While many retailers are facing inflation and raising prices, Ikea says it is doing the opposite, even as transportation challenges deepen across the Red Sea. The store, known for its do-it-yourself desks and chairs, is lowering prices on some popular products, in what experts say is an attempt to attract cost-sensitive shoppers.
The company’s Canadian website already features hundreds of items it says have lower prices, from kitchenware to lighting to the popular “Billy” bookcase.
Doug Stephens, founder of Toronto consulting firm Retail Prophet, pointed out that Ikea owns more of what goes into its products than other companies: It’s involved in everything from manufacturing to shipping to retail stores.
This gives Ikea greater ability to unilaterally control costs, with “control over virtually every aspect of the supply and value chain”, according to Stephens, who stressed that he believes the company would want to leverage part of that.
Stephens suggested competitors might struggle to catch up.
“There aren’t many companies that would have the kind of leverage and wiggle room in their operations like Ikea. And that’s a big sword to wield… certainly a very difficult thing to match for virtually any what a competitor,” Stephens said.
Furniture prices in Canada have actually deflated in 2023
Ikea’s decision comes as furniture prices in Canada have fallen, according to Statistics Canada.
Even though the consumer price index showed that global inflation was 3.4 percent from December 2022 to December 2023, the furniture inflation rate over the same period was -2.7 percent.
This means that furniture prices have not suffered the effects of inflation, but rather the opposite: deflation.
That being said, some of Ikea’s price cuts are larger than this deflation rate. The dark blue Billy bookcase with glass doors, for example, has seen its price drop by about 20 percent.
In an emailed statement to CBC News, Ikea admitted that “many factors” come into play when determining whether a price can be reduced. The company said it would invest $80 million in lowering prices on more than 1,500 products.
“This investment does not constitute a limited time sale or offer,” the company wrote.
Ikea’s profit rises over the past year
Ikea could be leaving money on the table by making this decision, according to marketing professor Nicole Rourke.
“The head of finance at Ikea, you’re probably a little nervous,” said Rourke, who teaches marketing and business administration at St. Clair College in Windsor, Ontario.
“There’s the downside that you don’t make as much per unit you sell.”
However, Ikea may have some wiggle room in this regard. From the company retail sales and profits grew significantly in its 2023 fiscal year, which ended Aug. 31. In Canada, sales increase by almost 11 percent, to reach $2.9 billion.
Around the world it was a similar story. According to the company, as inflation increased its costs, global profits also reached $2.39 billion at the end of the financial year, up from $1 billion the previous year.
The company attributes this in part to a “reduction in global supply disruptions,” saying that as international supply chain issues have eased, transportation and inventory costs have improved for them.
Higher volume could offset lower prices
“I think what they’ve done here is actually a brilliant marketing and public relations move,” said Stephens, the retail analyst.
Customers who leave Ikea with a positive impression may make more purchases there. This could offset the reduction in profits from price cuts – or even contribute to an increase in total sales.
“Volume compensation could actually provide some protection against reduced profit margins,” said Stephens, who thinks Ikea could see its total sales increase.
Rourke, the marketing professor, shares this view. She pointed out that Ikea could gain valuable market insights from consumer reaction to discounts.
“If all of a sudden they find that they just sold 5,000 more lamps because they lowered the price by $20, they’ll get hard data that will tell them, ‘It’s the consumers who are price-sensitive, and we’re going to target our ads at them,” she said.
Red Sea problems won’t change plans: CEO
Attacks on ships sailing in the Red Sea by Houthi militants in Yemen, who say they are acting in solidarity with the Palestinians, have disrupted global trade. Some shipping giants are diverting their ships to the southern tip of Africa, a longer and more expensive journey.
These higher transportation costs raised fears of further inflationary pressures just as consumers were getting some relief from the start of falling prices. But Jesper Brodin, CEO of Ingka Group, the parent company that owns most Ikea stores, said he still sees “pretty significant deflation” in the company’s supply chain.
Although lower product prices can hurt profits, Brodin also said IKEA tends to take market share when consumers are under financial pressure.
“This is not a year for us to maximize our profits,” he said in mid-January in Davos, Switzerland, on the eve of the annual meeting of the World Economic Forum.
“It’s a year to try to navigate lower profits, but to make sure we support people.”