IKEA’s strategic overhaul

Many opine this could result in better tax planning, while some say, the Kamprad family could benefit from it, while others think it could boost growth. What is your take on the matter?

In what has been described as a strategic major overhaul at IKEA in decades, the Swedish group plans on transferring the ownership of some of its operating entities to a small company which owns the IKEA brand. Its carefully worded 250-word press release gave away very little.

The strategic decision to modify the structure of its organisation drawn up by Ingvar Kamprad, its founder, in the 1980s was taken at a secret meeting outside Copenhagen in the latter half of 2014.

The secret meeting, which was attended by the board of Inter IKEA – owned by a Liechtenstein foundation, was chaired by Mathias, Kamprad’s youngest son.

The little known company currently plays a small operational role in the IKEA universe, employing 1,500 people, compared to 160,000 at the IKEA Group, which is technically a Leiden-based company called INGKA Holding.

As of now, INGKA effectively manages nearly everything that most consumers see in an IKEA store: from manufacturing, logistics, furniture design, procurements, INGKA controls it all. However, the IKEA brand is owned by Inter IKEA, including its patents and business processes, which are collectively known as the IKEA ‘concept’.

Although the purpose of Inter IKEA is to develop newer concepts, former executives and its leaders however have widely acknowledged that its main role to is lower its tax profile by charging INGA for the usage of the IKEA brand.

In the secret meeting of 2014, Inter IKEA’s board unanimously agreed to significantly expand its role and take charge of designing, manufacturing, procurement and logistics from INGKA. It managed to do this since it owned the rights to the IKEA concept. It has justified its actions saying it is good for the brand’s future.

“It has been a pretty static concept,” said Torbjorn Loof, Inter IKEA Systems B.V.’s CEO.

He went on to add, “(There) is always also the risk that you keep that concept, you protect that and make it better and better and better, and things in the world around you happen, and suddenly you stand and say, you know what, this is maybe not relevant.”

 However, the IKEA concept will have to undergo fundamental modifications if it were to satisfy the growing demand from customers who want to make purchases online and pick them up from drop-off points. Loof has responded to these demands by saying if he has to satisfy these demand he will need full control over logistics.

Online retail giant Amazon.com is making competition increasingly fierce making new entrants to the online retail market incredibly tough.

“We have been a little bit protected in the home furnishing business, in margin pressure in my view, if I compare with supermarkets or do it yourself businesses,” said Loof.

In the past five years INGKA’s margins have typically been 14%, while Inter IKEA’s have been even higher. In comparison Amazon’s margins are just under 2%.

Its current plans are following the guidelines set by a French consultancy firm in 2011 which was hired for this very purpose. As per its report, IKEA’s corporate structure made it harder to adapt to changes in market conditions in comparison to other businesses. As per its guidelines, which is currently being followed, INGKA will only manage the stores.

“We will continue to handle the interface with our customers,” said Peter Agnefjall, INGKA Holding’s CEO. INGKA’s reduced responsibilities are likely to make it focus more on its online business. IKEA’s online footprint lags behind those of Amazon.com because Agnefjall has yet to find a way to achieve strong margins online.

“There’s a lot of successful retailers doing online business but not all are profitable. It’s really about cracking that code,” said Agnefjall.

Strategic Tax planning

Dutch owned INGKA plans on selling its designs, manufacturing and logistics subsidiaries to Inter IKEA. Incidentally, logistics subsidiaries alone employ 25,000 people. These changes have spooked many.

“Some people from IKEA are a little bit afraid,” said Yves Galimidi, a former executive still in touch with people at the company. “It’s quite normal that if you have the lead on something and suddenly you don’t have it any more, or you might not have it in the future, it creates some kind of questions,” he said.

Although many have attributed all of these moves to tax strategy, a few lawyers say, they could in theory, benefit the Kamprad as well. This subscribe to this school of thought since assets of a company can be more easily extracted from a Liechtenstein foundation than a Dutch one. The restructuring has however one Achilles’ heel: the INGKA-Inter IKEA structure is not well designed for inheritance tax avoidance. However, Inter IKEA and INGKA’s Dutch base allows them to tweak their tax profiles more efficiently than their competitors.

 

New issues because of Restructuring

After this strategic restructuring, the relationship between IKEA and INGKA is that of a franchiser and franchisee. Basing on the result of such a relationship in the industry leads one to the possibility of introducing new tension in the IKEA corporate structure.

“There is a healthy tension between the franchisee and the franchiser, and the demands on each other in the business relations will also be stronger, in what we are contemplating to do now,” said Hansen.

Although the model of franchisee and franchiser is tried and tested, no franchiser has ever managed a franchisee as big as INGKA which has a sales turnover of 43 billion euros a year. Moreover academics also point out that a following a business model with reduced integration may not work for IKEA, since it lists “togetherness” as one of its core values.

“IKEA has always really, really thrived on the fact that they integrate and connect all the pieces,” said Professor Enrico Baraldi at Uppsala University. Anna Jonsson, Associate Professor at Lund University, has a different take on the matter, she thinks the restructuring could in fact accelerate growth by making it easier for Inter IKEA to recruit partners to run franchised stores in newer markets.

All Loof had to say on this matter is that “We’re still pretty small, and people’s need for home furnishings is there.”

 

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