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Episode: IKEA

Author: Ben Gilbert and David Rosenthal
Duration: 03:22:28

Episode Shownotes

IKEA may be the most singular company we’ve ever studied on Acquired. They’re a globally scaled, $50B annual revenue company with no direct competitors — yet have only ~5% market share. They’re one of the largest retailers in the world — yet sell only their own products. They generate a

few billion in free cash flow every year — yet have no shareholders. And oh yeah, they also sell hot dogs cheaper than Costco! (Sort of.)Tune in for an episode flat-packed with counterintuitive lessons about how this folksy mail order business from the Swedish countryside came into your living rooms (and bedrooms and dining rooms and kitchens and bathrooms and patios and garages and backyards) all over the globe!Sponsors:Many thanks to our fantastic Fall ‘24 Season partners:J.P. Morgan PaymentsStatsigCrusoeLinks:Please take our 2024 Acquired Survey if you have a minute. It'd mean the world to us!The Testament of a Furniture DealerOur past episodes on Costco, Walmart, Amazon, LVMH and HermèsWorldly Partners Multi-Decade IKEA StudyEpisode sourcesCarve Outs:DetroitersThe 11-inch iPad ProThe QB SchoolIce Cube at the World SeriesMore Acquired:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Check out the latest swag in the ACQ Merch Store!‍Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

Summary

In this episode of 'Acquired,' Ben Gilbert and David Rosenthal explore IKEA's unique business model and growth story, revealing how founder Ingvar Kamprad transformed a quaint mail-order business into the world's largest furniture retailer with $50 billion annual revenue. Despite having only a 5% market share, IKEA manages to dominate the market through affordability, innovative shopping experiences, and a commitment to sustainability. The discussion highlights critical insights into effective retail strategies and the company's fascinating evolution over 81 years.

Go to PodExtra AI's episode page (IKEA) to play and view complete AI-processed content: summary, mindmap, topics, takeaways, transcript, keywords and highlights.

Full Transcript

00:00:00 Speaker_04
I also got a flat packed chocolate mousse. I put it together this morning. It's very easy. It's three pieces. Oh, mousse like an animal, not chocolate mousse like the pudding. Yeah, that's correct.

00:00:12 Speaker_04
It looked really good at first, but like the sun rays came in my window and within like 10 minutes it was melted and broke on the kitchen table.

00:00:20 Speaker_00
Oh boy. Is there an analogy about IKEA furniture in there?

00:00:23 Speaker_04
I hope not. It was funny, though. No, I don't think so. I'm ready if you are.

00:00:27 Speaker_00
I'm ready. Let's do it.

00:00:29 Speaker_02
Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way.

00:00:46 Speaker_04
Welcome to the Fall 2024 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts.

00:00:57 Speaker_04
When you're running an in-person retail establishment, you know one thing for sure. If people are going to buy your products, they have to be in your store. And more time in your store generally means they buy more product.

00:01:10 Speaker_04
So what is a great way to increase time in store? Meatballs, David. Meatballs. Meatballs. And hot dogs. And hot dogs. We'll get there.

00:01:23 Speaker_04
So listeners, today we dive into IKEA, the company that sells over a billion Swedish meatballs a year and a lot of furniture and homewares to go with it. IKEA is an 81-year-old company. People visit their stores nearly 900 million times a year.

00:01:40 Speaker_04
And it's quirky as hell. If you've ever shopped there, you're familiar with the crazy maze of showrooms. David, I spent five hours inside the Seattle store last weekend. I went there to prepare for this episode.

00:01:50 Speaker_04
I didn't realize that I was going to spend the whole day there, but that's what happens when you go to IKEA.

00:01:56 Speaker_00
God bless you. Did you make use of small land?

00:01:59 Speaker_04
Uh, I went with a friend who had a kid old enough to take advantage of small land. So yes. Nice. Perhaps, you know, the relationship test of can you make it through Ikea together? And that's just at the store.

00:02:12 Speaker_04
Then you get home and you have to assemble all that flat packed furniture you just bought.

00:02:16 Speaker_04
But the furniture, it does look good, even though it's extremely inexpensive and you do have to build it yourself using the funny diagrams with the funny little man and the funny labels. it ends up looking pretty good.

00:02:28 Speaker_00
Hell yeah, it does.

00:02:29 Speaker_04
And the results of this crazy stew of ingredients is that IKEA has become the world's largest furniture retailer and one of the largest retailers, period.

00:02:39 Speaker_04
Today, we'll examine why it has worked so well, how its founder became the eighth wealthiest person in the world before shifting his ownership into a foundation, and how all the little innovations have just added up and refined the concept along the way.

00:02:54 Speaker_04
So whether it's the Pohang chair, the Lack shelf, the Billy bookcase, it is very likely that you have something from Ikea in your house right now.

00:03:03 Speaker_04
This is the story of a mission to create simple, well-designed, low-cost furniture accessible to as many people as possible, taken to its absolute logical extreme. Totally.

00:03:15 Speaker_04
Well, listeners, after this episode, come discuss it with us on Slack and check out ACQ2, our second show, where we just had Luis Fonon as a guest, the CEO of Duolingo.

00:03:25 Speaker_04
His company story is pretty unlikely, given most investors assumed you could not build a large business in either the education or language learning market specifically, and Luis has some of the most practical advice I've ever heard for anyone building a consumer startup, and have sent it already to a bunch of friends who are building consumer companies.

00:03:42 Speaker_04
So go check it out. ACQ 2 available in any podcast player. And if you haven't taken the Acquired 2024 survey yet, please do. It is open for another week and we would greatly appreciate your feedback.

00:03:53 Speaker_04
Click the link in the show notes or go to acquired.fm slash survey for your chance to win some sweet Meta Ray Bans or an ACQ dad hat.

00:04:02 Speaker_00
We might need to add a poeing chair or something to that.

00:04:05 Speaker_04
Actually, that'd be extremely economical for us to offer.

00:04:08 Speaker_00
Yes, it would be cheaper than the Ray-Bans.

00:04:10 Speaker_04
Maybe we'll even throw in some at-home assembly for you and really gross it up.

00:04:14 Speaker_00
Well, as we will discuss later in the episode, including, you know, delivery and everything that comes with e-commerce, I don't know if it'll be cheaper or it will certainly be impacting IKEA's margins.

00:04:25 Speaker_04
It's true. Well, before we dive in, we want to briefly thank our presenting partner, JP Morgan Payments.

00:04:31 Speaker_00
Yes, just like how we say every company has a story, every company's story is powered by payments, and JPMorgan Payments is a part of so many of their journeys from seed to IPO and beyond.

00:04:42 Speaker_04
So with that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only.

00:04:51 Speaker_00
Unfortunately, there is literally no possible way for us to have investments or for any human being to have investments in the companies that we discuss here. But we start in the small town of Elmhut, Sweden.

00:05:07 Speaker_00
which is in the province of Småland, which despite its name is not so small, but rather a large rural area in the south of Sweden, not too far from Denmark.

00:05:19 Speaker_00
And Småland, again, despite its sort of cutesy, friendly, IKEA-like sounding name, it's a pretty tough place. It's rural. It's agrarian. The soil is pretty barren. It's really rocky.

00:05:34 Speaker_00
There's a lot of forests and timber and timber wood foreshadowing maybe one day what will come out of this province in Sweden.

00:05:43 Speaker_04
It's also cold. Yeah.

00:05:45 Speaker_00
I mean, it's Sweden. It's really cold. Tough place to grow up. Totally. The farmers in small land, though, they really have to work hard to scrape out their existence.

00:05:55 Speaker_00
And there is actually a word in small land called lista, which means making do with an absolute minimum of resources appropriate to the province and appropriate to IKEA, as we shall see.

00:06:10 Speaker_00
And so, it is there, on a farm in Småland, in March of 1926, when our protagonist, Feodor Ingvar Kamprad, or just Ingvar, as he is known, is born. And he's born, where else, for the region, on a family farm named Elm Tarud,

00:06:31 Speaker_00
in an area about 20 kilometers outside of Elmhult called Agunarud, which, apologies to all of our Swedish friends if we butchered those. I listened to a lot of pronunciations to try to get this right. Now, to give you even more of a sense,

00:06:47 Speaker_00
of this land that we're talking about. Elmhult, the, you know, bustling local metropolis. I don't know what the population was in 1926, but in 2010 the population of Elmhult, the big city, was 9,000 people.

00:07:04 Speaker_00
And that is including IKEA's major, major presence there in that town today, including the first store, the IKEA museum, the IKEA hotel, et cetera, et cetera. I'm imagining maybe a thousand people live there at this time. Maybe.

00:07:19 Speaker_00
And Agudarud, the area where the farm is, in 2010, do you know what its total population is? Low hundreds? 220 people. All right, so he's in the sticks. This is the sticks. So, how did the Comprad family come to Smolland?

00:07:37 Speaker_00
Well, if you're perceptive and know your sort of northern and central European family names, you might say, Comprat is not a Swedish name. It's German. And actually, do you know what Ikea's largest market is still to this day? It is not Sweden.

00:07:53 Speaker_00
It's not the US. It's not China. Germany? It's Germany. So Ingvar's grandmother and grandfather had immigrated there to small land from Germany Only 30 years before Ingvar was born, so in 1896. And unfortunately, it's not a happy story.

00:08:10 Speaker_00
So they bought the farm, Elmterud, sight unseen, when they were in Germany, from an advertisement in a local hunting magazine. And people would sort of joke later that this was Ikea's first mail order purchase was the farm and moving to Sweden.

00:08:25 Speaker_04
Ayo. Ayo. So wait, why would you buy a sight unseen farm in Sweden?

00:08:32 Speaker_00
Especially a not very attractive place to farm in Sweden.

00:08:35 Speaker_04
This is like pre-World War I Germany too.

00:08:37 Speaker_00
Yes. So more to the story here. The stated purpose and idea was that they were going to convert the farm from like a agricultural farm into a timber farm, into a timber forest. Ingvar's grandfather HM had been connected to the timber trade in Germany.

00:08:56 Speaker_00
So idea makes sense on paper. Unfortunately though, it doesn't work out. And the next year after they immigrate in 1897, Ingvar's grandfather, HM, commits suicide. Oof.

00:09:10 Speaker_00
So that leaves his grandmother, Franziska, alone to raise three kids, one of which was just born, and manage this farm. She knows nothing about how to farm. It's a really difficult farm to operate.

00:09:25 Speaker_00
in a rural, isolated part of a country that she's not from, doesn't speak the language. Totally rough. Really, really rough.

00:09:34 Speaker_04
And I don't know if this came up in the stuff you were reading. Something I read alluded to the idea that Ingvar's grandfather committed suicide basically out of poverty.

00:09:43 Speaker_04
Like, his life was so miserable from being totally impoverished that he was clinically depressed, and yeah.

00:09:50 Speaker_00
Well, yes, so there's a little more to the story. Turns out, the actual reason for the family's immigration from Germany was more about Franziska and HM's marriage and Franziska's family.

00:10:07 Speaker_00
So, HM had been from a noble family in Germany, or at least a family with historically, you know, ties to the nobility. Francisco was a commoner, and I think an illegitimate child born out of wedlock.

