EVERY SPOKEN WORD
150 min read · 30,087 words- 0:00 – 0:46
Flat-packed chocolate moose & setting up the IKEA episode premise
- BGBen Gilbert
I also got a flat-packed chocolate mousse. [chuckles]
- DRDavid Rosenthal
Ooh, hoo, hoo!
- BGBen Gilbert
I put it together this morning. It's very easy. It's three pieces.
- DRDavid Rosenthal
Oh, moose like an animal, not chocolate mousse like the pudding.
- BGBen Gilbert
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]
- DRDavid Rosenthal
Oh, boy. Is there an analogy about IKEA furniture in there?
- BGBen Gilbert
I hope not. It was funny, though.
- DRDavid Rosenthal
No, I don't think so.
- BGBen Gilbert
I'm ready if you are.
- DRDavid Rosenthal
I'm ready. Let's do it.
- SPSpeaker
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?
- 0:46 – 4:51
Why IKEA wins: meatballs, mazes, and the mission for ‘the many people’
- BGBen Gilbert
Welcome to the Fall 2024 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Meatballs.
- BGBen Gilbert
Meatballs.
- DRDavid Rosenthal
Meatballs and hot dogs. [chuckles]
- BGBen Gilbert
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.
- DRDavid Rosenthal
God bless you. Did you, uh, make use of Småland?
- BGBen Gilbert
Uh, I went with a friend who had a kid old enough to take advantage of Småland, so yes.
- DRDavid Rosenthal
Nice.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Hell yeah, it does.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Totally.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Ooh, we might need to add a, uh, Poäng chair or something to that.
- BGBen Gilbert
Actually, that'd be extremely economical [chuckles] for us to offer.
- DRDavid Rosenthal
Yes, it would be cheaper than the Ray-Bans.
- BGBen Gilbert
Maybe we'll even throw in some at-home assembly for you and really gross it up.
- DRDavid Rosenthal
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.
- BGBen Gilbert
It's true. Well, before we dive in, we want to briefly thank our presenting partner, J.P. Morgan Payments.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- 4:51 – 12:25
Småland roots: hardship, frugality, and the Kamprad family backstory
- DRDavid Rosenthal
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-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... come out of this province in Sweden.
- BGBen Gilbert
It's also cold.
- DRDavid Rosenthal
Yeah. [chuckles] Yeah, I mean, it's Sweden. It's really cold.
- BGBen Gilbert
Tough place to grow up.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
-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.
- BGBen Gilbert
Maybe.
- DRDavid Rosenthal
And Agunnaryd, the, uh, area where the farm is, in 2010, do you know what its total population is?
- BGBen Gilbert
Low hundreds?
- DRDavid Rosenthal
Two hundred and twenty people. [laughing]
- BGBen Gilbert
[laughing] All right, so he's in the sticks.
- DRDavid Rosenthal
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.
- BGBen Gilbert
It's Germany?
- DRDavid Rosenthal
It's Germany.
- BGBen Gilbert
Ah.
- DRDavid Rosenthal
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]
- BGBen Gilbert
Heyo!
- DRDavid Rosenthal
Heyo.
- BGBen Gilbert
So wait, why would you buy a sight-unseen farm in Sweden?
- DRDavid Rosenthal
Especially a not very attractive place to farm in Sweden.
- BGBen Gilbert
This is, like, pre-World War I Germany, too.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Oof.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Totally rough.
- DRDavid Rosenthal
Really, really rough.
- BGBen Gilbert
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.
- 12:25 – 17:26
A 5-year-old merchant: matchboxes → pens → the obsession with selling
- DRDavid Rosenthal
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! "
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
"I still remember the lovely feeling. From that time, selling things became somewhat of an obsession for me."
- BGBen Gilbert
Yeah, the seeds are sown of one of the greatest retailers of all time, right here at age five.
- DRDavid Rosenthal
Totally. I mean, Sam Walton, Jim Sinegal, Sol Price, Jeff Bezos, Ingvar Kamprad.
- BGBen Gilbert
Absolutely. Yep.
- DRDavid Rosenthal
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."
- BGBen Gilbert
I have product market fit, I should raise money.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And in nineteen thirty-eight dollars, sixty-three dollars is hundreds of dollars today.
- DRDavid Rosenthal
Yeah, especially for a twelve-year-old.
- BGBen Gilbert
So imagine your kid walking down the street and going, and somehow going back with five hundred dollars. [chuckles]
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
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]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... capital that ever goes into IKEA. That is the only money that Ingvar would ever raise. [chuckles]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
Freaking wild. [chuckles]
- BGBen Gilbert
Totally crazy.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yeah, his wife's family, I believe, invested.
- DRDavid Rosenthal
That's right, his wife's family.
- BGBen Gilbert
The whole thing gets financed off of cash flow from pens.
- DRDavid Rosenthal
Yes. He literally trades matchboxes to Christmas cards, to pens, to furniture, to IKEA.
- BGBen Gilbert
Nuts.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- 17:26 – 23:29
IKEA is born: catalogs, drop-shipping, and scaling demand by mail
- DRDavid Rosenthal
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?
