simplify it for now, 'cause INGKA is, like, ninety percent of the stores. And then INGKA buys that furniture from Inter IKEA Holdings, pays three percent of revenue, and then runs the stores.

David Rosenthal 1:45:59 Yep.

Ben Gilbert 1:46:00 Now, David, I simplified out the part about the foundations that own each of them. I think we should come back to that later, 'cause there's some interesting nuances there, but that's sort of the structure they devise here.

David Rosenthal 1:46:11 Yep, and then ultimate foundation owners for both of these two separate companies that get set up, the Kamprad family, at least after Ingvar dies, the Kamprad family will be involved, but does not have ultimate control or voting power over either of these companies. So today, certain of the brothers are on the board of certain companies. All three of them are on the board of one company or the other, but they are far from a majority, and they cannot, even if all three of them get together, influence or control the decisions of either company. And that was super important to Ingvar.

Ben Gilbert 1:46:51 Yep, it's pretty interesting.

David Rosenthal 1:46:53 And I believe the INGKA company and foundation still rolls up to a Dutch parent, and the Inter holding company, I believe, is a Liechtenstein foundation that owns it. It's all, like, this sort of spread around to ensure this sort of political continuity of the company. It's almost sort of like Bitcoin maximalist people who have ripped up their keys into different parts and put it in different safe deposit boxes all around the world. That is exactly what Ingvar is doing here.

Ben Gilbert 1:47:24 That's a good analogy. Yes, you are correct. INGKA, the franchisee who operates the stores, rolls up to a Netherlands-based charitable foundation, where Inter IKEA Systems, the kind of parent that owns the IP, rolls up to a Liechtenstein-based enterprise foundation. Different, like, non-charitable, is an enterprise self-owning foundation based in Liechtenstein, which, for those wondering what Liechtenstein is [chuckles] , it is a country that is sort of landlocked and sandwiched in between Austria and Switzerland with a very small population, but it happens to be very good for establishing entities like this from a tax and treaty perspective.

David Rosenthal 1:48:10 Yep, and you said, too, just sort of a enterprise foundation, I think is the word you used, not a charitable foundation. The purpose, this is like a circular function in computer science, the stated purpose, and goal, and activities of that foundation is to ensure the continued operations and success of IKEA.

Ben Gilbert 1:48:31 Yes, to secure the independence and longevity of the IKEA concept and the financial reserves needed to ensure this. That is the purpose of the foundation.

David Rosenthal 1:48:44 Which is so interesting. Again, the INGKA Foundation is a charitable foundation, and they do disperse, I think now, like two, three hundred million euros a year in charitable donations around the world.

Ben Gilbert 1:48:55 And it's to things you would expect. It's climate, it's poverty, it's charitable causes. But yeah, to your point, the Inter IKEA Holdings, the foundation at the top of that, is literally to ensure IKEA's continuity.

David Rosenthal 1:49:06 It is like a Fort Knox for IKEA.

Ben Gilbert 1:49:10 Fascinating. Okay, so the structure is gonna shift a little bit. As I mentioned, like, they'll rename things, they'll break some things apart, they'll shift who's responsible for what on the edges, but that's largely the structure that is in place going forward.

David Rosenthal 1:49:22 Yep. So once this is all done, and Ingvar and the family no longer directly own the company, in 1976, he writes this document that is intended to serve as sort of a, like, forever operating system of the company.

Ben Gilbert 1:49:40 It's almost like the Bezos leadership principles.

David Rosenthal 1:49:43 Yes, exactly. Ex-- That's exactly what it was like. And he titles it "The Testament of a Furniture Dealer," as we've talked about. And it literally, like, he's treating this like it's his last will and testament, even though he stays involved in the business for another forty-two years and hands-on the whole time.... It's an amazing document. We'll link to it in the show notes. Like, you should go read it. It's on the IKEA website. It's really cool. So it has nine testaments, so sorta commandments, and you already read one, [chuckles] which was the mortal sin of wasting resources at IKEA. The first one, though, number one: the product range, our identity. "We shall 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." Talked about that earlier. "Our products must be functional and well-made, but quality must never be an end in and of itself. It must be adjusted to the consumer's needs." This is fascinating. He continues, "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. Quality must always be adapted to the consumer's interests in the long term. No effort must be spared to ensure our prices are perceived to be low. There shall always be a substantial price difference compared to our competitors, and we shall always have the best value for money offers in every function. Every product area must include breathtaking offers." This is before the hot dog analogy in '95.

Ben Gilbert 1:51:23 It's great! It makes so much sense.

David Rosenthal 1:51:25 It's so great.

Ben Gilbert 1:51:26 The analog to software companies is engineering for engineering's sake. There's many examples of sort of architecting the perfect system that's, like, wildly overkill. Anyone who's put together IKEA furniture knows anything that's not seen, like things that on the bottom that face the floor or that face the wall, are not finished, and oftentimes, like, the back of shelving units or the back of cabinetry is, like, thin, flimsy... You don't need it to be structurally stable, so it's not, 'cause they wanted to cut a corner there and make it as cheap as possible because they view that as a value for you, the customer.

David Rosenthal 1:52:00 It's not that they don't care or that it's sloppy. They care a lot.

Ben Gilbert 1:52:03 Right. It's that it would be insulting to spend money on it.

David Rosenthal 1:52:06 Yes, exactly. This is the polar opposite viewpoint of the Apple, Steve Jobs, the insides-

Ben Gilbert 1:52:13 [chuckles]

David Rosenthal 1:52:13 ... must be beautiful. [chuckles]

Ben Gilbert 1:52:15 Yes.

David Rosenthal 1:52:15 But it's actually a lot closer in philosophy than you would think. It is intentionality about it.

Ben Gilbert 1:52:21 Yes.

David Rosenthal 1:52:22 Nowhere in either company is there sloppiness, but at IKEA, it's, "We are going to intentionally make the backside and the insides not beautiful so that it is a higher value to you as a customer."

Ben Gilbert 1:52:37 Yeah. There's so much good stuff in this document. Just to illustrate Ingvar's personality, the fact that he wrote this is... Well, here it is: "Bear in mind that time is your most important resource. You can do so much in ten minutes. Ten minutes, once gone, are gone for good. You can never get them back. Ten minutes are not just a sixth of your hourly pay. Ten minutes are a piece of yourself. Divide your life into ten-minute units and sacrifice as few of them as possible in meaningless activity." [chuckles]

David Rosenthal 1:53:07 It's so f- I'm so glad that you brought this up. I wasn't gonna put this in the episode, but I totally highlighted that reading it, and I was like: Wow, I need to think about that in my life.

Ben Gilbert 1:53:16 Totally! And there's so many times when we're, like, ten minutes away from a call that you and I are jumping on or ten minutes away from recording an episode, and I'm like, I'm amazed in the amount I could get done in those ten minutes when I really was forced to. And it's such a good point. Like, if you actually force yourself, "Hey, just go focus and get ten minutes of work done," you can be astonishingly productive in ten minutes.

David Rosenthal 1:53:38 Totally. I hadn't thought about this, but, um, maybe IKEA and Apple are more spiritually aligned than I even realized.

Ben Gilbert 1:53:45 IKEA and Apple are very similar in a way that I will get to later.

David Rosenthal 1:53:48 Ooh, okay, I love it. Okay, and then another similarity analogy, the last testament, number nine, is just so early Jeff Bezos shareholder letter-like that we can't not read it. The title of the testament is "Most Things Still Remain to Be Done. A Glorious Future!" So he, he writes, "The feeling of having finished something is an effective sleeping pill. A person who retires feeling that he has done his bit will quickly wither away. A company which feels that it has reached its goal will quickly stagnate and lose its vitality. Happiness is not reaching your goal. Happiness is being on the way. It is our wonderful fate to be just at the beginning in all areas. We will move ahead only by constantly asking ourselves how what we are doing today can be done better tomorrow. The positive joy of discovery must be our inspiration in the future, too."

Ben Gilbert 1:54:46 Oh, I share this affliction.

David Rosenthal 1:54:48 A hundred percent, me too.

Ben Gilbert 1:54:50 I feel for Ingvar, that this is his, like, view on life, because anytime anything awesome happens, I'm, like, immediately onto the next thing and unwilling to acknowl- Like, it doesn't give me happiness that something great happened. What gives me happiness is working toward the next great thing. If we ever just decided, "All right, we made all the good episodes. We're done," I'd be miserable.