00:10:20 Speaker_00
So HM's parents, and particularly his mother, was not happy about this, didn't approve of the marriage. And so part of, or really probably the whole reason for their emigration from Germany to Sweden was to escape this. This is tough.

00:10:37 Speaker_04
So to plant a seed here, there is a strong cultural thing in this family of don't be poor. Figure out a way to earn a keep, make wealth, deeply ingrained from this.

00:10:50 Speaker_00
Yes. Really, really bad situation. Nonetheless, The family perseveres, and by the time these children grow up, Francisca has turned Elm Tarud into, like, a real functional farm. They're getting by.

00:11:05 Speaker_00
It's not going to make them rich, which, again, like, nobody in small land is rich. Like, they're making it work, and they've built themselves into a respected family in the area.

00:11:15 Speaker_00
Now, the eldest of these children, the eldest son, Franz Feodor, grows up and marries the daughter of the biggest merchant in Elmhult. So, bringing, you know, now some merchant blood into the family.

00:11:29 Speaker_00
When he's 25, Franziska asks him, and I don't think she asked, to come help manage the farm. So, Franz Feodor and his new wife, Bertha, they have two young sons, the elder of whom is Feodor Ingvar Kamprad, our protagonist here.

00:11:44 Speaker_00
They arrive at the farm, and this is where Ingvar Kamprad, the founder, purveyor, janitor, soul embodiment of IKEA grows up. I mean, really, we say this on a lot of episodes, but Ingvar is IKEA, as we shall see.

00:12:01 Speaker_00
He is like Jensen and Mark Zuckerberg all in one.

00:12:05 Speaker_04
Singular founder, the company wouldn't exist but for his exact personality magnified and multiplied into this huge behemoth. You already see the frugality, the we're about to get to the like cleverness of being a merchant.

00:12:21 Speaker_00
The adversity, the chip on his shoulder, I mean all of it. Yes. Yep. So when Ingvar is super young, like five years old, this merchant side of his DNA starts to come through and blossom.

00:12:34 Speaker_00
His aunt, the youngest child, the third child of Franziska, helps young Ingvar buy bulk sets of matchboxes, mail order, from Stockholm, the capital of Sweden.

00:12:45 Speaker_00
Ingvar, little Ingvar, five-year-old, then goes around the countryside selling individual matchboxes to other farms and other families in the area at like a 3x markup from what he got them unit price in the bulk package from Stockholm.

00:12:59 Speaker_00
So he writes later, my aunt didn't accept payment for the postage. So then I sold the boxes at two to three or each or is like a penny to a kroner at the time in Sweden, so like two to three cents each, sometimes even five.

00:13:13 Speaker_00
The whole mail order package of 100 cost 88 cents. Talk about profit margins. I still remember the lovely feeling. From that time, selling things became somewhat of an obsession for me.

00:13:26 Speaker_04
Yeah, the seeds are sown of one of the greatest retailers of all time right here at age five.

00:13:32 Speaker_00
Totally. I mean, Sam Walton, Jim Senegal, Sol Price, Jeff Bezos, Ingrid Comprad. Absolutely. Yep. So young Ingvar, he gets a taste of this. He's hooked. He goes on all throughout his childhood. He's

00:13:46 Speaker_00
ordering bulk items, mail order from elsewhere in the country, selling all kinds of stuff out to the residents out in the small land countryside. So like Christmas cards, wall decorations, garden seeds, you know, just like random small goods.

00:14:02 Speaker_00
Ultimately, he finds a niche and a good business importing and selling fountain pens from other countries in Europe. He's like 10, 12 years old at this point. He's selling these fountain pens so fast that he decides like, oh, hey,

00:14:17 Speaker_00
I wish I had some financing to be able to buy some more of these pens. I know I could make money. I have product market fit. I should raise money. I should raise money.

00:14:24 Speaker_00
So he goes to the village in Elbhult and he takes out a 500 kronor loan from the bank there, Swedish kronor. This is like $63 about at the time. This is in 1938. And in 1938 dollars, $63 is hundreds of dollars today. Yeah. especially for a 12-year-old.

00:14:43 Speaker_04
So imagine your kid walking down the street and going and somehow coming back with $500.

00:14:47 Speaker_00
Right. That's also part of this story here. He finagles, like, I don't think his, you know, grandmother or his parents were helping him with this. Right. So he uses that to import 500 fountain pens from Paris.

00:14:59 Speaker_00
And then I think, you know, they sell quickly, like repays back, you know, the loan pretty quickly. And that, listeners, is the only capital that ever goes into IKEA. That is the only money that Ingvar would ever raise.

00:15:17 Speaker_04
We will flash all the way forward to modern day. Ingvar always owned 100% of IKEA. He built it into the world's largest furniture store and one of the world's largest retailers, period, without anybody else owning a single share of the company.

00:15:37 Speaker_04
No outside financing, no debt financing, nothing.

00:15:41 Speaker_00
Nothing they own. I think all of their real estate today. They own all this I'm sure they probably use construction financing today, but you know, they have 25 billion euros in the bank like This is it. This is the background.

00:15:54 Speaker_00
This is what he comes from 500 kroner loan in 1938 paid back immediately Only capital that ever goes into the business freaking wild totally crazy. Totally wild. I don't recall exactly like the Walmart story, but

00:16:08 Speaker_00
I mean, even that, I think Sam was like from family and banks and other folks taking money.

00:16:13 Speaker_04
Yeah, his wife's family, I believe, invested.

00:16:16 Speaker_00
That's right. His wife's family. The whole thing gets financed off of cash flow from pens. Yes. He literally trades matchboxes to Christmas cards, to pens, to furniture, to Ikea. Nuts.

00:16:28 Speaker_00
It's like the story of the guy who starts with a paperclip and ends up with not just a house, but like a city.

00:16:33 Speaker_04
It's not, though. It's not really trading. It's he generates positive cash flow off of the sale of each of those items, then reinvests that positive cash flow in buying the inventory for the next thing.

00:16:47 Speaker_04
It's just this, like, thank God he's had 81 years to do it. Otherwise, you could never grow to something this large, financing your future growth only on the cash flows you've generated so far.

00:16:58 Speaker_00
Right. It's a good point. Although he is a trader for a very long time. I think that is how he would think of himself. It's not like he's getting the better of other folks. Like, he's creating value. He's creating value for suppliers.

00:17:10 Speaker_00
He's creating value for buyers. He's performing capitalism here. Right.

00:17:15 Speaker_04
That's just the definition of capitalism. You sell something, you have excess cash flows in the form of profit margin, you reinvest that in growing your business. And he just did that over and over and over again.

00:17:26 Speaker_00
Okay, so in 1943, when Ingvar is 17, he's about to go off to the equivalent of college at the School of Commerce in Gothenburg, which is a much bigger city in Sweden. Like, it's actually a city in Sweden.

00:17:43 Speaker_00
And Ingvar decides that before he goes, he wants to officially start a company, like a firm, to formalize all of his trading activities that he's been doing, because he intends to expand it while he's in Gothenburg at school.

00:17:57 Speaker_00
His sort of import-export business, shall we say.

00:18:00 Speaker_04
And there is one other thing happening during this period of time in Ingvar's life. We will come back to that later.

00:18:06 Speaker_00
So, before he leaves, he registers an official trading firm with the county of Smalland and names it, very creatively, the natural thing that comes to mind, very descriptive term, he names it his name and his mailing address.

00:18:22 Speaker_00
Ingvar Kamprad Elmterud Agunyard. I-K-E-A.

00:18:31 Speaker_04
Ah, I never put together it was like his mailing address. I always knew it was the two initials of his name and the farm and the city. Well, I think that was his mailing address. Ah, that makes sense.

00:18:42 Speaker_00
You know, this is the countryside here. It's not like there's any more to the address than like Elmteroo de Goonyard. He doesn't have a house number. So cool. So that's IKEA. That's Ingvar Kamprad's trading firm.

00:18:53 Speaker_04
This is it. And he does put the first IKEA logo sign on like a little shed on the property. It's simultaneously labeling the property by address then in addition to saying this is where IKEA does business.

00:19:07 Speaker_00
Yes, which is all part of the lore. I'm not sure how much actually happens in the shed besides he puts the sign up there. I think he just stores inventory there. Yeah. Well, let's talk about inventory.

00:19:20 Speaker_00
So Ingvar goes off to the School of Commerce, and for the first time there, he's able to do what I think he intended, which was get access in the school library to real actual trade publications, import-export trade papers and trade publications.

00:19:37 Speaker_00
So he starts writing to the suppliers all over Europe who are listed in these trade publications and asks if he can become a selling agent of theirs in Sweden. Now I say agent. At this point, he's running an actually incredibly capital light business.

00:19:56 Speaker_00
Most things, I think he is not taking inventory. Some of it he is, he's storing some pens and stuff, small goods under his bed while he's at college. But a lot of it, what he's doing,

00:20:07 Speaker_00
is he's finding and aggregating demand in Sweden and sending purchase orders directly to the manufacturers, wherever they are in Sweden or elsewhere. And they just fulfill the orders directly to the customers by mail. It's pretty awesome.

00:20:21 Speaker_00
So like the first drop shipper. Yeah, he's not doing the shipping.

00:20:24 Speaker_04
I mean, he's just an aggregator for demand. He's an agent. And he never takes possession of the inventory. It's fulfilled in real time as he gets the order, the supplier puts it in the mail. It's great.

00:20:35 Speaker_00
Yep. And again, not always, you know, sometimes he gets a box of 500 pens or whatever, like he's doing whatever is going to make him the most money and be the right arrangement. But being an agent is the best way to do this.

00:20:46 Speaker_00
So he starts off, you know, naturally he continues the pen business. He goes from fountain pens to ballpoints. That's a big hit. Then he gets into wallets, cigarette lighters, file folders, you know, all sorts of small goods.

00:21:00 Speaker_00
And at first, he's mostly just kind of doing what a lot of other people are doing at this point in time who are trader-agent types. He's a traveling salesman.

00:21:11 Speaker_00
He's going back and forth to Gothenburg and to small land, and he's selling to customers that he meets mostly out in the countryside. It's, you know, hand-to-hand combat. It's ringin' doors. It's calling on his network.

00:21:21 Speaker_00
Then though, he gets the idea, he's like, well, I'm getting all my supplier relationships through trade magazines and corresponding by mail. And then a lot of times when I'm the agent, they're fulfilling the orders by mail.

00:21:35 Speaker_00
What if I just get into the mail order business myself? These trade publications are a pretty good way to get business for the suppliers. What if I do that?

00:21:44 Speaker_00
So he starts a product catalog and he advertises it in publications all around Sweden with the idea being that like, oh, rather than just what I'm limited to doing myself, I can now scale across the whole country and I can aggregate a lot more demand.

00:22:01 Speaker_00
It actually doesn't matter if I don't know these people or I don't go to these parts of Sweden. The suppliers don't know them either. It's all going to work the same. Yep.

00:22:09 Speaker_00
And he's also learned at this point that if he can aggregate more and more demand and get higher order volumes, he's for sure going to get better prices from these suppliers.

00:22:19 Speaker_00
Now, here in the, call it mid-1940s, this is not a new innovation that Jung Ingvar is coming up with. I mean, it's basically the story of the Sears robot catalog, you know, 50 years earlier in America, this is happening all over the world.

