IKEA - Furniture or Food Company

IKEA, the renowned Swedish furniture retail giant, is not only synonymous with furniture but also boasts the title of the world's largest furniture retail brand.

In the year 2021, IKEA recorded an impressive $42 billion in revenue, spanning its extensive network of 458 stores worldwide.

However, what may come as a delightful surprise to many is that IKEA is not merely in the business of furniture; it's also a major player in the food industry. In fact, it ranks as the 10th largest food seller globally outside the United States and secures a place among the top 50 food chains on a global scale.

But, why would a furniture retailer sell food in the first place? Why would anybody eat at IKEA and where is IKEA going with this?

Let’s take this from the top!

Does IKEA really sell a lot of food?

IKEA's food enterprise generates a staggering annual revenue of approximately $2.5 billion!

But, why does IKEA even sell food?

IKEA’s food business wasn’t a random experiment, but a well-thought out strategy to drive their furniture sales.

Given that IKEA stores are typically situated on the outskirts of cities, far from the usual restaurant hubs, the initial concept was to provide in-store dining options, ensuring that customers stayed longer without needing to venture outside for meals or snacks.

IKEA’s founder, Ingvar Kamprad, very succinctly makes the point, “Hungry customers buy less”.

These food stores were not intended to be profit-centers. The idea was to lure in customers with low-priced, tasty meals that would end in them making big ticket furniture purchases.

In essence, IKEA's food establishments serve a dual purpose:

1. Boost Foot Traffic: By offering enticing food options, IKEA attracts a higher number of visitors to its stores.
2. Prolonged Shopping Experience: These dining facilities encourage shoppers to extend their stay within the store, a factor often correlated with increased spending on significant furniture items.

How much of an effect does the food industry have on the sales of IKEA furniture?

Let’s take the example of the IKEA restaurant in Hyderabad, India to understand how big an impact the restaurant has on furniture sales.

Number of visitors who come to IKEA primarily to eat food

1. IKEA Hyderabad restaurant has about 1000 seats, and is open for 11 hours between 9:30AM to 8:30PM on all days of the week.
2. Let’s conservatively assume that the restaurant has negligible rush for 5 hours, peak rush filling 40% seats for 3 hours and normal rush filling 20% seats for 3 hours.
3. So, total number of daily visitors to the restaurant = # of hours x # of seats filled = 3 x 400 + 3 x 200 = 1800
4. Assuming the restaurant runs for 350 days in a year (accounting for national holidays),# of visitors to IKEA restaurant annually = 1800 x 350 = 630,000
5. Now, IKEA Hyderabad store had ~2 million visitors in 2019-20. So, 630,000 / 2,000,000 x 100 = ~32% visitors came to the store for food!

Furniture sales from visitors who primarily come to eat food at IKEA

1. Let’s say the average order value (AOV) for furniture at IKEA is INR 5000.
2. Also, IKEA’s revenue from the Hyderabad store was INR 566 crores in 2019-20.
3. Consider 3 scenarios where 10%, 20% or 30% of visitors who came to eat food at IKEA end up buying furniture. So, furniture sales =A) 10% ? 630,000 x 10% x 5000 = INR 31.5 crores % revenue = 31.5 / 566 = 5.6%B) 20% ? 630,000 x 20% x 5000 = INR 63 crores % revenue = 63 / 566 = 11.1%C) 30% ? 630,000 x 30% x 5000 = INR 94.5 crores % revenue = 94.5 / 566 = 16.7%

So, IKEA’s food business is able to drive ~5-15% of its furniture sales!

Reasons people prefer eating at IKEA?

Certainly, IKEA recognizes the importance of tailoring its menu to suit the demographics and preferences of the specific store locations. This adaptability ensures that customers can find a variety of options that cater to their tastes and dietary preferences.

Moreover, IKEA's commitment to affordability and the provision of delicious food makes it an attractive dining choice for many, aligning with the company's overall ethos of offering value-driven products and experiences.

Finally, where is IKEA going with this?

While the food business might not be the primary profit center, it diversifies IKEA's revenue streams and provides a cushion against economic fluctuations in the furniture industry.

In essence, IKEA's foray into the food industry is a multifaceted strategy designed to complement its core furniture retail business, enhance the customer experience, and drive both foot traffic and revenue.

IKEA's restaurants have undeniably become an integral and enduring facet of its business model. As for the future, whether the company chooses to further explore and maximize their potential remains to be seen. It's a development that will require observation and patience to fully understand.

A big credit to - Buildd.