IKEA Australia plans small-format stores ahead of online push

Sue Mitchell
July 2, 2015
The Age
Swedish furniture giant IKEA, known for its maze-like hypermarkets, plans to more than double its presence in Australia by opening small urban stores and selling products online for the first time.
IKEA Australia country manager David Hood has unveiled ambitious plans to lift store numbers from eight to about 22 over the next few years – building another three or four 30,000 square metre mega-stores and as many as 12 small-format stores less than one third of their size.
The small-format stores, which are currently being tested in markets such as Spain, Germany, the UK and Tasmania, would enable consumers to buy top-selling products such as Billy bookcases and Klippan sofas in-store and collect products ordered online from a dedicated Australian e-commerce site.
IKEA also plans to build two distribution centres (DCs), including a 100,000 pallet multi-functional logistics centre, which would allow the company to increase the number of products stocked in Australia from 1300 to almost 9000, slashing the time it takes to ship orders to customers.
Mr Hood, a 25-year IKEA veteran who has been running the Australian business since 2008, expects sales to more than double over the next five years, from $733 million in 2014 to at least $1.8 billion by 2020, as customers shop more often and the group takes market share from competitors such as Bunnings, Masters, Harvey Norman, Freedom Furniture and Fantastic Furniture.
“It would be fair to say somewhere in 2020/21 for sure the East Coast alone, with good online step up and this [distribution] infrastructure in place … it could be around $1.8 billion or $1.9 billion,” Mr Hood told Fairfax Media in an exclusive interview.
“We have a real opportunity to grow the business very fast in the next five, six, seven years,” Mr Hood said. “But we have to first become more accessible to customers with our footprint and our stores.”
One week annually in-store
Mr Hood spent time this week helping customers load their cars at the Marsden Park store as part of an global initiative that forces all staff – including the CEO – to work one week a year in stores.
Most customers tend to shop at IKEA four or five times a year, and those who live hours away shop once or twice a year. Mr Hood hopes to boost the number of visits to seven or eight by making stores more accessible and giving customers the option to shop online.
IKEA has stepped up new-store expansion and will open three stores this year – Marsden Park in Sydney’s west opened last month, Canberra is due to open in November and a second Brisbane store in August – adding almost 80,000 square metres of floor space and 1000 jobs.
Mr Hood sees scope for another one or two more mega-stores in Melbourne and Sydney and a network of smaller stores along the east coast, including the NSW Central Coast and the Gold Coast.
“There are 22 locations that we feel the customers could meet IKEA in some way – what it will not be is what we see at Tempe [which is 37,000 square metres],” he said. “It could be 10 or 12 units of some kind to support the multi-channel rollout.”
Mr Hood said Australia was now enjoying strong support from its European parent, which will fund the investment in stores, DCs and e-commerce. IKEA is celebrating its 40th anniversary in Australia this week but Mr Hood said the Australian business between 1975 and 2003 was “a mess” of sub-scale stores, lack of infrastructure and ad-hoc planning.
“We shouldn’t have been here, we didn’t have the infrastructure set up, it wasn’t a global priority, people never came here and the range wasn’t formulated properly,” he said. “A lot of money was wasted.”
In 1999 IKEA bought back franchised operations on the east coast and set about closing underperforming stores, building new stores that matched the company’s European model and leasing a distribution centre, cutting the time it took to get stock into stores from 12 to five weeks.
Changes may come
“When I came in 2008 we had been on a journey – we are now half way through that journey,” he said.
However, as IKEA grows, so too will interest in its finances, particularly the amount of tax it pays in Australia.
Documents leaked late last year showed that IKEA’s profit growth in Australia over the last 10 years failed to match sales growth because the company reduced its taxable income by paying more than $2 billion in franchise fees, licence fees and royalties to its European parent, IKEA Supply.
Mr Hood defended the structure but agreed that it sat uncomfortably with the company’s image as an ethical organisation and a world leader in sustainability. Changes may be on the way.
“We are part of a business concept, everything from beginning to end is designed in-house, purchased in-house, distributed in-house, sold in-house,” he said. “We end up paying for that … it’s not that I have any option to operate the business in a different way.”
“But it’s a very hot topic in many countries and you’re right, we put an enormous investment into a lot of social and environmental issues, and this is one part of that big piece. These topics are always on the agenda on a global level,” he said.