00:22:34 Speaker_00
And there's plenty of other people doing the same thing in Sweden at the time.

00:22:38 Speaker_04
Once you had enough scale to say, hey, I've aggregated a bunch of interesting products, you started making a catalog and you mailed out to everyone and that was your sort of client base.

00:22:49 Speaker_00
I mean, it was the e-commerce industry before the e-commerce industry. Yep. Anybody could do it. It was just about aggregating demand. Yep. So Ingvar creates a catalog of his wares called IKEA News.

00:23:06 Speaker_00
Eventually he publishes IKEA News on its own with its own subscriber base, but at first he's just inserting it as an advertising supplement in local farming publications all around Sweden.

00:23:20 Speaker_00
So by the end of college, end of the war, like I said, he's doing really well. Like he's doing way better than probably anybody back in small land.

00:23:29 Speaker_00
So after school, he returns to the farm to Elmterud and he recruits his family to also start helping him with the business and fulfilling these orders and running all the mail and all that stuff. And they're still just running it on the farm.

00:23:43 Speaker_00
And then, in 1948, Engvar makes a fateful, but again not unique, decision, which is that he decides to add furniture to his catalog. Now, other competitors of his, other rural focused mail order businesses and dealers, offered furniture at the time.

00:24:08 Speaker_00
And that's actually why Ingvar starts doing it too. He had been shopping the competition, doing the Sam Walton thing. He's reading all the advertising supplements of all his competitors. And he notices that they start offering furniture.

00:24:20 Speaker_00
It seems to be working for them. They're promoting it more and more. And he says, well, hey, I should try that too." And he would joke later it was like it was an accident that he found his life's calling in the furniture business. Yep.

00:24:30 Speaker_00
So he does with furniture what he's doing with all IKEA products at this time, which is he goes around, he sources some suppliers, and he asks them if IKEA can be their agent to sell their furniture.

00:24:45 Speaker_00
Now, furniture isn't exactly like fountain pens or wallets. It's big. You can't just order a box of 500 armchairs and stuff it under your bed or put it in your little shed on the farm.

00:24:58 Speaker_00
Really what you need to run this model is you need local suppliers or at least domestic suppliers within Sweden. Yeah. Well, fortunately, as we discussed, Smallland is full of timber.

00:25:11 Speaker_00
And it just so happens that, probably because of that, there are a number of furniture makers right there in the province. So Ingvar goes around to local Smallland furniture makers and asks if he can be their agent.

00:25:24 Speaker_00
Like, hey, can I bring you more business? They're all like, well, sure. He's like, there's one condition, which is you'll have to deliver the furniture yourselves. Is that okay? And they're like, well, that's what we do anyway. It's part of our business.

00:25:39 Speaker_00
Sure. Yeah. Now famously, and this is part of the lore about Ingvar and probably is, uh, somewhat exaggerated. He loved to tell people that he's dyslexic and it totally serves this lore of like, Oh, here's this. hardscrabble country retailer.

00:25:58 Speaker_00
I don't know how dyslexic he really was.

00:26:01 Speaker_04
Really? This was like a thing that I almost thought I was going to stump you. I was because it comes up later in a key moment of Ikea that he's dyslexic. And it's why some I don't spoil it yet.

00:26:11 Speaker_04
But obviously, not only do you know he was dyslexic, you're proposing he may not have been that dyslexic.

00:26:16 Speaker_00
Well, I read some stuff from some former employees that suggested that it was more part of the legend that he cultivated than reality. But I actually don't know what you're referring to. I'm excited to be surprised.

00:26:29 Speaker_04
So it's why the products are named the way they are, rather than having model numbers.

00:26:36 Speaker_00
Oh, this is exactly what I was going to say. Okay.

00:26:38 Speaker_04
Yeah. It's like part of the, hey, I need to have a word for each of these things.

00:26:43 Speaker_00
Oh, yeah, yeah, this is exactly what I was about to say. I thought that was like, oh, is there another point later?

00:26:48 Speaker_04
No, no. Okay, so where are we going here, David?

00:26:52 Speaker_00
Well, regardless of it's veracity or not, Ingvar does not like remembering product numbers and codes and catalog. So he decides that he is going to give a name and not a product code or number to all these furniture pieces.

00:27:08 Speaker_00
And yes, this is the beginning of IKEA product naming conventions. Do you know though, I actually had no idea until I started researching, what these sort of general naming conventions are within IKEA today?

00:27:22 Speaker_04
I think so. I think different product categories are named after different things like rivers and... Yes. Certain furniture is named after certain, it's almost like conference room naming at companies.

00:27:34 Speaker_00
Yes. So products are usually named after Scandinavian locations. I think Swedish locations are used for sofas and coffee tables, like the core part of the line.

00:27:48 Speaker_00
Norwegian locations I think are used for beds, Danish locations for textiles, and then some of the smaller goods like lamps are seas and lakes, and outdoor furniture is islands, I think. We've got the whole, you know, schema here with names.

00:28:05 Speaker_00
Ingvar, if he truly was dyslexic, would now be having a tough time with all of this.

00:28:10 Speaker_00
So, anyway, Ingmar decides that he's going to start all this off with his, you know, named pieces of furniture in the IKEA catalog that, again, are not his furniture. He's just sourcing them from local furniture makers like other people are doing.

00:28:24 Speaker_00
He's going to start with a test. and he puts three pieces from Small Land in the catalog, two armchairs, one of which is a armless armchair, so I guess just a chair, that is intended for baby nursing.

00:28:37 Speaker_04
Dude, an armless chair for baby nursing sounds awful. Sounds like torture. Like, that's the time when you need the arm the most.

00:28:44 Speaker_00
Hey man, different era. Yeah. Different era. So he writes, the response was unambiguous. We sold a huge amount of this quote-unquote test furniture, And Ingvar, of course, he's a trader. He has a nose for business. He's like, great, what more can we add?

00:29:01 Speaker_00
So he quickly sources a sofa bed to add to the catalog. Famous, you know, IKEA sofa bed. There it is right in the beginning. Then a chandelier and all sorts of other stuff. And it's off to the races.

00:29:12 Speaker_00
Pretty much any piece of furniture or furniture like home goods that he can get his hands on and advertise in the catalog, it sells like hotcakes. Or maybe meatballs. Is that too much? That's too much. Anyway, so now.

00:29:33 Speaker_00
Why is it selling like meatballs here? Why is there a huge demand?

00:29:37 Speaker_00
Before mail order, the only way that people out in the countryside could get furniture that wasn't locally made right there or passed down from generations, but still it had to get made and bought at some point in time, was through dealers like Ingvar used to be, like, you know, traveling salesmen type people.

00:29:58 Speaker_00
And they had very limited access to inventory. They were sourcing like individual pieces probably more often than not, you know, secondhand estate stuff, or maybe they're from a distributor or a third party middleman.

00:30:11 Speaker_00
I mean, either way, we're talking super limited scale, very sparse and unreliable product offerings.

00:30:18 Speaker_00
Like you need a baby nursing chair, an armless baby nurse, whatever you need, a dining table, like the likelihood that your guy had that in his stock was low. And so that's just availability, but then also the pricing, I mean.

00:30:34 Speaker_00
Again, we're talking about how everybody here is just basically eking out a living. The traveling salesman agent types, you know, they're trying to eke out a living too. They're trying to make as much money as they can.

00:30:45 Speaker_00
They're not trying to build scale. They don't get like, oh, hey, volume drives prices down. Low prices drive volume. It's like, no, no, no, no.

00:30:52 Speaker_04
What's the maximum margin I can extract for this very one-off random special sale I'm making?

00:30:58 Speaker_00
Totally. Ingvar, though, because of his history in small goods and as an importer, he's got a very different mindset. He knows that, oh, selling goods in bulk and bulk orders, it's all the way back to the matchboxes.

00:31:13 Speaker_00
That's how he's approaching the problem. He's also young. He doesn't have a family. He can just operate in a very different mindset than everyone else here. So scale doesn't bother him.

00:31:23 Speaker_00
He's happy to try and drive prices down as low as possible, pass that savings along to buyers, undercut everyone else, get more demand. Like this is how he operates. And even more than that, he realizes furniture...

00:31:36 Speaker_00
is way better than these small goods. Because even though, you know, I could sell cheaper, these are still large ticket purchases for people.

00:31:45 Speaker_00
The absolute number of dollars or, you know, kroner that I'm going to make on any given piece of furniture, even if I'm selling it at a low margin, is like way more than ballpoint pens here. Right.

00:31:57 Speaker_00
And not only that, but it's also selling quickly, even though these are high priced items, because there's this huge unmet demand in the countryside. People are starving for this stuff.

00:32:08 Speaker_00
And even better, the logistics and distribution for us, for IKEA, is just as easy as ever. The furniture makers are handling it all themselves. This is great. Let's pour resources into this.

00:32:21 Speaker_04
It is crazy he managed to aggregate demand for something that is very difficult to manage and take inventory of, and he managed to sell to those customers without having to deal with the really tough inventory problems.

00:32:35 Speaker_04
I mean, it truly is like the first dropshipper.

00:32:38 Speaker_00
Well, as we'll see, it works for a while, and then it doesn't. But for the moment in time, the furniture makers love it. Ingvar and the other folks who are doing this has just expanded their market.

00:32:50 Speaker_00
This is the golden early days for this whole catalog dropshipping industry. So within a couple months, Ingvar is getting so many orders from customers and so many furniture makers who want to be

00:33:04 Speaker_00
in the catalog that he's like, okay, we got to just focus on furniture. He starts hiring a handful more of other folks beyond just his family to help out, but it's still like a fairly lean operation. We're talking 10 people or so through the forties.

00:33:18 Speaker_00
They're still running it out of the farm at Elm Tarud. And then in 1949 Ingvar decides to go really big. He starts buying regularly, every week, a supplement in the big national farmer's paper in Sweden, which has a circulation of 285,000 copies.

00:33:43 Speaker_00
I guess we should have talked about this earlier. I'm talking about supplements, advertising. I'm realizing that I bet a lot of our audience has no idea what I'm talking about.

00:33:53 Speaker_04
Like a supplement to a newspaper.

00:33:55 Speaker_00
Yes. This is, here in America, going back to the Best Buy circular in the Sunday paper, or the Target circular, or the Sears circular.

00:34:04 Speaker_04
I don't get a newspaper anymore, but I'm pretty sure this still happens. I think this is still a very common advertising channel.

00:34:10 Speaker_00
Totally. Anyway, back to 1949, Ingvar goes big, he commits to regular weekly publication as a supplement in the National Farmer's Paper.

00:34:22 Speaker_04
So before this, when we said people were subscribed to his catalog, how did that work?

00:34:27 Speaker_00
It worked like all these businesses I think did at the time, which was, if you were a customer, you saw something in this advertisement circular in a paper or somehow got exposed to it, you then place an order, you then get placed on the customer list.

00:34:42 Speaker_00
So I think once Ingvar's got your address and knows who you are, you're in his CRM, so to speak, now I think you're getting his catalog directly.

00:34:52 Speaker_00
So, in this first weekly supplement, he specifically appeals to what he ultimately terms this idea of the many. And we'll keep coming back to this. This is super critical to IKEA. So, in this first National Circular that goes out,

00:35:10 Speaker_00
He writes, You may have noticed that it is not easy to make ends meet. Why is this? You yourself produce goods of various kinds—milk, grain, potatoes, etc.—and I suppose you do not receive too much payment for them.

