Flat pack giant's bottom line seems a little, well, flat
ANALYSIS:Ikea is constantly hailed as a global success story, brandishing one of the most recognisable logos in the world, but what happens when profits no longer stack up on flat-pack fervour?
The Swedish furniture giant says it is relatively resilient to recessions as these make consumers more cost conscious, turning them to cheaper goods such as those at Ikea.
It said consumers were making a beeline for its stores as their budgets tighten further with the economic downturn, and while that is certainly the case in Ireland with shoppers spending almost €2 million a week in Ikea’s Dublin last year, the company is not making any more profit, nor are its revenues increasing. In fact, the Irish outlet’s revenues remained static at €102 million during the 2011 and 2012 financial years.
There is no doubt Ikea is still a profitable company. However, these profits have substantially decreased over the past three years, with overall profits falling from €11.7 million in 2010 to €2.4 million last year.
It would seem Ikea’s high-volume, low-price strategy no longer seems to be working so well, considering profits at the Irish arm of the company have fallen by more than half each year since 2010, Ikea’s first full year in Ireland.
Ikea chose to keep prices down despite higher raw materials costs, hurting its profit margin, which was already very tight. The company also decided to keep high inventory stocks in the year to improve product availability. Lower gross margins thus resulted in pretax profits decreasing from €6.8 million to €2.9 million.
And it was not some disastrous hedging policy that affected Ikea’s margin as the noted in the accounts state “transactions in foreign currencies are translated at the foreign exchange rate reporting at the date of the transaction”.
If the store continues at the rate it is going, it will be making a loss in the next few years. While it says it will continue to lower prices, guaranteeing “the lowest price on the market for every comparable product in each area of the home” this strategy cannot continue with increasing raw material costs and larger stocks.
It cannot afford to fail. What will it do with those manufacturing centres, distribution hubs and gigantic stores then?