TOTTENHAM COURT road is a little-loved street of furniture stores in central London, made even more drab by boarded-up shops and SALE signs plastered across the windows. But since October a new type of outlet has brought in some Lewis Carroll-like magical realism. Through vast glass windows, passers-by gaze in on a kitchen so tall it looks like part of Wonderland. Inside are no tills; indeed nothing is sold there. It belongs to IKEA, a Swedish furniture retailer, which also seems topsy-turvy; IKEA is famously a staple of suburbia.
It may seem as if Alice has stepped through the looking-glass. But there is method in the madness. As other retailers are driven off the high street, partly because of competition from big-box stores like IKEA, the company is heading into the heart of London, Paris and New York as part of an expansion into 30 city centres. It is not only examining where it puts its shops. Though IKEA woke up late to the importance of e-commerce, it is using the shock as an opportunity to rethink its business model; the internet will become more central to its future. Many of its competitors still see digital commerce as just one retail channel among many. They are making a big mistake. Unless they face reality, more will join the ranks of struggling retailers such as Sears, JC Penney and Macy’s in America, and Debenhams in Britain—especially if consumer spending turns down.
Retailing is not an industry prone to reinvention. Far from it. As Mark Pilkington, a former lingerie executive, explains in a new book, “Retail Therapy”, its two great innovations happened long ago, when shops grew into supermarkets, department stores and malls, and when merchandise moved out from behind the counter. The big stores became vast distribution systems, benefiting from oodles of capital and high barriers to entry. Meanwhile, customers bought the merchandise and walked out with it; the retailer saw little reason to engage with them beyond advertising and pretending to listen to their complaints.
E-commerce has upended this arrangement. Strip out items that are not widely bought online, such as cars, fuel and meals, and the internet’s share of total retail sales last year rose above 17% in Britain, 16% in America and 15% in Germany, according to the Centre for Retail Research, a British consultancy. Above 15%, says Mr Pilkington, is the point at which legacy retailers, with their high cost of stores and staff, struggle to survive, posing huge risks to jobs, the commercial-property business, lenders and investors.
Not bearing such costs or capacity constraints, e-retailers can offer a wider range of goods, at better prices, with a more personalised, data-driven service. E-commerce also changes the distribution system. Retailing used to be cash-and-carry, with shoppers taking their merchandise home with them. Now they often travel by different routes, unencumbered by shopping bags. So in addition to sales, retailers have to factor in delivery. That is where IKEA is devoting lots of attention.
Though Tolga Öncü, IKEA’s head of retail, explains this with a wad of Swedish snus, or smokeless tobacco, beneath his upper lip, he appears more excited than nervous about the transition. The company’s strong brand and balance-sheet give it freedom to have a “test-and-fail” approach, rather than “being in a panic to do something”, he says. It has three big tasks ahead: redefining sales measures, logistics and the whole concept of the store.
Start with sales measures in stores. These will remain crucial; online sales make up at most 10% of the total, and stores are still the best way of attracting customers. But the idea that IKEA’s success can be measured only by how much it sells per square foot is outdated. As it ships more of its products to people’s homes, it has to bear in mind online purchases, delivery and assembly. In 2017 IKEA bought TaskRabbit, a gig-economy startup that can spare customers the grief of assembling furniture with an Allen key and a wordless instruction manual. Logistics is another factor. As people shop online, they demand speedy delivery. Part of this comes via IKEA’s stand-alone warehouses. But Mr Öncü says its large suburban stores, which are within easy reach of densely populated areas, can also “double up” as part of the logistics network, shortening delivery times.
This feeds into the third challenge—changing the purpose of the store. Rather than always stocking the full range of products, the priority in smaller stores is to allow customers to “touch and feel” items they have seen online. That means stores can keep less inventory. Meanwhile, space is freed for displays of kitchens and other rooms, with staff on hand to offer home-furnishing advice.
This switch to more personalised service will be particularly evident in the city centres. In Tottenham Court Road, the outlet is a “planning centre”, where no money or goods change hands. This is aimed at online shoppers who need humans to talk to about design without having to travel to suburbia. This spring IKEA will open a different type of store in Paris, selling goods across a fairly small floor space. Its aim will be to attract local visitors more frequently, offering frequent range changes, fresh food and events.
Change everything, except the meatballs
Both store formats respond not just to online pressure, but to generational trends like urbanisation, demand for sustainability and reduced car use. IKEA is lucky. Shoppers already treat going to its stores as an “experience”—albeit not one for all tastes. In an online world, it is vital to build on this to keep customers interested.
IKEA is by no means safe. Its recent results show falling profits as it invests in new formats, but at least it has lots of cash on its balance-sheet. Others have less freedom to experiment, especially retailers who have overexpanded, been leveraged to the hilt by private-equity owners, and paid dividends out of sale-and-leaseback property deals that expose them to rising rents. Many are only just realising that their business model is bust. It may be too late.
This post was originally posted at https://www.economist.com/business/2019/01/26/as-retailers-abandon-the-high-street-why-is-ikea-moving-in.