00:35:23 Speaker_00
No, I'm sure you don't, and yet everything is so fantastically expensive. To a great extent, that is due to middlemen. Compare what you receive for a kilo of pork with what the shops ask for it.

00:35:35 Speaker_00
In several areas, it is unfortunately true that goods that may cost one or two krona to manufacture cost five, six, or more to buy.

00:35:44 Speaker_00
In this price list, we have taken a step in the right direction by offering you goods at the same price your dealer buys for, in some cases, lower.

00:35:54 Speaker_04
I mean, this is it. We'll make it up in volume. This is thinnest margins possible for the many people with an obsession in cutting out middlemen.

00:36:05 Speaker_00
Yep. And what's interesting here is I think this is the first time where he's, by instinct, appealing specifically to the low-price aspect.

00:36:14 Speaker_00
Like, again, almost everybody else was appealing to the selection, the availability of, like, oh, you can finally get furniture. He's now saying like, no, no, I know it's hard for you out there. I know you're struggling to make ends meet.

00:36:26 Speaker_00
I'm going to give you the absolute lowest prices on this stuff.

00:36:30 Speaker_04
Oh, yeah. This is worth a pause. Harken back to our Walmart episode. What's the sort of perfect triangle of delivering a retail product? It's convenience, price and selection. And what he's basically saying is price, price, price.

00:36:45 Speaker_00
Yes. And way better selection than you had in the old model. Convenience, probably not as good, but price. I know you care about price. You are struggling to make ends meet.

00:36:56 Speaker_03
Yep.

00:36:57 Speaker_00
A little later, we're going to talk about this amazing document that Ingvar writes in 1976 called The Testament of a Furniture Dealer. He's so folksy.

00:37:06 Speaker_00
But the very beginning of it, the very first thing reads that the mission of the company is to create a better everyday life for the many people, the many, by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.

00:37:26 Speaker_04
I mean, that's it. It's all right there in that sentence.

00:37:29 Speaker_00
Yep. Now, the interesting question though here and for the rest of the episode is, like we said, Ingvar is not the only mail order furniture company at this point.

00:37:42 Speaker_00
He has plenty of competitors who are doing the same things and probably catching on to this same idea that low prices are also important. But none of them become IKEA. And the next reason why none of them become IKEA is none of them have a showroom.

00:37:58 Speaker_00
Oh, yes. But before we tell the showroom chapter of IKEA, now is a great time to tell you about our presenting partner this season, JP Morgan Payments.

00:38:09 Speaker_00
We've been talking about how IKEA brought simplicity to a complex and fragmented customer experience. This is exactly what JP Morgan is doing for payments.

00:38:18 Speaker_00
Businesses don't want complexity or to have to rely on connecting multiple third-party hardware and software vendors together. or to sacrifice stability and security in order to grow their top line.

00:38:28 Speaker_00
This is why JP Morgan invests over $17 billion a year in technology as the end-to-end seamless payment solution to handle everything from payment acceptance and processing to security to reconciliation so you can focus on running your business.

00:38:45 Speaker_04
Exactly. And since we're in IKEA land, let's zoom in today on retailers, and specifically on a product that most of you are very, very familiar with. Tap-to-pay.

00:38:56 Speaker_04
Obviously, there's been a massive shift in the last few years in how consumers expect to seamlessly use their phones to check out. Well, J.P. Morgan Payments enables this as part of their omnichannel solution.

00:39:07 Speaker_04
That's likely been running under the hood in many of the in-person checkout experiences that you've had.

00:39:12 Speaker_04
We've reached this tipping point where 50% of global in-person transactions are now contactless, and it's totally essential for companies to offer a great tap-to-pay experience.

00:39:22 Speaker_00
I honestly love this and I've been preaching the virtues of tap to pay for years now.

00:39:26 Speaker_04
Listeners, I can vouch for that. David was a very early adopter when we would go on morning runs. I think actually back when you lived in Seattle and you'd only bring your watch even when we were going to go get breakfast together afterwards.

00:39:37 Speaker_04
And I thought it's just crazy.

00:39:39 Speaker_00
Yes, it's great. It's great for everyone. For merchants, they can easily accept debit and credit cards from the NFC enabled digital wallets on smartphones.

00:39:46 Speaker_00
For employees, it's great because they can seamlessly complete payments from anywhere in the store. And of course, for customers like us, it's great since they get a transparent and secure transaction and pay more conveniently. Yep.

00:39:58 Speaker_00
For anyone who was at our Chase Center show, this is the exact experience we used for the roaming hawkers selling the hats. So you got to experience this firsthand and the results were pretty insane.

00:40:09 Speaker_00
We found out after that they sold 1500 hats in under two hours with a 100% success rate, which means zero declines.

00:40:18 Speaker_04
Yep. So any business, retail or otherwise, benefits from having a frictionless payment experience. Listeners can go to jpmorgan.com slash acquired and learn more about tap to pay and check out other payment solutions driving growth for businesses.

00:40:33 Speaker_04
Our thanks to JPMorgan Payments. Okay, so David, how does the first IKEA showroom come to be?

00:40:40 Speaker_00
So, as we alluded to earlier, in the early days of this mail-order-furniture-catalog-circular-type business model, it's the golden era. Everybody prospers. Consumers are happy. Furniture makers are happy. There's room for competition.

00:40:58 Speaker_00
Like, it's all greenfield. Everybody's going after new customers. Nobody's stepping on each other's turf. Inevitably though, as we get into the early 1950s, competition gets more intense among these mail order businesses like Ikea and price wars start.

00:41:17 Speaker_00
So this is the next chapter. And the thing about mail order was, yes, it enabled scale, which enabled selection, which enabled low prices, but there was no governor on quality.

00:41:34 Speaker_00
And what I mean by that is that anybody who had a mail order business could take attractive looking photos of their furniture and home goods and stick it in their catalog or their circular advertisements and say like, oh, buy my beautiful looking furniture at this really, really attractive price.

00:41:52 Speaker_00
And those photos may or may not have any sort of bearing on the reality of what the furniture actually was when it arrived.

00:41:59 Speaker_04
Not to mention you basically had no recourse because at this point there wasn't modern credit cards. So it's not like you could charge back.

00:42:05 Speaker_04
There wasn't 2024 style returns infrastructure where you could just get your money back by sending something back weeks or months after it was delivered to you and get a full refund.

00:42:15 Speaker_04
Nobody was building these big sort of global brands that were trustworthy. And so it was just a matter of which small, local, circular brand convinced you that their picture was worth ordering?

00:42:27 Speaker_00
I actually don't know what their return policies are. I hope they're good, but it's like the Timu of 1950s Sweden here, right?

00:42:34 Speaker_00
The disconnect after a couple of years of this between what you think you're getting and what you're actually getting starts to widen.

00:42:41 Speaker_04
And so even though Ingvar is focused on quality furniture at the lowest possible prices, the fact that other people aren't is hurting him because it's hurting consumer trust.

00:42:52 Speaker_00
I can just deliver low prices if I compromise on quality. So he's searching for a way out of what's starting to become a pretty brutal competitive landscape.

00:43:01 Speaker_00
And one night, as legend has it, he's working late with one of his early employees, a guy named Sven Gothe, and they come up with a crazy idea. And the crazy idea is, what if we had a showroom?

00:43:18 Speaker_00
where people could come and they could touch and see and feel the actual items that we are selling in our catalog, and then they could convince themselves like, yes, this is the quality, this is the item that I'm going to get at this price.

00:43:32 Speaker_00
I think if we could just show people, they could see with their own eyes, touch with their own hands, they would see that the quality we're delivering at this price is way better than anyone else out there.

00:43:43 Speaker_00
And it just so happens at this moment in time that the local furniture joinery in Elmhult is about to close. He is going to buy the building for 13,000 kroner, which is about $2,500 at the time. We're here in like early 1950s.

00:44:01 Speaker_00
So, you know, not cheap, but not that much money. And that $2,500 investment becomes the first IKEA showroom. I mean, we seriously kid you not, listeners, the only money this guy ever raised was that 500-kroner bank loan.

00:44:18 Speaker_04
Yeah, it's nuts. And the funny thing about this, it is a showroom. It's not like a store. Our business model continues to be this catalog thing, but we have a place where you can just kind of touch and feel the furniture.

00:44:30 Speaker_00
I think Tesla does this today or has done it for a while.

00:44:32 Speaker_04
Or Bonobos or... Yeah, yeah.

00:44:34 Speaker_00
There's a store and a mall that you can go see the cars or see the pants, but you can't take it home. Right. So let's illustrate why this is a completely nutty idea. A, there's the obvious, you can't take it home.

00:44:46 Speaker_00
B, the whole point of the mail order business was that Buyers and sellers can now access each other across the whole country, all of Sweden as a market, all the rural areas everywhere in the country, and Sweden is a pretty big geographical country.

00:45:05 Speaker_00
What Ingvar is doing here, they're opening a showroom in one singular remote part of this country, you know, in a town with like a thousand people who live there, and they're

00:45:15 Speaker_00
business model is to sell to the other towns of a thousand people all over the rest of the country. Why on earth would opening one showroom in one little town work? Here's the thing. I mean, by God, does it work?

00:45:26 Speaker_00
I don't know that the customer base in the town of Elmhull was that important to IKEA itself. People come from all over the country to go to the showroom. This is wild.

00:45:36 Speaker_00
So Ingvar advertises that they're opening this for months leading up to the actual opening, which is in March of 1953.

00:45:42 Speaker_00
So all of his customers and everybody getting the circular advertisements in the weekly paper all across the country, they're hearing about this showroom in Elmholtz.

00:45:51 Speaker_00
On opening day in March of 1953, there are over 1,000 people from all over the country who show up and wait in line to get in. They take the train, they somehow make their way to Elmhull to see the furniture. They're not even buying anything.

00:46:07 Speaker_00
It's crazy.

00:46:08 Speaker_00
Ingvar and the team, like, they're so worried about this that they don't know that the floorboards on the second floor of this old joinery are like, you know, it's like an old building here that are, like, gonna stand up to 1,000 people being up there, plus all the furniture that they have as, you know, the showroom.

00:46:22 Speaker_00
They had also advertised in the circulars that they were going to offer free coffee and morning buns to anybody coming to shop.

00:46:30 Speaker_04
Yes. The very first time there's food at an IKEA is the very first time there's an IKEA.

00:46:35 Speaker_00
That's right. That has always, always been part of the concept. But yeah, Ben, as you say, like there's no warehouse, there's no flat pack furniture. Everybody's just there to like see the stuff.

00:46:46 Speaker_00
And you could also fill out an order form while you're there to then buy it by mail later.

00:46:51 Speaker_04
So Ingvar has a quote about this. At that moment, the basis of the modern IKEA concept was created. And in principle, it still applies. First and foremost, use a catalog to tempt people to come to an exhibition, which today is our store.

00:47:04 Speaker_04
Come and see us in Elmhut and convince yourself," we wrote on the back of the first catalog. Two very important words there, convince, and the other one is exhibition.

00:47:15 Speaker_04
Already they were seeing this idea and the fact that he marketed to the whole country and offered food. I mean, we're not just offering you a store that you can walk into and buy something. We are creating an exhibition.