David Rosenthal 1:55:11 I was gonna laugh. I'd be like, "This is the story of Acquired too"-

Ben Gilbert 1:55:13 Yeah

David Rosenthal 1:55:14 ... I think, you know? [chuckles] It's so funny. But more on the personal life advice from this, too. Like, Ingvar, I think, is living proof of this. I mean, the man lives to be ninety-one. He clearly didn't think he was gonna live to be anywhere near that age, and the stories we heard of him visiting stores, being super engaged in board meetings, making decisions, making product decisions up until the last weeks of his life at ninety-one years old are... I think he is totally right. You know, he writes, "A person who retires feeling that he has done his bit will quickly wither away." That is like, no more perfect example of that exists than Ingvar himself.

Ben Gilbert 1:55:51 Yeah, happiness for him was making things a little bit better. If he has nothing to make better, what's his reason for being?

David Rosenthal 1:55:59 Yep, totally.... So this is the mindset that Ingvar and the company are going into the '80s with, and the '80s is just continuing this compounding. So nineteen eighty-one, they open stores in France and Spain. Nineteen eighty-three, they go to Saudi Arabia. Nineteen eighty-four, they go to Belgium. Nineteen eighty-seven, they go to the UK. Nineteen eighty-nine, they go to Italy. And along the way, in 1985, as we talked about, they opened the first US store outside Philadelphia, in Plymouth Meeting, right by King of Prussia. Frequented it often as a child, outfitted my bedroom-

Ben Gilbert 1:56:35 [chuckles]

David Rosenthal 1:56:36 -and my family room, and everywhere else. The interesting thing about the US, though, which I was so surprised reading, 'cause again, IKEA has just been part of my life forever. It actually doesn't work that well for a really long time.

Ben Gilbert 1:56:51 Yeah, it opens with a bang. In 1985, they do this, like, incredible marketing campaign in the Philadelphia area. Part of it actually was figuring out how it should be pronounced, because in Europe, it was IKEA. The way you would pronounce it as a Swedish person is IKEA, and the ad campaign, they decided Americans are just gonna pronounce it IKEA, so let's lean into it. So it was an I and a picture of a key, dash U-H. And so coming soon, IKEA, and people sort of knew about it 'cause it had been in Canada for nine years. I think it had started in Nova Scotia, and actually, I happen to know the founders of Costco made a special trip up to one of the Canadian IKEAs even before the founding of Costco, 'cause they had so much respect for IKEA as a brand they admired. They, like, wanted to go and see it and experience it.

David Rosenthal 1:57:44 Oh, that's amazing!

Ben Gilbert 1:57:46 Yeah. Isn't that crazy? So, like, people in the US, especially merchants, and people knew of IKEA from its Canada presence, so it's opening. The pent-up demand in Philadelphia from the cacophony of factors leading to the excitement around it was insane. There was over a one-mile long line to get into the store. They ran out of merchandise on opening day, and they actually had to run radio ads, apologizing and announcing that they were restocking the store as fast as they can.

David Rosenthal 1:58:15 Whoa! That's wild.

Ben Gilbert 1:58:17 That said, a failure of IKEA corporate, as they were expanding around the US, was assuming that the US was homogenous. And so I think they expanded to ten or twelve stores, and it wasn't going great relative to their other markets, and I think it's 'cause they sort of misunderstood that the US has really different needs in really different parts of the country.

David Rosenthal 1:58:42 Yeah, that would make sense. I mean, in, in Europe, not to say all European countries are homogenous, but any given European country is a lot more homogenous than all of the United States of America. And there was also some just basic US market-specific stuff. I love this, uh, softer sofas. Americans like to sit in the sofa, whereas Europeans sit on the sofa.

Ben Gilbert 1:59:05 Oh, really? Is that part of it?

David Rosenthal 1:59:07 Yep, yep. So the sofas are softer in America.

Ben Gilbert 1:59:09 [laughing]

David Rosenthal 1:59:09 You sink into them, whereas in Europe, you know... Yeah. [chuckles]

Ben Gilbert 1:59:13 Funny. Yeah, around this time, I think when they were observing the US stores were not in great shape, they were open to the idea of individuals franchising IKEA stores. Now, they had this structure in place. They thought, "Maybe this is an interesting thing for former longtime IKEA employees to do, to sort of open up a store." So they did an experiment starting in Seattle, and the sort of idea from Ingvar was, if you have your own wallet on the floor, how do you do compared to the corporately owned stores? And it was this-- essentially like a bake-off and a test to see if the bureaucracy was hurting them, or if they had too many layers of management, or if they had more innovative marketing ideas, which the independently owned stores, specifically the Seattle one, absolutely did. Created their own marketing campaigns, and, like, it became pretty divergent. The Seattle store was actually a leased old Boeing warehouse that ended up being laid out pretty differently than other IKEA stores, and so you kinda get what you ask for. If you want different ideas, the concept is gonna end up being pretty different. So they only opened one or two more, despite the fact that the locally owned stores... Well, the Seattle store actually did way better. We think it was the highest performing US store and beat all the corporate-owned ones. Despite doing another deal in San Diego and another one in Houston, eventually, they kinda wanted to bring the learnings back to the mothership to kinda have them all be homogenous, and so all the US stores are now operated by Ingka. But for anyone in Seattle, that during the twelve years of independent ownership, visited that store, it actually was a pretty different thing with very different marketing materials than anyone else in the US was getting.

David Rosenthal 2:00:58 Was it in the same location, uh, that the current one is, down in Renton?

Ben Gilbert 2:01:02 I think that where the original IKEA was is now the parking lot, and they've shifted and built this new shiny building next to it.

David Rosenthal 2:01:08 Man, I spent so much time in that store when I first moved to Seattle to work for Madrona. I mean, I was moving across country as a young person on my fourth and fifth apartment since graduating from school three years earlier.

Ben Gilbert 2:01:29 Wow!

David Rosenthal 2:01:30 Man, I was so squarely in the sweet spot for IKEA at that moment in my life. It was almost a weekly pilgrimage that I did to that IKEA store.

Ben Gilbert 2:01:40 Wow.

David Rosenthal 2:01:41 And I used to love going to the As-Is section. Like, I would always start there at the end and be like, "Okay, what can I get a deal on here?"

Ben Gilbert 2:01:47 'Cause As-Is is, like, returns and-

David Rosenthal 2:01:49 Yeah, broken stuff or showroom floor stuff that they're getting rid of.

Ben Gilbert 2:01:53 Yeah, yeah. It's like when I enter a Lululemon, I always go right to the back and look at the clearance rack.

David Rosenthal 2:01:57 Yep.

Ben Gilbert 2:01:58 Even though Lululemon's clearance is horrible, they're, like, fifteen percent off or something.

David Rosenthal 2:02:02 Oh, man, sometimes in the IKEA As-Is section, you can get some screaming deals.

Ben Gilbert 2:02:07 [laughing]

David Rosenthal 2:02:07 Some would argue everything is a screaming deal.

Ben Gilbert 2:02:10 ... But to this point of, like, the reason they were doing this Seattle-specific thing, the individual franchising, this like, Ingvar was obsessed with reducing bureaucracy. I get the sense this is still an ongoing battle today, now that they're a bigger company, in figuring out how to be as lean and scrappy as they were. You know, when you have more committees, and more lawyers, and more traditional corporate leaders from other companies, and all that coming in, this sort of thing is a helpful antibody against that.

David Rosenthal 2:02:40 Totally. There's one other thing that happens in 1985 in IKEA land.

Ben Gilbert 2:02:46 Meatballs, baby. It's like the final piece of the puzzle.

David Rosenthal 2:02:49 They add meatballs to the menu. Now, this is what's funny. You would think this would be, like, the capping of his career, the end of the story. You know, it's, um, 1985, they add meatballs, the concept is perfected. In 1986, Ingvar is sixty years old. He steps down as president of the IKEA store operation, of Ingka.

Ben Gilbert 2:03:11 It's the reverse Morris Chang. Isn't that the year he started TSMC? He was fifty-nine, something like that.

David Rosenthal 2:03:17 That's right. Yes, he steps down as president in 1986. I don't think anything changed whatsoever in his daily activities. I think he was doing exactly the same things that he was always doing, and, uh, his successor, a guy named Anders Moberg, does stay there, I think, for twelve, thirteen years, maybe. He would leave at the end of the '90s to go become president of Home Depot's planned European expansion-

Ben Gilbert 2:03:42 Mm.

David Rosenthal 2:03:42 -which then ends up not happening, and so he would leave Home Depot. But yeah, I think he was constantly clashing with Ingvar about, like, "Hey, I'm the president here." "No, no, no, there's only one president at IKEA," [chuckles]

Ben Gilbert 2:03:54 [chuckles]

David Rosenthal 2:03:54 ... Even if not in name, and that was Ingvar.