- BGBen Gilbert
And there is one other thing happening during this period of time in Ingvar's life. We will come back to that later.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Well, I think that was his mailing address.
- BGBen Gilbert
Ah, that makes sense.
- DRDavid Rosenthal
You know, this is the countryside here. It's not like there's any more to the address than like-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... Elmtaryd Agunnaryd. He doesn't have a house number.
- BGBen Gilbert
So cool.
- DRDavid Rosenthal
So that's IKEA! That's Ingvar Kamprad's trading firm. This is it.
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
I think he just stores inventory there-
- DRDavid Rosenthal
Yeah [laughing]
- BGBen Gilbert
-before.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So, like, the first drop shipper? [chuckles]
- DRDavid Rosenthal
Yeah, he's not doing the shipping. I mean, he's just an aggregator for demand. He's an agent.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
I mean, it was the e-commerce industry before the e-commerce industry.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
Anybody could do it. It was just about aggregating demand.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- 23:29 – 40:40
Furniture enters the catalog: local timber, naming conventions, and early product-market fit
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
-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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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]
- DRDavid Rosenthal
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.
- BGBen Gilbert
So it's why the products are named the way they are. Rather than having model numbers-
- DRDavid Rosenthal
Oh, this is exactly what I was gonna say.
- BGBen Gilbert
Okay. Yeah.
- DRDavid Rosenthal
[laughing]
- BGBen Gilbert
It's, like, part of the, "Hey, I, I need to have a word for each of these things, and not only-
- DRDavid Rosenthal
Oh, yeah, yeah. This is exactly what I was about to say.
- BGBen Gilbert
All right. All right.
- DRDavid Rosenthal
[laughing] I thought that was like, "Oh, is there another point later?"
- BGBen Gilbert
No, no. Okay, so where are we going here, David?
- DRDavid Rosenthal
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.
- BGBen Gilbert
I think so. I think different product categories are named after different things, like rivers and-
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
Certain furniture is named after a certain... It's almost like conference room naming at companies.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
And, um, outdoor furniture is islands, I think.
- BGBen Gilbert
Ah, [chuckles] clever.
- DRDavid Rosenthal
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]
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
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.
- BGBen Gilbert
Dude, an armless chair for baby nursing sounds awful. Sounds like torture. Like, that's the time when you need the arm the most!
- 40:40 – 54:28
The showroom breakthrough (1953): ‘come and convince yourself’ + the birth of IKEA food
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Right
- DRDavid Rosenthal
- starts to widen.
- BGBen Gilbert
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.
- DRDavid Rosenthal
... and I can just deliver low prices if I compromise on quality.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
I think Tesla does this today or has done it for a while.
- BGBen Gilbert
Or Bonobos or-
- DRDavid Rosenthal
Yeah, yeah.
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
There's a store in a mall that you can go see the cars or see the pants-
- BGBen Gilbert
Yeah
- DRDavid Rosenthal
... but you can't take it home.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Wow
- DRDavid Rosenthal
... 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-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Yes. The very first time there's, uh, food at an IKEA is the very first time there's an IKEA.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes, it is an experience. It's almost like you're getting a free ticket to this experience, this exhibition.
- BGBen Gilbert
Yes. Great retailers have more in common with P.T. Barnum than poor retailers.
- 54:28 – 1:27:36
Competition forces vertical integration: in-house design + the flat-pack epiphany
- DRDavid Rosenthal
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.
- BGBen Gilbert
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]
- DRDavid Rosenthal
Well, remember, IKEA is not shipping it, the suppliers are shipping it.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep. Okay, so where does flat packing come from?
- DRDavid Rosenthal
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.
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
Put a pin in it. I have a thesis on why.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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."
- DRDavid Rosenthal
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.
- BGBen Gilbert
This is, like, the most European thing ever, that the regulation should, uh-
- DRDavid Rosenthal
This is too good for consumers! [chuckles]
- BGBen Gilbert
Yes, exactly. [chuckles]
- DRDavid Rosenthal
[chuckles] Oh, man, we could make a million jokes about European regulation.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... 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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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."
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
We almost broke up, but we didn't, and four hours later, [chuckles] I have the, the, the cabinet together.
- DRDavid Rosenthal
One of the articles I was reading for, uh, research called it the, uh, Lego for adults.
- BGBen Gilbert
Totally. That's totally right.
- 1:27:36 – 1:38:24
From rural to urban modernity: the Stockholm mega-store and the modern IKEA format
- BGBen Gilbert
All right, so into the 1960s, David, they open a bigger store where?
- DRDavid Rosenthal
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.
- BGBen Gilbert
What?
- DRDavid Rosenthal
Yeah.
- BGBen Gilbert
That's, like, even still probably their biggest store or among their biggest few.
- DRDavid Rosenthal
I think it is still, I believe, the flagship IKEA store.
- BGBen Gilbert
'Cause even today, they're, like, three, four hundred thousand when they build new stores.