00:47:27 Speaker_00
Yes, it is an experience. It's almost like you're getting a free ticket to this experience, this exhibition.

00:47:34 Speaker_04
Yes. Great retailers have more in common with P.T. Barnum than poor retailers.

00:47:38 Speaker_00
Totally. Oh, my God. So this is, I think, and Ingvar thinks he writes this, this is the very first time anywhere in the world that a mail order business is combined with a physical showroom.

00:47:55 Speaker_00
So you might think, oh, Sears in the US, obviously that's a mail order business and they have Sears stores. No, no, no, they're different. Like the Sears stores, you buy the stuff at the stores and you walk out. It's not a showroom.

00:48:06 Speaker_00
Here with IKEA for the first time, it is that concept you just described, Ben. It's like, we tempt you to come see this exhibition and then you order by mail. I don't think anybody had ever done this before. Because again, it was a crazy freaking idea.

00:48:20 Speaker_00
But of course, it becomes an enormous success. So within the first couple of years of the Elmhull showroom store, it's not a store being open, a huge portion of IKEA's catalog subscriber base, they've now formalized it as the IKEA catalog.

00:48:37 Speaker_00
About half of their catalog subscriber base, which is hundreds of thousands of people now at this point in time, make the pilgrimage to Elmhull and they visit the showroom.

00:48:48 Speaker_00
You know, this tiny little village, hundreds of thousands of people are now coming there.

00:48:52 Speaker_04
And you might ask yourself, what's the big deal with the catalog? Like, why are people so interested in getting a catalog? It was really inspirational. I mean, it hadn't

00:49:00 Speaker_04
quite made this shift yet, but especially in the 60s after Britta Lange took over from Ingvar, because Ingvar is like everything right now. He's like art directing the photography. I think he might even be taking the pictures and writing the copy.

00:49:11 Speaker_04
But it turned into this thing with these vibrant, beautiful living room settings, and people are anticipating the arrival of the IKEA catalog. And it positioned IKEA as this brand, this lifestyle.

00:49:24 Speaker_04
It illustrated a life you could be living if you participated in the IKEA story.

00:49:30 Speaker_00
Yep. That really, really becomes a thing in the 60s with modernity and when the target customer becomes the urban and suburban customer. But even with the rural customer, like it still works. They lean into this model heavily.

00:49:44 Speaker_00
So they arrange for any IKEA customer to get discount tickets on Swedish railways to make the pilgrimage to Älmhult.

00:49:52 Speaker_00
And then they also set up this program where customers who come from another location and commit to furnishing a whole house, they call these the setting up house customers, they get free dinner at the hotel in Elmholt that night.

00:50:11 Speaker_00
Like this is hokey stuff, but to your point, P.T. Barnum, that's what this is.

00:50:16 Speaker_00
So within a year, they pass one million kroner in sales at this showroom, which has got to be by multiples, the largest business ever built in Elmhult in like human history.

00:50:31 Speaker_00
In 1954, so the next year after this has been open, they passed 3 million kroner in sales. I think the exchange rate was about 5 to 1 at this point in time of 5 kroner to 1 dollar. 1955, they double again to 6 million in sales.

00:50:48 Speaker_00
The number of IKEA catalog subscribers around the country passes half a million. And all this is done with still less than 30 employees, the business still being run out of the combination of the family farm and this one showroom.

00:51:03 Speaker_00
It's wild the scale they get to. It's amazing.

00:51:06 Speaker_04
Yeah. So it's one of these things that, you know, on the one hand we are, how many years into Ikea was founded in 43 and we're approximately in 53, 54 here. So we're 10, 11 years in.

00:51:18 Speaker_04
But the thing that is really working is this thing that just got started the previous year, which is the combo of the catalog and the showroom.

00:51:29 Speaker_04
That proves to be this like amazing winning combination that they just realize, oh my God, we need to scale this.

00:51:35 Speaker_00
Yep, totally. This is, I would say, like generation three of the IKEA business. You know, generation one is just small goods trading company.

00:51:43 Speaker_04
Matches and pens.

00:51:44 Speaker_00
Generation two is furniture plus catalog. Now we're here in version three of like furniture catalog plus showroom, and that's what's really exclusive. Yep.

00:51:57 Speaker_00
But here in the 50s, though, the target customer base, we referenced this a minute ago, and the product mix is still geared towards these rural farmland families. Like, hey, I'm outfitting my farmhouse. Yep.

00:52:13 Speaker_04
And when you look at the old catalogs, you can tell. Totally. It's not this simple Swedish design that we think about as IKEA as today. It's like pretty rugged, robust, heavy furniture.

00:52:25 Speaker_00
Yes. So, when the 1960s come around, Sweden, like pretty much all of Europe, starts rapidly and inexorably urbanizing. The automobile becomes commonplace. Farms are closing down. Young people are moving into cities and suburbs.

00:52:42 Speaker_00
They're taking jobs in factories. They're taking white-collar jobs, other blue-collar jobs.

00:52:47 Speaker_00
I think there was some stat in the IKEA story that during the decade between the mid-50s and the mid-60s, I think three-quarters of the farms in Sweden closed down. It's wild, but this is happening all over Europe.

00:53:02 Speaker_00
The customer base for IKEA and all their competitors starts to majorly, majorly shift. It's no longer families setting up their farms or taking over the farm from the elder generations.

00:53:16 Speaker_00
It's now like a whole new lifestyle of modernity in the cities, in the suburbs, smaller houses, modern houses, electricity, apartments.

00:53:26 Speaker_04
Not to mention it's kind of impossible to do the traditional thing of just pass down the furniture to the next generation, which is how most people got their furniture up into this point because they were living very close to their parents or perhaps taking over the house from their parents.

00:53:41 Speaker_04
Totally. This is, oh, I'm getting an apartment in Stockholm. I kind of need to start from scratch and the furniture needs to be pretty easy to move or put together.

00:53:52 Speaker_00
Yes, yes, indeed it does. So on the one hand, this is like a total existential threat to IKEA's business. It's like, well, your customer base is shifting. The products that you are selling are no longer wanted. They're going away.

00:54:03 Speaker_00
On the other hand, there has never been a bigger opportunity in the history of furniture making and selling throughout all of human history than what is about to happen here.

00:54:14 Speaker_00
And IKEA, even though it's currently serving what is effectively the parent generation of these new customers, with a little bit of adaptation, has the perfect model for these new young urban and suburban families.

00:54:27 Speaker_00
But to get there, Ben, I know you were itching to tell this story. There's one more element of the IKEA model that needs to fall into place.

00:54:37 Speaker_00
And ironically, even though it is totally identified core part of the company today, it's a reaction to competition that drives it. And that is designing its own furniture and specifically flat packing.

00:54:52 Speaker_04
It is astonishing that so far in the story, they've been shipping like full-sized, fully-assembled armchairs in order to get them to your house.

00:55:01 Speaker_00
Well, remember, IKEA's not shipping it. The suppliers are shipping it.

00:55:05 Speaker_04
But that it's taking up a huge amount. Think about a flat-packed chair that you're ordering versus a fully-assembled chair and how much room that takes up in the truck.

00:55:14 Speaker_00
Yep. In the early days, this doesn't really matter to IKEA. Like, hey, it's all great. Like, that's my supplier's problem. As the business is scaling, though, this becomes IKEA's problem because it's a limit to scaling. Yep.

00:55:27 Speaker_04
Okay. So where does flat packing come from?

00:55:30 Speaker_00
So it's totally intertwined with IKEA taking on the furniture design itself. And I said it was driven by competition. It's not driven by competition because any of the other players do the same thing. It's actually the opposite problem.

00:55:47 Speaker_00
IKEA has become so dominant in Sweden at this point in time that it's monopolizing like a huge portion of all the furniture makers production output. And so the rest of the industry starts organizing against IKEA.

00:56:02 Speaker_04
And IKEA is philosophically trying to drive down prices. They want to create the

00:56:08 Speaker_04
furniture for the many, and their competitors are all trying to maximize margin and have kind of small businesses because the whole furniture landscape, in fact, to this day, is very, very fragmented.

00:56:19 Speaker_04
It's tons of players serving niche, local use cases, and so you've got the whole Swedish furniture industry that's pissed at IKEA for going to the furniture manufacturers and saying, what's the very best deal you can give me?

00:56:32 Speaker_04
And then turning around to customers and saying, I'm going to make very little margin and sell you all of this manufacturer's capacity at extremely low cost. So the competitors are feeling it from both sides.

00:56:42 Speaker_04
They're saying, okay, the manufacturers have no capacity to manufacture for me and no customers want my stuff because you're selling it cheaper.

00:56:50 Speaker_00
It's freaking wild. Ikea does not have a direct competitor today in 2024. There is not a single other globally scaled furniture business in the world.

00:57:01 Speaker_04
Put a pin in it. I have a thesis on why.

00:57:03 Speaker_00
Oh, OK. So what do the competitors do? They start locking IKEA out of trade fairs, trying to limit their access to suppliers. They start pressuring IKEA's existing suppliers into not selling to IKEA.

00:57:17 Speaker_00
They say, oh, we're all collectively going to boycott other orders from you.

00:57:20 Speaker_04
And IKEA is not yet big enough where that fails. That actually works. And the manufacturers just come to IKEA and say, sorry, the collective leverage of all your competitors is too large and we're not going to serve you.

00:57:33 Speaker_00
Yep. Competitors even go to the Swedish government and they lobby the Swedish government to limit IKEA's ability to circulate its catalog. I don't know on what grounds.

00:57:43 Speaker_04
It's like the most European thing ever, that regulation should, uh. This is too good for consumers. Yes, exactly.

00:57:50 Speaker_00
Oh man, we could make a million jokes about European regulation.

00:57:53 Speaker_04
Yep.

00:57:53 Speaker_00
Anyway, to your point, it starts to work and this becomes a real problem for IKEA. So Ingvar, the company, they're like, all right, well, how are we gonna design our way out of this one? And turns out design is the answer.

00:58:09 Speaker_00
So they start going to the suppliers, to the furniture makers, and they say like, okay, we hear you that our competition does not want you to give your pieces to us like you're also giving to them.

00:58:22 Speaker_00
What if we give you a new set of designs for different furniture and you make those designs just for us? Separate line, open up separate lines. Could you do that? And most of them say, well, yeah, I think I could do that.

00:58:38 Speaker_00
And this is the beginning of Ikea in-house designed furniture. Now the first quote unquote designer who Ingvar sets to work on this is a former advertising draftsman named Gilles Lundgren.

00:58:53 Speaker_00
and Ingvar had hired him originally to help Ingvar do the set layout and the photo shoots for the catalog as his, like, assistant.

00:59:00 Speaker_00
Lundgren starts cranking out sketches of furniture designs for the manufacturers and so then as legend has it, all this is going on and then one night, the two of them,

00:59:14 Speaker_00
Lundgren and Ingvar are taking down the set from a photo shoot and Lundgren says, well, he's putting a table away. He's like, oh God, this thing is so heavy. What a huge amount of space it takes up.

00:59:27 Speaker_00
Let's just take the legs off the table and put them under the tabletop and then we can store all this stuff better. And Ingvar is like a bolt of lightning has hit him.