Ben Gilbert 2:03:56 Do you know what Anders Moberg is doing now?

David Rosenthal 2:03:59 Ooh, I do not.

Ben Gilbert 2:04:01 Anders is on the board of directors for the IKEA Foundation.

David Rosenthal 2:04:07 Oh, interesting!

Ben Gilbert 2:04:09 Yep.

David Rosenthal 2:04:09 Well, there couldn't have been that many hard feelings then.

Ben Gilbert 2:04:12 Right. Yeah, which is the foundation on the Ingka side of the tree, the franchisee side.

David Rosenthal 2:04:18 Amazing.

Ben Gilbert 2:04:18 With two of the sons, two Kamprad brothers.

David Rosenthal 2:04:22 Yep, and I think the third son is on the Inter board.

Ben Gilbert 2:04:25 Yes. Yep, exactly.

David Rosenthal 2:04:27 So that takes us into the '90s. Basically, the compounding story continues unabated. In 1994, they enter Taiwan. In the spring of 1998, they enter China. They expect that China will become a obviously huge, huge market for them, which it does. By the end of the '90s, IKEA is a ten billion dollar annual revenue business. They're rocking and rolling.

Ben Gilbert 2:04:53 Seriously. There is another thing that happens in the '90s that we have to talk about on this episode, and happened way earlier in Ingvar's life, but this is the moment where it really intersects the IKEA story. The news comes out that in his youth, Ingvar was a part of a Nazi and fascist movement in Sweden, which in some ways is not surprising. I mean, his grandparents had immigrated from Germany, had very strong feelings, had lived this horrible life, and Ingvar very much looked up to his grandma and sort of looked to her for political, moral, social guidance. And so, unfortunately, Ingvar was a part of this Swedish fascist movement. It was, like, sort of, uh, provable that he was attending meetings, helping to organize, raised funds, recruited members. He stayed close to this Swedish leader even after the war. In as late as 1950, wrote a letter that he was proud of his involvement. The net of all this is, in 1994, when this came out, he immediately came out and said that his fascist activities were, "A part of my life which I bitterly regret, and the most stupid mistake of my life." He was direct about it. In fact, the first employee of IKEA was a Jewish refugee who had fled Austria in 1943. So there's a lot of complex stuff going around here, but the thing that is definitely admitted to, proven, is that he was a recruiter, organizer for the Swedish fascist movement during the Nazi regime.

David Rosenthal 2:06:34 Yep. The extent of his involvement in the Swedish fascist movement after the war actually didn't come out then in the '90s, came out later in the 2000s, and Ingvar, I think, rightly took a lot of flak for not fully disclosing how long that went on.

Ben Gilbert 2:06:55 Yeah, he had a friendship with the Swedish Fascist Party leader, who would go on to be this pretty horrible, vocal Holocaust denier. And Ingvar maintained that friendship, and even at the end of his life, went on the record and said this person was a great man. So, you know, on the one hand, you wanna say, "Look, he apologized, and it was fifty years earlier, and he was seventeen at the time. Can't a person make a mistake when they were younger, and admit a mistake, and move on?" On the other hand, you could imagine wanting to give him more forgiveness if he hadn't continued to stand by the Holocaust denier guy, maintain that friendship-

David Rosenthal 2:07:31 Or just came clean about that whole thing initially.

Ben Gilbert 2:07:34 Totally. Or with his vast, vast resources, made a big contribution to a Holocaust museum, or the families, or something.

David Rosenthal 2:07:43 Yep. This is one of these things that covering these old European companies, like, you can't avoid this.

Ben Gilbert 2:07:49 Totally. My heart dropped, and it was also not surprising when we first started doing the research and had no idea and came across... It's not hard to find this. You come across it for the first time, and you're like, "Ah, crap!"

David Rosenthal 2:08:00 Yep.

Ben Gilbert 2:08:01 So coming out of the '90s-

David Rosenthal 2:08:02 Coming out of the '90s, in 2000, IKEA starts their next big geographical growth initiative, which is Russia.... So they reach a deal with the Russian government that IKEA is gonna enter Russia, and they're gonna use the market, which they expect to be really big for IKEA, to also pilot the, quote, unquote, "MEGA," M-E-G-A, all capital, shopping center concept, which I think was actually, like, the brand name of this shopping center, that they then later roll out to other places around the world. And the idea is IKEA, writ large, has so much capital and so much resources at this point. We've always owned our own real estate, and we think that's a key part of securing that future. We have so much more cash resources now, what if we also invest in, like, large retail centers around the IKEA store? Which they hadn't really done before. And the idea, this is kind of genius and not novel now because so many other folks do it, we surround the IKEA with lots of partial competitors. 'Cause IKEA sells so much stuff in its range that, yes, there could be a Home Depot there, or yes, there could be a Bed Bath & Beyond there. I'm using American terms here. Obviously, these are not Russian stores, and we compete with them partially.

Ben Gilbert 2:09:21 I didn't realize Russia is where they started this strategy.

David Rosenthal 2:09:24 Yeah, Russia is where they started. But because it's now this retail center, if even only, say, ten percent of the people that are coming go there for, call it Bed, Bath & Beyond, might also visit IKEA, well, then that's a found extra ten percent customers for us. So they pilot this in Russia, which is interesting, and I think it works pretty well. Unfortunately, for IKEA and everything that [chuckles] would happen in Russia over the next twenty years, they end up completely exiting the market in March of 2022 after Russia invades Ukraine. So they had seventeen stores total in Russia, fourteen of which were these MEGA complexes. They close all the IKEA stores. They sell off the fourteen MEGA complexes to the, um, Russian, uh, I think supermarket chain, Gazprombank. So they end up fully exiting the market after twenty years, but it does become pretty large for them and sort of pilots this MEGA retail center idea.

Ben Gilbert 2:10:24 Yeah, I mean, as much as twenty years later, they had to sell it all off, or in some cases, I imagine they didn't get a return, they just had to, like, close up shop. It does lead them to this insight, which is, we've been building these Disneylands out in the potato fields, and I've heard a few people refer to the potato fields, and, and I, I read it in a few places. And then everything springs up around. We should probably benefit from the fact that everyone is springing up around it to try to take advantage of the fact that people are driving out for their day at IKEA. And so they wanna be everyone's landlords who are drafting off the success of IKEA, creating a whole bunch of traffic to this area. I think it's a pretty major strategy of theirs now, whenever they open a new store, to own as much real estate as possible around it and help develop it.

David Rosenthal 2:11:10 Yep. I mean, gosh, I think about here in the Bay Area, the Emeryville store across the Bay, in the East Bay. I don't know how much of the Emeryville complex they own, but there is so much retail all around that. Yes, it would be genius for IKEA to participate in it.

Ben Gilbert 2:11:27 Yep. So another thing that happens around this era, it's sort of the mid to late nineties, is they really codify these principles with what they call democratic design. They had always believed in optimizing form and function. Like, they wanted things to have beauty, but also incredible purpose, but they added three more pillars. So they now have these five pillars. So you've got form, function, quality, sustainability, and low price. And we've talked about the quality, we've talked about... Again, quality is not maximum quality, it's appropriate amount of quality for the object. Low price, we've talked a lot about. Sustainability, they were extremely early. This is before anybody's mentioning ESG or anybody, like, uh, most people are mentioning climate. They are making heavy investments, even in the late nineties, when it was kind of viewed as heretical. They probably wouldn't have been able to do it if they were a public company, but starting to invest in renewable energy and other things, and now this is, like, a huge... If you go to ikea.com, it gets a lot of real estate in everything they do as their sustainability efforts. But their goal is to optimize across these five vectors and weigh the trade-off in between them. And so their idea of democratic design is that everyone, regardless of their income, can access well-designed products to improve everyday life. And every time they iterate on a product, every year, they should be further optimizing some set of the products in the range to get a little cheaper or find a little better way to manufacture it, or develop some way to serve more customers with the same product to get a little bit better scale economies, or to do something in a slightly greener way. You could imagine a five-point diagram where they have sort of a score on each of these five. They want the total area to be as high as possible for everything they do across those five vectors.

David Rosenthal 2:13:19 You sound like a, uh, McKinsey consultant now. [laughing]

Ben Gilbert 2:13:21 [chuckles] I am confident that diagram has a name, and I am proud that I don't know it.

David Rosenthal 2:13:26 Yes. [chuckles] Me too. I've seen them before, and I don't know what it's called, and I don't wanna know. [laughing]

Ben Gilbert 2:13:31 But yeah, that is democratic design.