- DRDavid Rosenthal
It is a circular building inspired by the Guggenheim Museum in New York City.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So 20 million USD at the time.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So it's probably, like, a year or two of all of their profits go into this.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
So it doubles the company's revenue.
- BGBen Gilbert
They also, at this store, for the first time, now have the setup where customers fetch the products themselves from the warehouse.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Whoa!
- DRDavid Rosenthal
-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.
- BGBen Gilbert
Oof.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
-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.
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
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?
- 1:38:24 – 2:04:53
Blitzscaling globally—while staying frugal: 1970s expansion and the succession/tax problem
- DRDavid Rosenthal
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.
- BGBen Gilbert
Whoa! Really? Like, it's the illiquid ownership of the company, plus the working capital in it?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Oh, his net worth would eventually rise to something around $60 billion.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Huh.
- DRDavid Rosenthal
... Ingvar moves back to Småland, moves back to Sweden.
- BGBen Gilbert
Oh, wow. I didn't realize that was part of it.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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]
- DRDavid Rosenthal
[laughing] Oh, my God. What a folksy dude.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
[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.
- BGBen Gilbert
The operator of the stores.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Designs the catalog, et cetera, et cetera.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep, it's pretty interesting.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
It is like a Fort Knox for IKEA.
- BGBen Gilbert
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.
- 2:04:53 – 2:08:02
Founder controversy surfaces: Ingvar’s fascist involvement and reputational reckoning
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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-
- DRDavid Rosenthal
Or just came clean about that whole thing initially.
- BGBen Gilbert
Totally. Or with his vast, vast resources, made a big contribution to a Holocaust museum, or the families, or something.
- DRDavid Rosenthal
Yep. This is one of these things that covering these old European companies, like, you can't avoid this.
- BGBen Gilbert
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!"
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So coming out of the '90s-
- 2:08:02 – 2:11:27
2000s growth plays: Russia as a lab for MEGA malls + real-estate strategy
- DRDavid Rosenthal
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.
- BGBen Gilbert
I didn't realize Russia is where they started this strategy.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- 2:11:27 – 2:13:33
Democratic Design formalized: the five-part product doctrine (incl. sustainability)
- BGBen Gilbert
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.
- DRDavid Rosenthal
You sound like a, uh, McKinsey consultant now. [laughing]
- BGBen Gilbert
[chuckles] I am confident that diagram has a name, and I am proud that I don't know it.
- DRDavid Rosenthal
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]
- BGBen Gilbert
But yeah, that is democratic design.
- 2:13:33 – 2:27:48
E-commerce collides with IKEA’s model: margin pressure, city stores, and catalog sunset
- DRDavid Rosenthal
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]
- BGBen Gilbert
Yeah.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Which you can understand, it is against every other element of their DNA.
- DRDavid Rosenthal
Totally!... And I'm sure still to this day, very much less profitable for IKEA than in-store visits.
- BGBen Gilbert
I bet e-commerce is not a profitable business for them.
- DRDavid Rosenthal
I suspect that is right.
- BGBen Gilbert
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?
- DRDavid Rosenthal
Should we use third-party logistics? Should we use our own, et cetera, et cetera.
- BGBen Gilbert
It goes in the opposite direction as everything they've been trying to optimize for the last fifty years.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep, including San Francisco.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
And today, 2024, e-commerce is twenty-six percent of revenue.
- BGBen Gilbert
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.
- DRDavid Rosenthal
I mean, simply just inferring from the financial statements, they don't- [chuckles]
- BGBen Gilbert
... 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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
So something is happening that is making them less profitable.
- DRDavid Rosenthal
Yep, and seems like a fair assumption. It's e-commerce.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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-
- DRDavid Rosenthal
No
- BGBen Gilbert
... what the IKEA catalog was.
- 2:27:48 – 3:14:30
IKEA today: two-sphere structure, giant cash piles, and why it has no true peer
- BGBen Gilbert
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.
- DRDavid Rosenthal
Totally. Three percent of your revenue for the IKEA brand and concept? That seems very fair.
- BGBen Gilbert
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..."
- DRDavid Rosenthal
Yeah, what did you say, um, operating income margin is these days? Like, six, seven percent, if I remember right.
- BGBen Gilbert
That's high. It's, like, four or five percent.
- DRDavid Rosenthal
Four or five. Okay, so yeah, they're taking basically half of your [chuckles] operating income.
- BGBen Gilbert
Yeah. On the other hand, like, are these really different companies?
- DRDavid Rosenthal
No. [laughing]
- BGBen Gilbert
Like, there's not really a deal between the two. That's... Yeah.
- DRDavid Rosenthal
And there's actually a specific tax reason, right, why it's a royalty on sales.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
Is the Novo Nordisk Foundation also self-owned?
- BGBen Gilbert
Maybe.
- DRDavid Rosenthal
This is sounding familiar to me.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
But twenty eleven to today is among the best investment returns in history, assuming they were just at market beta.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- DRDavid Rosenthal
Well, you start investing in retail centers.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
It's fascinating.
- DRDavid Rosenthal
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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
But operating income, at least for the moment, is not growing.
Episode duration: 3:22:27
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