00:59:36 Speaker_00
He's like, oh my God, I have just received like, you know, the last commandment from God about how to run this business. Like, yes, we take the legs off and it takes up a lot less space. My God, we can design these things to come off on purpose.

00:59:55 Speaker_00
And then when we have our manufacturers ship the tables to customers, they're going to be able to fit a hell of a lot more of them in those trucks.

01:00:02 Speaker_04
Yep. And it's kind of apocryphal. I am sure something along the lines of this insight happened.

01:00:09 Speaker_04
There were many other companies that were doing flat-packed furniture before this, including the company we've talked about multiple times on this episode, Sears Roebuck, was flat-packing in their catalog distribution in America.

01:00:20 Speaker_04
But certainly the company that gets credit for popularizing and growing the volume of flat-packed furniture being shipped 100x, 1,000x around the world is IKEA. And it's a nice little story.

01:00:33 Speaker_00
But I think what Ikea does is they go all in on this. So the first flat pack product that they design is the Max table in the mid 1950s.

01:00:44 Speaker_00
But by the end of the 1950s, flat pack and then self-assembly by the customer is expanded across the entire range, like all of Ikea's furniture. And obviously some stuff you can't flat pack, but like as much as possible,

01:00:59 Speaker_00
And because they had for separate reasons started doing their own designs with manufacturers, they can do this. Yep.

01:01:08 Speaker_04
So flashing forward a little bit to today, but it's interesting to look at all the downstream things that happen from flat packing. One, it enables this space saving in trucks. It enables you to do more volume for the same cost.

01:01:22 Speaker_04
Two, there's a cost reduction since customers can do the labor and transport. Before, you had to have someone at your company put the chair together, and that costs a lot of labor. Now you're putting that on the customer.

01:01:39 Speaker_04
You're also making it so the customer has the capability to transport the merchandise in a way that they couldn't before. They had to have a truck

01:01:47 Speaker_00
Right. Mail order was the only way to make this happen. You're not going to drive away or get on a bus with a table.

01:01:54 Speaker_04
Yep, absolutely. There's a further cost reduction since it decreases the broken merchandise in transit. So there's this third amazing benefit to flat packing.

01:02:04 Speaker_04
Ultimately, they pass all this along to the customers, meaning now their products are definitely the least expensive on the market for their quality. And psychologically, it gives this feeling of accomplishment.

01:02:15 Speaker_04
It increases your fondness for whatever object you assembled because of the labor, the blood, sweat, and tears that you just put into it. You feel like, I made this.

01:02:23 Speaker_01
Yeah.

01:02:24 Speaker_04
We almost broke up, but we didn't. And four hours later, I have the cabinet together.

01:02:30 Speaker_00
One of the articles I was reading for research called it the Lego for adults. Totally. That's totally right. Yeah. Another great Scandinavian company. We'll have to cover it someday.

01:02:40 Speaker_04
I have a fun story for you, David, on Flatpak that I haven't told you yet.

01:02:43 Speaker_00
Ooh, light on me.

01:02:44 Speaker_04
So there's another word for this. Do you know what it is? Do you hear it anywhere? It's kind of an old school retail or merchant phrase.

01:02:51 Speaker_00
Ooh, no, I don't think I did.

01:02:52 Speaker_04
Knockdown.

01:02:53 Speaker_00
Ooh, no.

01:02:55 Speaker_04
And it was referred to as KD. So in preparation for this episode, I talked to Jim Senegal, who's the co-founder of Costco, because I was asking about IKEA and the similarities.

01:03:04 Speaker_04
And he said he used to love going to IKEA to look at the KD furniture that they stocked. And I thought this was like a brand. I was like, oh, maybe this was like a brand that IKEA used to stock.

01:03:13 Speaker_04
At some point, I realized and I recall, oh, no, this is like what people used to call the flat packed as KD furniture.

01:03:19 Speaker_00
That's amazing.

01:03:21 Speaker_04
Yeah. The interwovenness with Costco is really interesting. Another research call was with Bjorn Bailey, who ran Ikea in the US in the late 80s.

01:03:29 Speaker_04
And he mentioned that Ingvar always looked up to Costco and thought they were like the greatest retailer in the world. So there's a lot of shared admiration there.

01:03:36 Speaker_00
Oh, man. We're going to talk about hot dogs in a little bit more. You think I'm joking. I'm not. All right. Let's go. OK. Before we get there, though, So KD, you know, this innovation, knocked down, flat back.

01:03:51 Speaker_00
This is also, though, what enables this shift in the product mix for the new modern, young, urban and suburban customer who doesn't want the same kind of furniture, can't use the same kind of furniture that their parents were using back on the farmlands.

01:04:07 Speaker_00
So legend has it that right around this time, as the whole IKEA range is shifting to flat pack, Ingvar goes on a trip to the Milan furniture show in Italy.

01:04:21 Speaker_00
And while he's there, one of the suppliers, a carpet supplier at the fair, offers to take him around the city. And, you know, Ingvar wants to see how people live. And he's like, sure.

01:04:32 Speaker_00
I'll ask a bunch of my employees who work in my urban modern mechanized factory here in Milan if you can just go into their homes and so Ingvar goes into their apartments and he's just appalled by like the furniture that he sees there and how different it is from the new modern city living designs he's seeing at the furniture fair.

01:04:53 Speaker_00
It's all the old rural farmhouse big heavy dark furniture that takes up a lot of space and isn't practical in the city. And so supposedly this is the moment when Ingvar really gets religion of like, Oh, this is our new customer.

01:05:09 Speaker_00
And this is our opportunities to design the low price, high quality, affordable furniture for this target market. All these people that are moving to cities for the first time, this is modern middle-class living. Yep.

01:05:24 Speaker_04
So we're all familiar with the simple Scandinavian design that IKEA furniture is, and it's become extremely popular, basically universally adored.

01:05:34 Speaker_00
I just accept it as, like, the standard of what modern furniture is.

01:05:39 Speaker_04
Right. The question is, is there something intrinsic to simple Scandinavian design that makes it universally applicable? Or is it IKEA's success that now we all sort of look at it and have some reverence for it? Because it really

01:05:56 Speaker_04
is beneficial to IKEA that we all like simple designs instead of ornate designs at this point because it makes it work much better for flat pack, for reducing cost, for making transportation easy.

01:06:08 Speaker_04
I mean, imagine chunky ornate furniture with intricate hand-carved designs still being the creme de la creme of here's what you should have in your house and it's basic and expected.

01:06:19 Speaker_04
It kind of makes the business model work that it's these simple designs.

01:06:23 Speaker_00
Yeah, I think these things are inextricable.

01:06:25 Speaker_00
I mean, I'm not an expert in design history, and people who are might contradict me here, but I don't think there was necessarily that much about Scandinavian or Swedish design that was particularly light, simple, minimal before IKEA.

01:06:45 Speaker_04
Yeah, listeners, join us in the Slack. I'm curious if someone has traced the lineage of this sort of Scandinavian aesthetic in a pre-1950s world where this sort of comes from. Who are we all copying?

01:06:56 Speaker_04
Because there's definitely some lineage of designers that all this is sort of trying to emulate.

01:07:01 Speaker_00
Yeah, so Ingmar writes to this, he says, a design that was not just good, implied unlike what the Milan factory workers previously had in their homes, but also from the start adapted to machine production and thus cheap to produce, which Ben is exactly the point you were making, with a design of that kind and the innovation of self-assembly, we could save a great deal of money in the factories and on transport and keep the price down to the customer.

01:07:28 Speaker_00
There it is. So entering into the 1960s here and all the demographic change that's happening, IKEA is perfectly positioned and it's just explosive growth for the company.

01:07:41 Speaker_00
And to capitalize on it, they obviously need to ramp supplier production significantly. So they've had these battles in Sweden with competition. They've gotten around that with their own designs, but now they need to ramp up so much.

01:07:55 Speaker_00
Sweden itself, even if they didn't have these problems, just doesn't have enough capacity for all this new furniture that IKEA needs to source.

01:08:04 Speaker_04
Yeah, just to illustrate your point about 1955, they did 6 million kroner. By 61, they did 40 million kroner. So that's almost a 7x in six years.

01:08:15 Speaker_00
Yes. So Ingvar starts looking around elsewhere in Europe to expand supplier production.

01:08:22 Speaker_00
And then in 1960 Ingvar reads in the Swedish newspaper that the foreign minister of Poland is coming to visit the Stockholm chamber of commerce with the express purpose of developing business relationships with Swedish companies.

01:08:39 Speaker_00
And you might be like, okay, you know, doesn't this kind of stuff happen all the time? What's the big deal? Well, Poland at the time was a communist country behind the iron curtain. Yep. So this was odd.

01:08:52 Speaker_00
And Ingvar is like, well, you know, if we could find a way to work with the communists, we could probably lock up a lot of production capacity that nobody else is going to go through the trouble of getting. Yep.

01:09:07 Speaker_00
And I bet they can also produce things pretty cheaply over there and in pretty high volumes. Yep. So in 1961, IKEA goes to Poland to help local manufacturers, state-sponsored manufacturers there. set up furniture production of the IKEA designs.

01:09:28 Speaker_00
And by the end of the decade of the 60s, Poland is producing 50% of IKEA's furniture, including some of the first modern classics like the Billy Bookcase, the Agla Cafe chair.

01:09:41 Speaker_00
It's the sort of wooden, sort of curved back chair that you know, the iconic one. Yeah, that's, I think, if I have it right, I think that design is actually based on like a Polish chair design.

01:09:53 Speaker_04
Oh, interesting.

01:09:54 Speaker_00
Becomes, yeah, one of the biggest selling products for the company in history.

01:09:58 Speaker_04
The other thing that they're doing here is IKEA is investing in bringing up these factories.

01:10:05 Speaker_04
They're trying to build really close supplier relationships here and basically make sure that those factories are going to be successful for the long run so they can kind of bet their business on it.

01:10:14 Speaker_00
Totally and I mean they get really really intertwined to the point where eventually in the this is a little later in the 70s after Ikea invests a ton in developing board on frame quote-unquote technology or sandwich board construction as it's called this is the lack table so

01:10:35 Speaker_00
listeners probably many of you know for those of you who don't you definitely have seen this thing you've probably owned it the lack coffee table or lack shelves or yeah poland is where they produce this coffee table that they use particle board you know sandwich board construction inspired by how doors are made sort of more cheap not solid wood doors

01:10:59 Speaker_00
Today, in 2024, the Lack table retails for $9.99 in America. This is a table that you can buy for less than $10. It's astonishing how they've driven price down on some of these things. Totally astonishing.

01:11:14 Speaker_00
And in fact, I think it's worth a little sidebar on the coffee table right now as an example. It perfectly illustrates the new consumer dynamic and demand explosion that IKEA is about to head into.

01:11:28 Speaker_00
The Lack coffee table is the first example of this idea that Ingvar starts to develop of the item with the breathtaking price, quote unquote.

01:11:39 Speaker_00
And every product that IKEA sells in its range should be high quality, great value, ideally way better on both dimensions than any competition. Have beautiful form.

01:11:49 Speaker_04
I think that's a part of it too, is it's supposed to have the form and design. It's not just build quality, but actually the form should be elegant to look at.