David Rosenthal 2:13:33 Jumping forward to 2007, they hit twenty billion in revenue in 2007, up from, you know, call it ten in '99, 2000. So growth is really still going here. And then... they hit a rough patch. Part of that, obviously, is the financial crisis in 2008 and onwards, but it's also e-commerce. [chuckles]

Ben Gilbert 2:13:56 Yeah.

David Rosenthal 2:13:57 So IKEA makes the, like, considered and deliberate decision here in the mid-2000s, as e-commerce is taking off, not to participate, or at least to participate only as minimally as is required.

Ben Gilbert 2:14:13 Which you can understand, it is against every other element of their DNA.

David Rosenthal 2:14:18 Totally!... And I'm sure still to this day, very much less profitable for IKEA than in-store visits.

Ben Gilbert 2:14:26 I bet e-commerce is not a profitable business for them.

David Rosenthal 2:14:29 I suspect that is right.

Ben Gilbert 2:14:30 If you just think about all the ways in which they whittle price down, every single place they could make a deal with a customer and say, "Hey, how about you do a little bit of work, and we don't? We'll give you a better price." And the customer says, okay. You know, it's picking it out yourself in the warehouse. It's assembling it yourself at home. It's driving it to your house. It's, "Oh, I don't need the back to look good." You know, it's every single way in which the customer makes the deal with IKEA to, yeah, lower the price a little bit. E-commerce blows it all up. The overhead, the cost structure required for e-commerce, I mean, shipping things to your house, having the delivery network, figuring out a whole new supply chain. Like, should it come from the store every time? Should it not come from the store every time? Should we box them differently?

David Rosenthal 2:15:15 Should we use third-party logistics? Should we use our own, et cetera, et cetera.

Ben Gilbert 2:15:19 It goes in the opposite direction as everything they've been trying to optimize for the last fifty years.

David Rosenthal 2:15:24 Totally. And even more than that, we alluded to this much earlier in the episode, it also breaks the beautiful sort of closed-loop ecosystem of controlling both the demand and the supply chains. In an internet, e-commerce, post-catalog world, IKEA no longer controls the demand chain in the way that they did before.

Ben Gilbert 2:15:44 Right.

David Rosenthal 2:15:45 So for the next four years, between 2007 and 2010, revenue is basically flat. Growth falls off a cliff, like zero growth for four years. In 2011, they do start growing again. Revenue hits twenty-five billion euros. They enter Latin America, so they're starting to open up new markets again.

Ben Gilbert 2:16:07 Yeah, but 2014, they decide to shift strategy, but not to start doing e-commerce. The strategy shift is to start opening small stores in cities, starting in Hamburg, Germany. They have now embraced this and launched in dozens of cities.

David Rosenthal 2:16:24 Yep, including San Francisco.

Ben Gilbert 2:16:26 Yeah. It's this smaller set of products, so it's pretty interesting observing this trend toward urbanization and trend toward buying online. As of 2014, they still don't really have e-commerce.

David Rosenthal 2:16:39 Yep.

Ben Gilbert 2:16:39 And on the one hand, maybe that's the right strategy. Maybe they never should have done e-commerce. I don't really know. Because they're not a public company and because they don't break out segments, we don't really get to know if e-commerce is a profitable business for them. What we do know is that over time, their revenue keeps growing. At least if you look at Ingka, the operator of these stores, their operating profit does not. In fact, over the last several years, it's been declining. So as a percentage of their revenue, the operating profit of these stores is going down, and David, I think where you're sort of going with this is they really start going down once IKEA does meaningfully start investing in e-commerce. Starting in 2018 is when they really put their foot on the gas.

David Rosenthal 2:17:26 And today, 2024, e-commerce is twenty-six percent of revenue.

Ben Gilbert 2:17:32 Right. So it is what their customers want. So you can't bury your head and say, "Look, forever, we're not gonna do e-commerce, 'cause it doesn't really fit with our model." If it's what your customers want, and the fact that twenty-six percent of people are doing it today, clearly, you do have to go do that, but I'm not sure yet that they have a profitable way to do that with their model.

David Rosenthal 2:17:51 I mean, simply just inferring from the financial statements, they don't- [chuckles]

Ben Gilbert 2:17:55 ... Because revenue is growing, e-commerce share is growing, and operating income is flat to declining. Yeah. My only skepticism on it is, like, before truly issuing judgment there is maybe there's something we're missing, since we don't have full financials, and we're just looking at Ingka, which is the franchisee that operates the stores. Maybe there's... I don't know, but yeah, I mean, you and I ran the numbers. I'll pull up the spreadsheet real quick. Starting in 2017, revenue continues to grow on the order of five-ish percent per year, but their, uh, operating margin drops from eight percent, six percent, five percent, and kinda hovers in this three to five percent range the last few years.

David Rosenthal 2:18:36 Yep.

Ben Gilbert 2:18:37 So something is happening that is making them less profitable.

David Rosenthal 2:18:40 Yep, and seems like a fair assumption. It's e-commerce.

Ben Gilbert 2:18:45 Yep.

David Rosenthal 2:18:46 2018, two big things happen. One, they enter India. Two, Ingvar passes away in January 2018 at age ninety-one, and, you know, like we said, he's working right up to the end. One sort of poignant story we heard in the research is, you know, after one of the last board meetings that he was part of, he sort of took the rest of the board members and management aside and said, "I'm so jealous of you," you know, he knows he's coming to the end of his life, "that you get to keep working in IKEA and running this business, and I don't." [chuckles] It's like, this was his life.

Ben Gilbert 2:19:21 Yep, absolutely. So 2021, they finally discontinue the catalog. It's a sad, sad time. At peak, two hundred and twenty million copies were printed across sixty-nine different versions, thirty-two languages, and fifty markets. I mean, they really used to have their own proprietary relationship with customers, and in this new era on the internet, any time that I have a thought, "Oh, I, I need to go buy something," I Google it. I look at a bunch of retailers. I am not specifically IKEA's customer in the way that in 1970 you would've been an IKEA catalog subscriber, and they don't really have a way to engage people as strongly as they once did. I mean, email marketing is just not the same [chuckles] as-

David Rosenthal 2:20:11 No

Ben Gilbert 2:20:11 ... what the IKEA catalog was.

David Rosenthal 2:20:13 No, not the same kind of catalog.

Ben Gilbert 2:20:15 Now, on the one hand, they're competing on equal footing. On the other hand, I've spent thousands of dollars at IKEA over the last few years since moving to a new house, having a baby. Yesterday morning, I bought seven hundred dollars worth of IKEA merchandise, in part to prepare for this episode, but in part, I needed stuff.

David Rosenthal 2:20:32 Right? I mean-... Hell, I've got the IKEA high chair that I've used across two kids now.

Ben Gilbert 2:20:38 Yep. Oh, yeah, my son's crib is IKEA. Oh, and by the way, that seven hundred dollars was spent on e-commerce.

David Rosenthal 2:20:44 Oh, you didn't spend that on your trip to the store?

Ben Gilbert 2:20:47 No, I sp-- I had two big IKEA transactions in the last week. I mean, I wouldn't have gone to the store if I wasn't preparing for this episode, but the stuff that I bought online, that was stuff I needed, and I probably wasn't gonna go to the store to buy it.

David Rosenthal 2:20:59 Man, so you willfully and intentionally cost IKEA margins. [laughing]

Ben Gilbert 2:21:05 [laughing]

David Rosenthal 2:21:06 Literally took money out of their foundation's profits.

Ben Gilbert 2:21:11 I could have taken more time and gone to the store, but this episode would've been worse. I wouldn't have had as much time to research.

David Rosenthal 2:21:17 [laughing] Ah, there we go. This is, like, the version of, you know, when you, uh, Google for products you want, you know, click on the organic results, don't click on the ad result, even though it's at the top of the page, to save your, you know, favorite-

Ben Gilbert 2:21:31 Yes

David Rosenthal 2:21:31 ... company's money. Don't buy IKEA online. Go to the store if you love IKEA.

Ben Gilbert 2:21:37 Eh, at some point, it'd be great to talk to somebody at the company about this. I'm sure they don't, like, lose mon-- but they don't make as much money. Uh, maybe they do lose money on online orders. I don't know.

David Rosenthal 2:21:45 I don't know. Ingvar isn't alive anymore. I don't know.

Ben Gilbert 2:21:48 It's true. I will say, a thing that illustrates every point we've been making on this episode really, really well is, so they bought TaskRabbit for a small amount, fifty to seventy-five million, somewhere in there, a few years ago.

David Rosenthal 2:22:01 Yep, twenty seventeen.

