Ikea warns of price rises and lower profits as cost and supply pressures bite

World’s largest furniture group says disruptions mean next year will be ‘more difficult’ than 2021

Ikea in Ballymun, Dublin.

Ikea in Ballymun, Dublin.

 

The main company in the Ikea flat-pack furniture retail empire warned that profits would fall for two successive years after the group said it would be forced to raise prices due to the supply chain crisis and higher raw material costs.

Net profit in the year to the end of August fell 17 per cent to €1.4 billion at Inter Ikea, the owner of the brand, even as online and in-store sales across its franchise system rose 6 per cent to a record €41.9 billion.

The world’s biggest furniture retailer is expecting another difficult period. “For FY22 [year to the end of August 2022], we’re looking at supply disruptions still, we’re looking at raw material increases still, we’re looking at energy increases still,” Martin van Dam, Inter Ikea’s chief financial officer, told the Financial Times. “FY22 will not be easier than FY21, it will be more difficult . . . it eats away our margins in a massive way.”

Products

Ikea prides itself on lowering its prices for many products over time and is making a big push to increase its affordability as it enters countries such as India, making raising prices for retailers in its franchise system particularly painful.

Inter Ikea’s price rises will be the first since 2019 and are likely to be higher than then, although it has not been decided by how much.

However, Mr van Dam stressed that the move did not necessarily mean increases for customers as this depended on how much retailers such as Ingka Group, the main Ikea franchisee and also part of the Ikea empire, passed on and how much they absorbed.

“We really want to stay as low-priced as possible. We can’t let this period of time make us different,” van Dam said, although he added that Ikea had such “little availability” in some products that it was limiting its growth and disappointing consumers.

He said the rises were unavoidable because of the severity of problems in supply chains that had led to big product shortages.

“We want to absorb as much as possible these price increases. But there comes a moment in time that it becomes impossible for us to hold it back any more. It’s something we don’t like,” he added.

Inter Ikea is the central player in the furniture retailer’s franchise system, designing and sourcing the product range as well as charging retailers 3 per cent of turnover for using its brand and concept.

Profitability

Its gross margin – a closely watched profitability gauge for retailers – fell in its latest financial year from 15.8 per cent to 13 per cent. Inter Ikea spent €250 million trying to mitigate supply chain disruptions, from buying its own containers to moving goods by trains rather than by ship.

In the year to the end of August, it was boosted by an almost 75 per cent rise in online sales, offsetting lower revenue from its stores. But van Dam said the move towards ecommerce was “a big shift” for Ikea as online shoppers were focused on buying a particular product and were less likely to make the impulse purchases that were common in its stores.

“If we lose that out of our mix, it becomes lower type of margin items that we sell,” he said. “We want them to come to Ikea for a Pax cupboard, which is decent margin, but we want them to buy a cushion, linen and a candle, which are higher margin.” – Copyright The Financial Times Limited 2021