01:11:57 Speaker_00
Yes, but over and above just kind of like the standard products in the range, IKEA should always have a few products that are these breathtaking price products.

01:12:10 Speaker_00
And these products should also be high quality, but they should be priced at least 50% below any competitive or substitutive products out there. And ideally like well less than 50%. I mean, a $10 table today, that's breathtaking. That's astonishing.

01:12:27 Speaker_00
And so Ingvar says, like, it's our job to figure out, you know, start with that end goal in mind and then design backwards from that of like, how are we going to make that happen?

01:12:39 Speaker_00
And he would later write and describe the whole idea is based on the substantial price difference, the easily understood price by the consumer. We don't lose on the deal, nor do we make much profit, but at least we make a little.

01:12:51 Speaker_00
And in the end, that's what matters. We can't actually lose money on these products.

01:12:55 Speaker_00
And thus we need to design like, not just what the furniture looks like, the manufacturing process, the transport process, the raw material sourcing process, like everything end to end about how are we gonna sell- The product is the whole supply chain.

01:13:10 Speaker_00
Yes, a $10 coffee table. And so the way they do it, at least in the case of the lack is like, We're going to wholesale reinvent the manufacturing technology process for this. We're not going to make a solid wood coffee table.

01:13:24 Speaker_00
We're going to use board on frame construction. And what are the raw inputs for that? Well, we can use the leftover scrap wood chips. And then eventually now I think it's like pulp material from the timber.

01:13:36 Speaker_00
That's actually going to be like 90 plus percent of the material that goes into the product is our waste products from our other things that we're making. A, that's super cheap. B, it's super lightweight, even though they're pretty solid and sturdy.

01:13:51 Speaker_00
And then C, we can just scale this indefinitely. Today, IKEA sells almost 20 million lack tables every year and has been for decades. I mean, they've sold hundreds of millions of these things.

01:14:05 Speaker_00
So like you can optimize the freaking crap out of your whole supply chain to do this. That is wild. Ingvar would hilariously formalize this idea, this manifesto, in 1995 as the hot dog product policy.

01:14:33 Speaker_00
Because in 1995, they copied Costco and they start selling hot dogs in the stores.

01:14:39 Speaker_04
Okay, so I brought this up with Jim when I was talking about similarities between Costco and Ikea. He did not believe that Ikea copied the Costco hot dog. And here was his rationale.

01:14:49 Speaker_00
There's no way. It's 100% a copy. I don't believe him.

01:14:53 Speaker_04
I know IKEA started doing it in 1995. There is a rich Swedish tradition in hot dogs. Swedish hot dog carts are freaking everywhere. I don't think you had to look at Costco to observe, we could probably sell hot dogs at a Swedish store.

01:15:09 Speaker_00
Jim is a very kind and generous soul, despite being one of the greatest retailers of all time. So I'm just going to chalk this one up to that. The IKEA hot dogs today are priced at $1, which is cheaper than the $1.50 at Costco.

01:15:28 Speaker_00
Well, no, David, the $1.50 is a combo. That's what I was going to say. I think, though, you can only get the $1.50 combo at Costco.

01:15:35 Speaker_04
Yeah, I mean, I don't know if you could walk up and try to order a hot dog that's less than a dollar, but it is $1.50 for a hot dog and a drink, and there's no menu item of just a hot dog.

01:15:49 Speaker_00
Right. We talked about all this on the episode, like part of how they do this is including the drink. It's a bundling, yeah.

01:15:55 Speaker_00
Anyway, I refuse to believe that the ability to buy just a hot dog at IKEA is not a nod to the Costco deal because IKEA also has the hot dog and drink combo for $1.50.

01:16:08 Speaker_04
And it's right after checkout, just like Costco's is, and it entered the store about a decade after Costco started selling the hot dog.

01:16:16 Speaker_00
There's no way, there's no freaking way that Ingvar wasn't just like, all right, we gotta copy the hot dog.

01:16:25 Speaker_00
The even more amazing thing is he codifies this into the official policy of the company, which is we must have at least, at first it's 10 quote unquote hot dog products across the range. He later ups it to 20 and it's, yes, it's like the lack table.

01:16:40 Speaker_00
It's an impossible price for ideally one product in every category that we sell that is just, it's criminal not to buy this thing. Yeah.

01:16:52 Speaker_04
And the fact that they just keep whittling it down year over year over year. A great example of this is the Poang chair.

01:16:58 Speaker_00
Yes. Another hot dog product.

01:17:00 Speaker_04
Absolutely. I think they've sold 30 million of these since 1976. They've just been baniacal about optimizing. So the initial Poang chair, which was originally called the Poam, not the Poang.

01:17:12 Speaker_00
I didn't know that.

01:17:14 Speaker_04
In inflation-adjusted dollars was $350 in 1988. By 2016, they had it down below $100, and it's effectively flattened out. It's now $130, but with a little bit more inflation. It's astonishing you can get this chair that is a living room chair for $130.

01:17:33 Speaker_04
Comparable chairs are like $2,000 to $3,000. Right.

01:17:37 Speaker_00
You're not going to buy a Poang chair and have anybody mistake it for a Herman Miller recliner. No, but that's not what they're trying to be. But it's pretty darn close for the delta in price. I mean, a Herman Miller recliner is what, $5,000, I think?

01:17:53 Speaker_00
Something like that.

01:17:54 Speaker_04
Yeah, maybe this performs the same function, but you're not going to aesthetically mistake it for a Herman Miller chair.

01:18:00 Speaker_00
Oh, I guess my point is, like, the Delta in the design aesthetics is also way closer than $4,770. Yes, that's a great point.

01:18:10 Speaker_04
And it has this wow price. When you drive home with it and you set it up, you can marvel at the fact that it only cost you $130. Yes.

01:18:17 Speaker_00
Okay, which brings us to the other, I think, really uniquely IKEA piece of this hot dog policy that even Costco doesn't really have. I just love it, the hot dog policy.

01:18:30 Speaker_00
IKEA, thanks to the catalog, controls all parts of the demand and the supply chain. They control the supply chain, obviously, as we've been talking about. But the catalog for decades is the primary marketing and demand driving channel.

01:18:51 Speaker_00
So it's not like they're having to buy advertising. They fully control the marketing channel.

01:18:57 Speaker_00
And so they can use these hot dog products strategically and promote them in each market in the catalog to then drive the visits to stores, drive the huge demands, position them with other products. Then they do the layouts in the showrooms.

01:19:10 Speaker_00
You know, it's just, it's genius. It all works together.

01:19:14 Speaker_04
It's kind of amazing that because in many ways they are their own customer acquisition channel with the catalog, that they never turned into a customer acquisition channel for other businesses. they should sell advertising.

01:19:27 Speaker_04
I mean, it's the Amazon play, right? Once you reach scale and you have enough customer eyeballs, you can staple on a near 100% margin advertising business for free. And I flipped through decades worth of IKEA catalogs.

01:19:42 Speaker_04
Unless I missed something, I never noticed an emergent advertising business in there.

01:19:47 Speaker_00
Yeah, it's interesting. But that doesn't actually surprise me. I think Ingvar probably viewed that as a short term optimization and that is like antithetical to how he wants to run the business. Yeah.

01:20:00 Speaker_00
So now what's also interesting, though, is like this element that I was just saying of they control the whole demand and supply chain is no longer true. in the internet world. Like, in the catalog world, absolutely was true. In the internet world, no.

01:20:15 Speaker_00
And the company... Whoa, whoa, whoa.

01:20:16 Speaker_04
No spoilers. No spoilers.

01:20:18 Speaker_00
Okay. Okay. We're getting way ahead of ourselves.

01:20:21 Speaker_04
So I'm going to take us back to 1958. There's a few more key pieces of the puzzle that needs to come together. But first, this is a great time to talk about friend of the show, Statzig.

01:20:32 Speaker_04
So as we've been talking about, IKEA's big innovation was finding a way to make high-quality, well-designed furniture available to anyone at crazy affordable prices. And you know the three ways they did this.

01:20:43 Speaker_04
Sweating design and functionality, having a radically different delivery model, and offering great prices through crazy scale, which we are sort of getting to here in the story.

01:20:52 Speaker_04
Now, it might not seem this way at first, but StatSig is sort of doing the same thing for their category.

01:20:59 Speaker_00
Okay, lay it on me here.

01:21:00 Speaker_04
All right. And bear with me, listeners. You probably know the rough story of StatSig by now, but here's a quick refresher.

01:21:06 Speaker_04
They were founded by a team of engineers at Meta who wanted to build a complete set of data and engineering tools like those that powered the growth at Facebook and make all of those available to anyone at any company.

01:21:16 Speaker_04
Okay, so back to the IKEA similarities. Design and functionality. StatSig's tools were designed and built from the ground up for engineering, data science, and product teams by world-class people in the same functions.

01:21:29 Speaker_04
This means their tools come with things that aren't really available anywhere else, like advanced statistical treatments, over 30 high-performance SDKs, and the ability to deploy your own data warehouse.

01:21:40 Speaker_04
Now the second piece, a radically different delivery model. Unlike legacy vendors, Statsig bundles all of their products, which means that when your team starts to use Statsig, they get access to everything.

01:21:52 Speaker_04
Experimentation, feature flags, analytics, session replays, everything. And so rather than charging for seats or licenses, you just pay for what you use.

01:22:02 Speaker_04
This is super different than legacy vendors who are focused on maximizing revenue from just one product line. And because it's all sort of an interconnected set of tools, you can consolidate your spend and save time on configuration.

01:22:15 Speaker_04
So that's the second way. Third, Statsig makes their products super affordable because, like Ikea, they make it up on volume. They power companies like OpenAI, Atlassian, Microsoft, Figma, and they process over a trillion events per day.

01:22:29 Speaker_04
And they've got a great engineering blog on how they do this. This scale helps them basically give away their product for free to small companies and startups and help larger companies cut their SaaS spend.

01:22:40 Speaker_00
I love it. I love it. I get where you're going now. Statsig is the IKEA of product tools. Yes.

01:22:46 Speaker_04
So listeners, if this sounds interesting to you, there's a bunch of great ways to get started.

01:22:49 Speaker_04
Statsig has an insanely generous free tier for small companies, a startup program with a billion free events, that's $50,000 in value, and significant discounts for enterprise customers, plus the team is just awesome.

01:23:02 Speaker_00
They're so great.

01:23:03 Speaker_04
To get started, go to statsig.com slash acquired or click the link in the show notes and just remember to tell them that Ben and David sent you. Okay.

01:23:11 Speaker_04
So David, I'm taking us back here to the late fifties where we have a few more pieces of the puzzle of modern Ikea that kind of are coming together. So in 1958 they expanded. Remember we said there was just like some cold food and coffee. Yeah.

01:23:26 Speaker_04
They expanded that. They added hot food. They added self-service. It's more like you see today.

01:23:32 Speaker_00
This is all at the showroom in Elmhull.

01:23:34 Speaker_04
Yeah, exactly. And the philosophy behind this is the margin should never exceed 10% at the restaurant. They want to use it to attract customers, to retain and delight, but they want to make their money on furniture.

01:23:45 Speaker_04
And it's kind of like, David, these hot dog items you're talking about. They don't want to lose money. Just like Costco, they're sort of opposed to loss leaders.