Ben Gilbert 2:22:03 And I checked the little box, like, "Provide me an estimate of what it would cost for a TaskRabbit to come to my house and assemble all this stuff." Three hundred and fifty bucks on a seven-hundred-dollar order.

David Rosenthal 2:22:16 So half of your purchase?

Ben Gilbert 2:22:17 Yeah. That is the perfect encapsulation of how much money customers save by the IKEA flat-pack, pick-up-yourself-at-the-warehouse model. In fact, it's more than that, 'cause I think it was, like, thirty bucks or fifty bucks in a delivery fee, so call it four hundred dollars that you're saving by buying something the IKEA way versus a fully assembled, delivered-at-your-house thing. I'm saving over a third of the total purchase price by doing it the IKEA way versus the traditional way.

David Rosenthal 2:22:48 [chuckles] Which I'm laughing, uh, brings up what, for me, was the ultimate IKEA hack for many years of my life. I think I talked before on the meta episode about how much I love Facebook Marketplace and Craigslist before that.

Ben Gilbert 2:23:01 Yep.

David Rosenthal 2:23:02 I decided probably, I don't know, ten, fifteen years ago, hey, IKEA furniture, despite the fact that you have to assemble it yourself and whatnot, like, it actually is pretty durable. On the one hand, it gets the rep of, like, disposable, but if you take care of it, it'll last a long time.

Ben Gilbert 2:23:17 Even through a disassembly and a move?

David Rosenthal 2:23:19 Oh, I can attest to that, not just through the move.

Ben Gilbert 2:23:22 Really? 'Cause my whole thing with it is, to me, it feels like once you assemble it, it is good, but then when you disassemble it and put it together somewhere else, it always feels like it's a little wiggly.

David Rosenthal 2:23:31 Ah, well, my hack for quite a number of apartments and houses was just buy second-hand IKEA on Craigslist and Facebook Marketplace and be cool with it.

Ben Gilbert 2:23:41 Oh, so you could successfully move the IKEA, and it wouldn't...

David Rosenthal 2:23:45 Yep.

Ben Gilbert 2:23:46 Huh.

David Rosenthal 2:23:46 Not so much to save money, but more to save on the assembly. [laughing]

Ben Gilbert 2:23:50 [laughing]

David Rosenthal 2:23:50 That was the reason I was doing it. [chuckles]

Ben Gilbert 2:23:52 Huh.

David Rosenthal 2:23:53 And they hold their resale value pretty well.

Ben Gilbert 2:23:56 Well, first of all, they can't really go down in value, so they're fully depreciated when you buy them [chuckles] for a ten-dollar LACK table.

David Rosenthal 2:24:02 Right. I was not buying LACK tables on, uh, Craigslist.

Ben Gilbert 2:24:05 But there are some things that are super durable and some things that aren't. Like, a lot of the pressboard stuff, once you pull it apart, I wouldn't expect to be able to put it back together. But they do now sell, like, thousand-dollar dining tables made out of solid oak. First of all, I didn't realize you could get just the materials to make that for a thousand dollars. That's, like, a four or five thousand dollar table at other retailers. But something like that, I expect to survive moves very well. I, I think it's just... It's unfair to say everything from this retailer is throwaway or everything from this retailer is infinitely durable. Neither are true.

David Rosenthal 2:24:39 Yeah. What I really used to do my hack with was the Hemnes line, Hemnes bookcases. We have had so many Hemnes bookcases-

Ben Gilbert 2:24:45 [laughing]

David Rosenthal 2:24:46 ... in our homes over the years. You know, Jenny did a PhD, so she has lots of books. Lord knows I have tons of books now, as, uh, my vocation, our vocation. And Hemnes bookcases, like, they'll last if you take care of them, and you can disassemble, reassemble.

Ben Gilbert 2:25:00 Fascinating. All right, should I take us through to the, uh, state of the business today, and then we'll get into the analysis?

David Rosenthal 2:25:06 Let's do it.

Ben Gilbert 2:25:07 Awesome. But before we do that, we have one more of our favorite companies to tell you about, the climate-aligned AI infrastructure company, Crusoe.

David Rosenthal 2:25:17 Yes, Crusoe is the vertically integrated cloud platform built specifically for AI workloads and was recently named the gold standard of AI cloud providers by Dylan Patel over at SemiAnalysis. Crusoe is just such a cool story. They build and operate enterprise-grade GPU data centers that are specifically designed for AI workloads, and each one is powered by low-cost, stranded energy that otherwise goes to waste, or worse, gets emitted as greenhouse gases.

Ben Gilbert 2:25:46 Yep. They've totally reimagined the traditional data center architecture to support the huge power, cooling, and compute density needs of AI. And kinda like IKEA, they've done it all with a focus on getting the lowest cost of inputs possible, in this case, energy, which enables them to offer better prices to customers, which leads to signing more long-term contracts, which leads to Crusoe building more capacity faster, which just makes the whole flywheel spin over and over again. And it's not just better on cost, it's also super fast and reliable. Thanks to innovations across virtualization, networking, and other areas of the stack, they can do things like boot up a VM in under ninety seconds.

David Rosenthal 2:26:25 Totally. Power demand in GPUs is increasing dramatically, which means that, one, the traditional data center design and engineering of the hyperscalers is no longer optimal, and two, energy, not compute, is actually becoming the limiting factor in scaling AI.

Ben Gilbert 2:26:42 ... So Crusoe's infrastructure, unlike the hyperscalers, is built from the ground up for GPUs, with elements like high-density racks and direct liquid-to-chip cooling, which enables them to support the most demanding AI workloads that traditional data centers just cannot.

David Rosenthal 2:26:56 Yep, and because Crusoe can build with this unique access to stranded energy, they're able to bring massive amounts of compute online all at once. They currently have fifteen gigawatts in their development pipeline, and their coming Abilene, Texas, facility alone has over one point two gigawatts planned, which will make it one of the largest clusters in the entire world.

Ben Gilbert 2:27:18 Yeah. It's just an amazing company. The net of all this is Crusoe can provide nuclear levels of power for less cost than other cloud providers and with low, or in some cases, actually negative emissions. David and I are super proud to be working with them and also to both be investors. To learn more about Crusoe, go to crusoe.ai/acquired. That's C-R-U-S-O-E.ai/acquired, or click the link in the show notes and just tell them that Ben and David sent you. Our thanks to Crusoe. All right, so the

Ben Gilbert 2:27:48 IKEA business today. We'll start with a quick refresher on structure. There's two branches of IKEA to think about. There's Inter IKEA Systems, this is the corporate entity that owns the brand and the IP, and as of twenty sixteen, they also do all the product development, supply chain, all that stuff. So they own sort of all the inventory, and the franchisees take possession of it, almost on, like, a real-time basis as they need it. So Inter IKEA does three things: franchise, the range, which is the products, and supply, which is supply chain. And the way that I would sort of think about this is, there are, like, two things in one: one, they're a company that designs and makes products to sell to franchisees, and two, they're a licensor that takes a three percent rake, effectively, on all sales, which it's pretty fair.

David Rosenthal 2:28:40 Totally. Three percent of your revenue for the IKEA brand and concept? That seems very fair.

Ben Gilbert 2:28:45 But also, like, if you're selling razor-thin margins, it's actually a huge percentage of your profit pool. It's kinda like payment processing. You're like, "Oh, what's three percent?" And then you look at the profits on a retailer, and you're like, "Whoa, I'm shipping half my profits to..."

David Rosenthal 2:28:59 Yeah, what did you say, um, operating income margin is these days? Like, six, seven percent, if I remember right.

Ben Gilbert 2:29:04 That's high. It's, like, four or five percent.

David Rosenthal 2:29:07 Four or five. Okay, so yeah, they're taking basically half of your [chuckles] operating income.

Ben Gilbert 2:29:11 Yeah. On the other hand, like, are these really different companies?

David Rosenthal 2:29:14 No. [laughing]

Ben Gilbert 2:29:14 Like, there's not really a deal between the two. That's... Yeah.

David Rosenthal 2:29:17 And there's actually a specific tax reason, right, why it's a royalty on sales.

Ben Gilbert 2:29:23 From what I could tell, I'm not a tax expert, I think royalties are tax-deductible, so by shipping money around between two entities, instead of having it just be one simple C corp that runs the whole company, they are actually able to deduct those royalties off their taxes. Yeah, it is helpful for tax purposes. That parent company did twenty-seven billion dollars in sales of goods, and they made one point four billion dollars from franchise fees. That number pencils pretty well. IKEA, as a whole, did forty-seven billion dollars in revenue. So when you think about it, the parent company sells twenty-seven billion dollars of goods to the franchises, who then have their own top line of forty-seven billion. You can kinda start to understand the margin structure a little bit.

