Ikea: Why Invest More in Home Furnishing Retail Now?

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Swedish furniture giant Ikea announced its biggest-ever investment in the U.S. this past week, committing more than $2 billion into retail store expansion (including developing new store models like pickup locations) and building new fulfillment centers. This investment will increase the total number of Ikea stores by a third, implying approximately 75 U.S. locations compared to 51 today.

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The timing of this decision may seem curious given the headwinds facing the home furnishing sector. We’ve already discussed how the home furnishing category was one of the more challenged from a visitation perspective due to rising mortgage rates, slowing home sales, broader inflationary headwinds, and difficult comparisons due to the COVID-related pull forward in demand and government stimulus efforts. Based on the industry’s visitation headwinds, we expect this category to see a fair amount of consolidation and store size optimization efforts in the years ahead.

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Nevertheless, we do see some logic in the timing of Ikea’s decision. First, as we’ve alluded to several times this year, value-oriented retail concepts are outperforming full-priced retail concepts, and the home furnishing category is no exception. We broke the home furnishing retail category into value-oriented and full-priced chains, and saw the same shift to value that we’ve seen in other categories become more pronounced in late 2022 and into 2023.

Second, Ikea is also embracing smaller, more-interactive formats that have been successful for players like Arhaus. As part of its $2 billion investment, the retailer will open nine “Plan & Order points”, which is an evolution of the chain’s planning studios (where customers can get personalized help on bigger home projects, such as kitchen or bathroom remodels). No items are actually stocked for purchasing in the planning studios, and after consulting with Ikea’s in-studio planners, customers can order items to be shipped directly to their homes.

Third, there will be considerable market share up for grabs in the home goods category with store closures from players like Bed Bath & Beyond and Kirkland’s. While it will face competition from Walmart, Target, Amazon, and Wayfair (despite recent layoffs), Ikea's focus on new store models and fulfillment centers indicates that the company is rethinking previous strategies and finding ways to get closer to customers to remain competitive in an evolving market.

Finally, as we pointed out last year, Ikea's focus on the U.S. market is a clear indication of the company's commitment to its future growth. The investment will increase the number of Ikea stores in the US, and enable the company to better meet the changing expectations of consumers. As Ikea continues to adapt to the evolving retail landscape, it is likely that the company will continue to play a significant role in the home furnishings market for years to come.

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