David Rosenthal 2:30:15 And then they get that, call it one and a half, two billion-ish, sorta effective cash flow back in the royalty of that forty-seven billion dollar total revenue?

Ben Gilbert 2:30:26 That's exactly right. Okay, so where does money go when it comes up to the Inter IKEA Foundation? This is, again, the parent company, the one who owns the IP, the one who develops the product range, all this stuff, but they don't operate the stores. That company is owned by the Inter IKEA Foundation in Liechtenstein. The main purpose, as we talked about, is to ensure the independence and the longevity of the IKEA concept and to own and govern the IKEA group. The Inter IKEA Foundation is a self-owned entity. That's a new thing that I didn't know existed.

David Rosenthal 2:31:00 Is the Novo Nordisk Foundation also self-owned?

Ben Gilbert 2:31:03 Maybe.

David Rosenthal 2:31:03 This is sounding familiar to me.

Ben Gilbert 2:31:05 Yeah. And there is no, nor can there be, any individual beneficiary. Funds held by the foundation can only be used in accordance with the foundation's purpose, which again, the purpose is ensuring the future of IKEA. So David, you were doing some napkin math on this. What sort of cash do you think is held by the Inter IKEA Foundation in Liechtenstein?

David Rosenthal 2:31:29 Right. So it was reported around twenty eleven that it had roughly fifteen billion euros in assets, and that does not include the value of the company, so that's just, like, cash and marketable securities, call it, sitting, you know, on the balance sheet of this foundation. In the thirteen years since then, if you can sorta infer from the financial statements, and I think they actually do disclose now-

Ben Gilbert 2:31:56 Yep

David Rosenthal 2:31:57 ... how much the operating holding company sends in cash up to the foundation every year. It's, like, a billion euros in cash every year that gets sent to the Inter IKEA Foundation. So just add thirteen more billion euros in cash every year, you're up to, call it, close to thirty billion euros in assets there. That's assuming no investment return compounding.

Ben Gilbert 2:32:22 But twenty eleven to today is among the best investment returns in history, assuming they were just at market beta.

David Rosenthal 2:32:28 Totally, and it's, like, fifty billion-ish, seems like a v- wildly conservative estimate for the amount of assets in this foundation. You know, arguably closer to a hundred, but we don't know.

Ben Gilbert 2:32:41 It's not a charitable foundation. Let's be super clear. This is an enterprise foundation.... and their purpose is to ensure the continuity of IKEA. What do you do with fifty plus billion dollars?

David Rosenthal 2:32:53 Well, you start investing in retail centers.

Ben Gilbert 2:32:56 Right. This is not including the ownership of Inter IKEA itself, the company. This is in addition to the value of your ownership of that enterprise.

David Rosenthal 2:33:06 This is like, uh... remember we were joking at the arena show that the Forbes, uh, net worth estimations of Taylor Swift are laughable because they're just looking at, like, what is her bank account? You know, and they're not enterprise valuing Taylor Swift. This is, like, the bank account of the foundation, not valuing Inter IKEA, the company, at anything.

Ben Gilbert 2:33:24 It's fascinating.

David Rosenthal 2:33:25 Yes. One of the largest entities in the world by assets, and then if you include the value of IKEA, I mean, my God, what do you value IKEA at as a company?

Ben Gilbert 2:33:38 Yeah. It's funny, I had done some napkin math on if I were to buy all of IKEA, including Inter and Ingka, what would I value it at? Maybe now is a good time to share that. So the whole company does something like forty-five billion a year. It's growing at about five percent per year.

David Rosenthal 2:33:58 But operating income, at least for the moment, is not growing.

Ben Gilbert 2:34:01 Right. There's another company out there that grows at about five percent a year, that has a net income margin that bops around the three percent range. That's also a retailer, and that company is Walmart.

David Rosenthal 2:34:13 Ooh!

Ben Gilbert 2:34:15 Walmart is valued at about one point one x sales. So you could value all of IKEA, again, this would be Inter plus Ingka, plus the other franchisees, at about fifty, sixty billion dollars.

David Rosenthal 2:34:27 That feels low to me, just given the durability and defensibility of IKEA, but, uh, you could also make an argument that it's fair.

Ben Gilbert 2:34:37 Yeah, but call it fifty to a hundred. I don't really care about slicing it Inter versus Ingka. I think this is all silly, but it is interesting to think, like, there's a cash pile that the Inter IKEA Foundation has to ensure the continuity of IKEA that is approximately equal in value to all of IKEA itself.

David Rosenthal 2:35:00 Right. Yes, that cash pile is almost certainly between fifty and a hundred billion euros, dollars, whatever you wanna say. Similarly, the value of IKEA- [laughing]

Ben Gilbert 2:35:11 [laughing] Yes

David Rosenthal 2:35:11 ... is somewhere between fifty to a hundred billion euros, dollars. [chuckles]

Ben Gilbert 2:35:15 Yes, totally fascinating. So then flipping over to the Ingka side of the house, this is the largest franchisee with ninety percent of stores. That is the four hundred different IKEA stores out of the, what did you say it was? Four hundred and seventy total.

David Rosenthal 2:35:28 Seventy-six, I think.

Ben Gilbert 2:35:30 That they operate. They also have what they call Ingka Centers, which is this shopping center concept we talked about. They have forty-four of those experience-oriented shopping centers across Europe and China, and more are on the way.

David Rosenthal 2:35:44 And they're also applying that concept to the small city stores here. So, like, interestingly, in San Francisco, the IKEA here in downtown San Francisco, IKEA bought the building. It's not just like they leased some space in downtown San Francisco. It was actually an empty building. It was empty for a long, long time on Market Street.

Ben Gilbert 2:36:02 Ha!

David Rosenthal 2:36:03 They bought the whole thing. They put IKEA in, and now they're putting other tenants into this complex. So they're like, IKEA is participating in San Francisco downtown urban renewal, which is kinda wild, but, like, I think it's all part of this, "Hey, we need to make some investments with all this cash."

Ben Gilbert 2:36:19 Yep. So they have this arm, Ingka Investments, that basically allows them to invest in other companies that they think will, in some way, be additive to their core business. So it's like effectively super large-scale corporate venture. And then their owner, this is, again, the franchisee that operates ninety percent of the stores, Ingka's owner is the Stichting INGKA Foundation based in the Netherlands. The other one was Liechtenstein, this one's the Netherlands, and this one is an actual charitable foundation that has a specific focus on climate and poverty. And with this one, Ingka sends about fifteen percent of their net income up to that charity, and then they use the other eighty-five percent for reinvesting in the business. So call it two to three hundred million euros a year that Ingka actually ships up to their charitable foundation, and from what we can tell, it seems like the charitable foundation then does about two hundred million euros of grant-making every year. So hard to know exactly what the endowment size is of the Stichting INGKA Foundation's net of the asset itself. Like, any estimates that float around kind of include the enterprise value of Ingka, but there exists some cash pile there that probably grows modestly because they're doing so much donating out of the endowment.

David Rosenthal 2:37:48 Oh, that reminds me, there's another big cash pile that we forgot about.

Ben Gilbert 2:37:52 Oh, the actual balance sheet?

David Rosenthal 2:37:54 The balance sheet of Ingka.

Ben Gilbert 2:37:55 Yeah.

David Rosenthal 2:37:56 Ingka has twenty-five billion dollars in cash on hand.

Ben Gilbert 2:37:59 Yeah. Cash is not the constraint here.

David Rosenthal 2:38:02 No, and that cash, again, is at Ingka, totally separate from that, call it fifty to a hundred billion of cash and securities we can estimate that is over at Inter.

Ben Gilbert 2:38:12 Yeah.

David Rosenthal 2:38:13 Anyway, one way to think about this company is basically as like the Berkshire Hathaway of Europe.

Ben Gilbert 2:38:19 Yeah. If you wanted to sum some things together and just pick some midpoints, let's say you got seventy-five billion dollars for the enterprise value of the whole kit and caboodle. Then you've got another twenty-five billion on the balance sheet, so call it a hundred billion for the IKEA business. Then let's say another seventy-five billion for the Inter IKEA Foundation's cash pile, so that's one seventy-five. And then the question is, what is the cash size of the endowment that the Stichting INGKA Foundation has?... I'm gonna guess it's smaller, ten-ish billion, but we're still approaching two hundred billion dollars here in value, all created with no equity investment.

David Rosenthal 2:39:01 No debt investment.

Ben Gilbert 2:39:02 I mean, this is just eighty-one years of selling things that provide value to customers and reinvesting the dollars to do that again on a grander scale.

David Rosenthal 2:39:13 I truly don't think there is anything like this in the entire world.

Ben Gilbert 2:39:18 Yeah, I wonder if that's true, that this is the only business like that, and if we define it as, like, two hundred billion dollar scale built from nothing, with no investment, exclusively investing the cash flows of the business for growth. Like, there has been no inorganic growth.

David Rosenthal 2:39:34 Right.

Ben Gilbert 2:39:35 No material inorganic growth. I mean, with Berkshire, they traded a paperclip for a house many times. With LVMH, they did the same thing. He had, like, three years where he turned some small amount of money into six hundred million dollars to get the whole thing started, if I'm remembering our LVMH episode correctly.

David Rosenthal 2:39:51 Yep. But LVMH, certainly capital, both from Bernard and the family and other sources, went into the business. Berkshire, maybe you could make more of an argument it was trading paperclips, but either way, it was all inorganic growth.

Ben Gilbert 2:40:06 Right. Hermès is a pretty good.

David Rosenthal 2:40:08 Hmm.

Ben Gilbert 2:40:09 I mean, it's been around twice as long.

David Rosenthal 2:40:11 That's a good point. Doesn't have as much cash, is worth the same, or maybe arguably more-

Ben Gilbert 2:40:19 Right

David Rosenthal 2:40:20 ... but doesn't have the ludicrous cash pile that IKEA has.

Ben Gilbert 2:40:24 Meta didn't use much of their cash; otherwise, you could say Meta is this example, but they have a lot of other-- Mark is not the only shareholder the way that Ingvar was.

David Rosenthal 2:40:33 And it took venture capital to build that business.

Ben Gilbert 2:40:35 Yeah.

David Rosenthal 2:40:36 And debt capital, as we talked about.

Ben Gilbert 2:40:38 Yep. That, to me, is, like, the most impressive thing about this whole business, is that it was just one foot in front of another. Take your money, keep plowing it into the next thing.

David Rosenthal 2:40:49 Yep.

Ben Gilbert 2:40:49 More stats on the business today. They have two hundred and sixteen thousand employees. They call them coworkers. It's a slight decrease year over year from last year. IKEA is in sixty-three markets worldwide. Last year, they welcomed eight hundred and sixty million people to the store. Sometimes they say store visits, sometimes they say visitors, so I don't know if it's eight hundred and sixty million unique people or eight hundred and sixty million times a person walked into the door, but whatever. Either way, it's crazy. The demographic of their customer base is twenty to thirty-six, so there is an age where you kind of, like, churn out of IKEA, and they know this. This is measured in a bunch of external surveys.

David Rosenthal 2:41:34 I'm surprised to hear you talking about how you're doing so much active buying right now. Perhaps because you have your first child.

Ben Gilbert 2:41:41 It's a nursery and yeah.

David Rosenthal 2:41:44 I've totally aged out. As much as I love IKEA, and it's been such a huge part of my life for a long time, now that we're onto kid number two, we're reusing a lot of stuff. I don't actually buy from there that much anymore.

Ben Gilbert 2:41:54 There's a great study that Earnest did that we'll link to in the show notes, that shows IKEA's peak customer age is twenty-four. It's like they start churning after that. It's interesting to see the distribution. Like, Crate & Barrel's peak age is thirty-one, West Elm is thirty-three, Williams Sonoma is thirty-three. Then you start to get into, like, Restoration Hardware is forty-four, Pier One Imports-

David Rosenthal 2:42:18 Oh, yeah

Ben Gilbert 2:42:18 ... is forty-five, Home Depot is forty-eight, Lowe's is fifty-four. [laughing]

David Rosenthal 2:42:24 [laughing]

Ben Gilbert 2:42:24 This is like the cycle of life.

David Rosenthal 2:42:26 Oh, [chuckles] I love it. You go from sort of the IKEA semi-self-construction, or believe self-construction, to then the, "I'm just buying consumer furniture," to then, "No, I'm actually building this stuff myself." [chuckles]

Ben Gilbert 2:42:43 Yes, exactly. Well, you go from furnishing your apartment to furnishing your home, to fixing your home.

David Rosenthal 2:42:48 Yeah, that sounds right.

Ben Gilbert 2:42:50 Yeah. So geography, Europe is still their core. Seventy-one percent of sales even still come from Europe, even with the US as a huge and developed market.

David Rosenthal 2:42:58 And Germany is still bigger than the US, I think.

Ben Gilbert 2:43:02 Seventy-one percent is products in stores, twenty-six percent is e-commerce, three percent is services to customers. I assume that basically means TaskRabbit.

David Rosenthal 2:43:09 I assume so, yep.

Ben Gilbert 2:43:11 The majority of the revenue is still products sold in stores. Growth is pretty slow, five percent or so, not so different than Walmart. I decided I wanted to do a sales per foot analysis, the same way that we did on our Costco episode. It's a private company, they don't break it out, and they're limited in what they have to report to you. But if you assume all their revenue is spread over their four hundred and seventy-three stores, and you estimate it's about three hundred thousand square foot per store, that gives you three hundred and twenty euros a foot, which is like, I don't know, three hundred and fifty bucks a foot or something like that.

David Rosenthal 2:43:44 Yeah. Yeah, yeah.

Ben Gilbert 2:43:45 Restoration Hardware is nine hundred.

David Rosenthal 2:43:48 Okay.

Ben Gilbert 2:43:49 Williams Sonoma is one thousand three hundred. But if you've ever been in a Williams Sonoma store, that makes sense: it's overpriced, and it's very small.

David Rosenthal 2:43:56 These are also small stores, too. I mean, well, Restoration Hardware is huge complexes, but few of them.

Ben Gilbert 2:44:01 [chuckles] And they're these weird palaces. It's a crazy business.

David Rosenthal 2:44:05 Have you been to the one in San Francisco?

Ben Gilbert 2:44:06 No.

David Rosenthal 2:44:07 It's freaking wild. You would think it's, like, a tech company headquarters, but no, it's the Restoration Hardware building.

Ben Gilbert 2:44:13 Really? Yeah, they've been on quite the transformation, sort of going upmarket over the last couple decades. La-Z-Boy [chuckles] is, uh, hundred and fifty-seven dollars a foot. None of this is on a spectrum of, like, bad to good, 'cause IKEA is intentionally not trying to maximize their dollar per foot here.

David Rosenthal 2:44:32 Right.

Ben Gilbert 2:44:33 There are trade-offs they're willing to make instead of maximizing that. Now, let's compare it to the companies we mentioned on our Costco episode. Costco is eighteen hundred dollars a foot. They are trying to maximize their dollars per foot. Walmart is about six hundred, Target is about four hundred and fifty dollars, and then these, like, crazy businesses, just to compare it to the all-time greatest, Tiffany is three thousand dollars a foot for jewelry, and Apple is five thousand five hundred dollars. Much smaller footprint.

David Rosenthal 2:45:04 Yeah. I should remember this from our Hermès episode.... Do they report sales per square foot?

Ben Gilbert 2:45:11 I don't remember. I don't think we talked about it.

David Rosenthal 2:45:13 I don't think we talked about it either.

Ben Gilbert 2:45:14 It doesn't feel like a thing they would report.

David Rosenthal 2:45:16 But I got to imagine, though, that it is as high, if not higher, than Apple.

Ben Gilbert 2:45:22 You think it's higher than Tiffany?

David Rosenthal 2:45:24 Yeah.

Ben Gilbert 2:45:25 Yeah, you might be right.

David Rosenthal 2:45:26 We've spent a lot of time in her mez stores recently. [laughing]

Ben Gilbert 2:45:29 [laughing] We have. We have.

David Rosenthal 2:45:30 Can attest to some of the behavior that, uh, we have observed in there.

Ben Gilbert 2:45:35 You're raising their price per foot.

David Rosenthal 2:45:37 [laughing] No, I think I'm lowering their price per foot.

Ben Gilbert 2:45:42 [laughing] It's interesting. I don't really know how to think about this three hundred and fifty number. Like, they have a huge amount of square footage. They intentionally try to sell things as inexpensively as possible. The ultimate maximization function is-- it's almost like it's not margin dollars. I think it's, like, number of items sold profitably at all. They wanna sell more things to more people.

David Rosenthal 2:46:05 Yeah. I think it comes back to this concept of the many, which again, maybe is a little hokey, but, like, I actually think it is true.

Ben Gilbert 2:46:13 They've built a hundred billion dollar business on the idea of the many. It's not hokey at all.

David Rosenthal 2:46:16 Yeah, it is the many. That is the optimization, and so I think you're totally right. I don't think they're trying to optimize sales per square foot at all. I think it's just, like, the square feet are all in function of the many.

Ben Gilbert 2:46:30 Right.

David Rosenthal 2:46:31 And they own all the real estate, so, like, it's not like they're paying rent. They choose the location strategically, and then they become a landlord to other people in these new mega shopping centers.

Ben Gilbert 2:46:41 Yeah. The optimization function is they wanna provide as much value to as many people in the world as possible.

David Rosenthal 2:46:47 Here's another reason why this metric doesn't make any sense at all for IKEA. With the exception of Costco, which is its own thing, none of those other businesses also have their warehouses [chuckles] in their stores.

Ben Gilbert 2:47:01 [chuckles] Right.

David Rosenthal 2:47:01 [laughing]

Ben Gilbert 2:47:03 Right. So then the last thing in the sort of snapshot of the business today is the market. Today, in twenty twenty-four, with forty-seven billion dollars in revenue, IKEA holds only a five point seven percent market share. This is an astonishingly fragmented market. It was when Ingvar started the company, and it is today still.

David Rosenthal 2:47:28 Right, which is so wild, and they are by far the largest player. [chuckles]

Ben Gilbert 2:47:33 Yep. I mean, even if you look around, where else do people get furniture that gets the job done, looks good enough, and is a good value to them? Target, Amazon, Wayfair, but then you start to get quickly into, like, more expensive, CB2, Pottery Barn. I mean, I get-- Walmart sells furniture, but...

David Rosenthal 2:47:55 Oh, yeah, I've been chomping at the bit all episode to talk about this.

Ben Gilbert 2:47:59 [laughing]

David Rosenthal 2:47:59 This is, like, the craziest thing to me about this whole story. IKEA has proved, beyond a shadow of a doubt, that furniture and home furnishings is an extremely large, extremely global, very attractive market, one. Two, IKEA and a whole set of other retail companies, Costco probably being foremost among them, have also shown that becoming a scale global player in a consumer market is a good position to be in. IKEA has no competitors in the Venn diagram of those two things. They are the only globally scaled furniture and home furnishings company. That's crazy!

Ben Gilbert 2:48:46 Yeah. Okay, so I'm foreshadowing power. As we move into analysis here, power is gonna be our next thing we examine. But just to name it, this company is scale economies, and so now that they have reached escape velocity, like they're through the takeoff phase in Hamilton's parlance, you can't compete directly with them because there's no chance that you could beat them on price or on quality for price. So it's almost like if there was gonna be an IKEA competitor, they would have needed to start fifty to eighty years ago, a direct IKEA competitor. So the most credible way to compete with them is doing something different. I mean, probably the best competitive strategy is Wayfair, something that's born on the internet, that does something with a completely different cost structure than they're capable of. Wayfair is not a high-margin business, but they have built the whole business around the idea that they sell online, whereas IKEA needs to figure out how to do that.

David Rosenthal 2:49:48 Which, as we've talked about, e-commerce is a challenge-

Ben Gilbert 2:49:51 Yes

David Rosenthal 2:49:51 ... for IKEA if you make it your strength. Yes, but, uh, you really gotta squint today to see Wayfair becoming a global business on the scale of IKEA.

Ben Gilbert 2:50:02 Wayfair is a five billion dollar market cap company.

David Rosenthal 2:50:05 Yeah, yeah. [chuckles] Long way to go. Now, it's interesting, as I was saying, that part of me is something like: That's so crazy, but you're right. Like, let's think through, how would you actually compete with IKEA if you wanted to build a globally scaled furniture brand? Well, an obvious one that pops out to me is, okay, give the low and low-medium ends to IKEA and then compete at the top end, like Restoration Hardware is doing. The issue with that, though, about going global, is that tastes at the high end are way more heterogeneous and fragmented, especially across geography-

Ben Gilbert 2:50:42 Yep

David Rosenthal 2:50:43 ... than they are at the middle and low ends.

Ben Gilbert 2:50:45 Yep, that's a great point. You can't have a narrow product range.

David Rosenthal 2:50:49 Yep.

Ben Gilbert 2:50:49 So you have a more expensive overhead in producing a wide variety of SKUs.

David Rosenthal 2:50:53 Yep.

Ben Gilbert 2:50:55 Probably the most credible competitor from my perspective, with me as a customer, is Target.

David Rosenthal 2:51:01 Yep.

Ben Gilbert 2:51:02 I probably would look at target.com and see if there are... 'Cause they partner with all these designers, they have, like, a reasonable sense of taste. It's not like high-end furniture and never will be, and it's not the best designs, but it's like, okay, this is gonna get the job done for a commodity thing in my house.... They don't just sell furniture, but, you know, Target's a seventy billion dollar company. I don't think it's global in the way that IKEA is. Again, it's like, to your point, competing on just furniture and competing at global scale, ugh, that's tough, tough nut to crack.

David Rosenthal 2:51:33 Yep. I totally agree with you that within the US or in North America, Target feels like the closest competitor to IKEA. However, exactly that, Target is a North American company. It is not a global company.

Ben Gilbert 2:51:50 Yep. So we're pretty squarely in power here. Normally, when we try to assess power, we say: What is it that enables the business to achieve persistent differential returns? Or put another way, be more profitable than their closest competitor and do so sustainably. We're asking a slightly different question here, which is: What enables this business to own this market?

David Rosenthal 2:52:13 To almost uniquely exist, yeah. [chuckles]

Ben Gilbert 2:52:15 [chuckles] Yeah, when no one else is really competing with them directly, or at least competing with them across everything they do.

David Rosenthal 2:52:25 Yeah. I'm trying to think if we've encountered a business like this before. [chuckles]

Ben Gilbert 2:52:29 You would have to counter-position them 'cause no one else can outscale economies them. Maybe Amazon would be the most credible because they have the scale if they were to make a real run at it. I assume there's an Amazon Basics line of furniture.

David Rosenthal 2:52:43 Yep, Amazon definitely has furniture.

Ben Gilbert 2:52:45 There's not switching costs from a customer perspective.

David Rosenthal 2:52:49 It's funny, I'm thinking through that now, like, yes, Amazon definitely has furniture. Amazon is more or less global, more so every day, but there's a supply side scale economies moat here for IKEA, which is, how on earth, if you're Amazon, even if you're just a retailer, you're not designing or sourcing any of this furniture yourself, how on earth are you gonna do the logistics around the world in the way that IKEA does?

Ben Gilbert 2:53:17 Right. Not to mention, at this point, IKEA, I think ten percent of their furniture is actually made in-house at IKEA. They own their own manufacturer.

David Rosenthal 2:53:27 Yes. And specifically, they own their own manufacturing for their highest volume and most strategic products, for the hot dog products.

Ben Gilbert 2:53:36 Hmm. Yeah, normally, when we do a power analysis, we're, like, looking at the competitors.

David Rosenthal 2:53:43 Yeah, there's nobody to look at here.

Ben Gilbert 2:53:45 Right. I guess we should assess it versus Target in North America, and-

David Rosenthal 2:53:50 I think it really is just local competitors in any given market.

Ben Gilbert 2:53:54 Right. They're not in the same segment as Williams Sonoma or Restoration Hardware, any of these other furniture companies.

David Rosenthal 2:54:00 Who, by the way, also are not global.

Ben Gilbert 2:54:03 Yeah. Ultimately, it's scale economies. Everything about this is the same scale economies as Costco. They take every dollar that they're not shipping up to the foundation, one of the two foundations, and they're not using to try to figure out e-commerce, and they try to deploy it in, "How do we further increase our fixed cost base to reduce variable costs?" Like, what are the ways in which we can design it better or manufacture it better or invest in another factory or something to reduce the price for customers over time?

David Rosenthal 2:54:36 Yep, and I think that really is the only one that matters. I was tempted to say, like, "Oh, brand's important here, too," and, like, yeah, the IKEA brand, great, but compared to scale economies...

Ben Gilbert 2:54:47 Well, and the definition of branding is that you're willing to pay more for it because it's from that brand.

David Rosenthal 2:54:52 Right. The definition of the IKEA brand is-

Ben Gilbert 2:54:54 It's always cheaper

David Rosenthal 2:54:55 ... you're paying less. Yeah. [chuckles]

Ben Gilbert 2:54:56 Right.

David Rosenthal 2:54:57 So, right.

Ben Gilbert 2:54:58 It's scale economies. It should be cheaper every time because of scale economies.

David Rosenthal 2:55:03 Yep, that's it.

Ben Gilbert 2:55:05 And the interesting thing is, cash really isn't the constraint. This is a lot like the big tech