01:23:52 Speaker_04
I don't know if it's as religious, but they are looking to make money on everything they sell.

01:23:57 Speaker_00
I think it's equally religious for different reasons. I think Costco was about not insulting your customers. I think at Ikea, it's Ingvar, just his background and being religiously opposed to losing money.

01:24:12 Speaker_04
Right. He's unbelievably frugal.

01:24:14 Speaker_00
Oh man, we got to tell that amazing story we heard in the research. He was doing a store visit somewhere in Europe. In Germany? Yeah, I think it was in Germany at night and the store manager's like, okay, you know, come on in.

01:24:27 Speaker_00
I'm going to turn the lights on. He's like, dear God, don't turn the lights on. Do you know how much that costs? And it wasn't a store manager. It was like a really junior person. Yeah, that's right. Do you know how much it costs?

01:24:36 Speaker_00
I'm going to use this flashlight. And they spend hours going through the store with flashlights.

01:24:41 Speaker_04
And because he's also like obsessive about details and a micromanager, he finds like 30 little things wrong all with a flashlight and, you know, asks for all of them to be fixed by morning. Amazing.

01:24:52 Speaker_04
But this whole restaurant thing, they really find religion on, this is here because we need to make it worth your while to come all the way to this store. It has to be an attraction.

01:25:02 Speaker_04
They develop this phrase, it's tough to do business on an empty stomach. And so it's early days. It's not like prolonging time in the store the way that it is today.

01:25:11 Speaker_04
But it is, hey, we want to add a Disneyland effect and add perceived value to your trip here. Today, restaurants, just to flash all the way forward, it is technically the world's sixth largest restaurant chain measured by number of customers.

01:25:27 Speaker_04
In 2017, they had 700 million people per year eat at their restaurants. Now, I think that's not deduplicated. If I eat multiple times per year, that might be counting me. Otherwise, it's kind of unfathomable. Does 10% of the world really eat in IKEA's?

01:25:46 Speaker_00
Even more wild, there are only 476 IKEA's in the world. Right. So whether that's deduplicated or not, 700 million customers across only 476 locations is wild. Totally wild. 30% of people who visit IKEA do so just to eat.

01:26:05 Speaker_04
I love it. A lot of meatballs. I have done that many times in my life.

01:26:10 Speaker_00
Most recently in downtown San Francisco.

01:26:13 Speaker_04
I don't have many of these stories, and I was trying to figure out why. Like, I was talking to my wife, and she was talking about, oh my god, I loved getting the catalog growing up, and oh, I've furnished so many apartments in Ikea.

01:26:23 Speaker_04
And I was kind of thinking, like, actually, until the last few years, I haven't. And like, I've never eaten at an IKEA just to eat lunch. And I kind of realized, Ohio did not get an IKEA for a really long time. Like, I grew up without an IKEA near me.

01:26:39 Speaker_04
And even when I went to college in Columbus, they got one in Cincinnati. But it was until after I left Columbus that they got one there. So until I got to Seattle, I don't think I had ever experienced IKEA. And the Seattle IKEA is so great.

01:26:52 Speaker_00
Well, I have a question for you then. What year did your family leave Delaware? You grew up very close to an IKEA and you just didn't realize it. Oh, really? Because IKEA has been part of my life pretty much my whole life.

01:27:06 Speaker_00
And again, I didn't realize why. The first U.S. store was in Plymouth Meeting, Pennsylvania, right outside Philadelphia, which opened in 1985. I was born in 1984. I grew up with, you know, Billy bookcases and all this stuff.

01:27:21 Speaker_00
Like, it's just been a constant my entire life. I mean, I went to the small land, I played in the ball pit, all this stuff. All right.

01:27:29 Speaker_04
It is funny how I've developed an appreciation as an adult, but it was not, like, a formative thing, like, for you and so many others. All right, so into the 1960s, David, they open a bigger store, where?

01:27:41 Speaker_00
Yes. So they actually had opened a showroom in Norway, in Sweden's next door neighbor country, to be able to sell in Norway. But that was, you know, same concept as the Almo showroom, not really a store.

01:27:55 Speaker_00
By the mid-60s, though, all of this, you know, new urban consumer all really, really taking off. In June of 1965, IKEA opens its second showroom location, very different than the original. This one is almost 500,000 square feet.

01:28:16 Speaker_04
What?

01:28:17 Speaker_00
Yeah.

01:28:18 Speaker_04
That's like even still probably their biggest store, or among their biggest few.

01:28:21 Speaker_00
I think it is still, I believe, the flagship IKEA store.

01:28:25 Speaker_04
Because even today, they're like 300,000, 400,000 when they build new stores.

01:28:31 Speaker_00
It is a circular building inspired by the Guggenheim Museum in New York City. Whoa. I think even this one is no longer circular. That does not last in the IKEA playbook.

01:28:41 Speaker_00
It costs 17 million kroner to build, or roughly $3 million, compared with the original Almuth location that Ingvar bought for 13,000 kroner.

01:28:53 Speaker_04
God, they must have done so much business out of that catalog and that little, you know, those two tiny showrooms in order to leap to this and spend all that money on this store.

01:29:04 Speaker_00
Well, by this time, the business was, call it, about 100 million kroner a year by the mid-60s, when this second store is opening. So 20 million USD at the time.

01:29:18 Speaker_00
So a $3 million USD investment in this store is, you know, a lot, because I don't know what their profit margins were, but like a big investment, but they could handle it.

01:29:27 Speaker_04
So it's probably like a year or two of all of their profits go into this.

01:29:34 Speaker_00
Yes. Most importantly, though, is the location. It is on the outskirts of Stockholm, the biggest and the capital city of Sweden. And for the first time, they actually stock items in the store. By now, Flatpak is really rocking and rolling.

01:29:54 Speaker_00
Like, they're trying to fit as much in the store for customers to buy cash and carry out themselves. And this is the first real modern IKEA. On the first day that they open it in June of 1965, they have 18,000 customers come through.

01:30:12 Speaker_00
And then in that first year, that store alone does 70 million kroner in sales. So it doubles the company's revenue.

01:30:21 Speaker_04
They also, at this store for the first time, now have the setup where customers fetch the products themselves from the warehouse.

01:30:29 Speaker_00
Yes. And a few more elements of this Stockholm store that you might recognize if you're an IKEA customer today. It's located on the outskirts of the city with good highways leading to it and lots and lots and lots of parking spaces.

01:30:45 Speaker_00
It's opening hours are 11 a.m. to 7 p.m. so that both you as the customer and the employees, the coworkers there, are not battling morning rush hour to get there when, you know, who's gonna be shopping at 9 a.m.

01:30:58 Speaker_00
in the outskirts of the city anyway, but it's open late after work.

01:31:02 Speaker_00
So you finish, you know, work, you finish your shift at the factory, you finish your white collar job, whatever you're doing, great, hop on the bus, hop in your car, go on over to Ikea, buy some furniture.

01:31:13 Speaker_00
And yes, Ben, as you say, you can buy and carry away the flat packed furniture right there.

01:31:19 Speaker_04
The fact that you don't need employees to go and fetch things for you, you can just grab them off of shelf yourself after you kind of wind through showrooms. It's like further compounding their cost structure advantage.

01:31:31 Speaker_00
Totally. So then This is tragic, but ends up being great for the company. Five years later, this beautiful design, Guggenheim Museum-inspired store, in 1970, one night, the neon IKEA sign on top of the building catches fire and the building burns down.

01:31:48 Speaker_00
I don't know if it totally burns down, but it's a major, major damage. I believe the insurance claim resulting from this was, at the time, the largest insurance claim in Swedish national history. Oof.

01:32:01 Speaker_00
But I think this is really part of the culture of IKEA, the company, and certainly Ingvar's mindset is like, every challenge is an opportunity.

01:32:10 Speaker_00
When they reopen the store a year later, it's got the full customer self-service checkout that you know of IKEA today, where like, yes, there are, you know, co-workers there helping you check out, but like, you're wheeling the stuff up, you're scanning the stuff, you're putting it through.

01:32:28 Speaker_00
It's got more capacity for more and larger flat packed items in the warehouse. And this is really the beginning of the end of the mail order business here.

01:32:39 Speaker_00
I mean, it still exists obviously for a long time, but the share of the business that is mail order versus cash and carry in the stores goes way, way, way down.

01:32:48 Speaker_00
Two, they add a children's playroom at the front of the store with a ball pit for kids to be entertained while your parents shop because

01:32:56 Speaker_00
Lord knows, you know, how on earth are you going to do your IKEA shopping with your crazy little kiddos running around?

01:33:02 Speaker_04
Which is also a genius way to prolong time in-store. I mean, you're just going to buy more stuff if your kids are looked after. I will say, the small land at the Seattle store, the idea is a little bit better than the execution. It was a two-hour wait.

01:33:17 Speaker_04
once you get there to get your kid into the small land, and they only allowed five kids at a time. It was sort of this odd, like, I was all built up for, oh, small land's gonna be this amazing thing.

01:33:27 Speaker_00
I suspect this is something that, you know, hey, a different era when we were growing up, like, things were, uh, it worked a little better, and, uh, you can't get away with these days. Totally. Like, one person watching 40 kids or something. Yeah.

01:33:39 Speaker_00
Drop your kid off, go knock yourself out, come back with ten fingers, ten toes. Yeah. Can't do that today.

01:33:46 Speaker_04
Yep.

01:33:47 Speaker_00
And then finally, number three in the newly redesigned Stockholm store. Yes, they had opened a restaurant at Almhult at the showroom a couple years ahead of time. But this was the real, like, cafeteria.

01:33:59 Speaker_00
The real cafeteria like we know and love it today with the traditional Smallland style menu. Yes.

01:34:07 Speaker_04
And so this is basically it. There is a lot that happens after this, but the core concept of the store and why the business model works and all that is pretty baked here by the mid-60s.

01:34:19 Speaker_00
Yep. And certainly by 1971, in this sort of V2 of the Stockholm store. Yep.

01:34:26 Speaker_04
So across the 60s, they opened more Denmark and Norway stores. In the 70s, they opened in Japan, Australia, Austria, Canada, Germany, Hong Kong, and Singapore. In 75, they entered Japan for the first time.

01:34:41 Speaker_04
They try real hard for 12 years to make it work, but it fails, and they withdraw in 1986. A few of the reasons are the furniture's too big. They just didn't understand the needs of that market well.

01:34:52 Speaker_04
Self-assembly was kind of an anathema to Japanese culture. And the delivery industry hadn't really been built out in the way that they need it to be. There's like a necessary precondition to IKEA entering a market, which is

01:35:06 Speaker_04
there's robust delivery services to make it work if you're going to rely on the catalog model.

01:35:12 Speaker_04
Otherwise, people have to be able to drive to the stores and use this store concept where you grab it off the warehouse, put it in your big car, drive home. In these dense urban areas in Japan, that's not really possible.

01:35:24 Speaker_04
And so they pull out after 12 years. They did eventually go back in in 2006 and make a bunch of changes to make it work today, but

01:35:32 Speaker_04
I think Japan was kind of this, after they saw success in all these other markets, it was a little bit of humble pie for them not seeing it work there. And I think it spooked them a little bit for further global expansion.

01:35:44 Speaker_00
Yep. It is amazing in the 70s, really until they go to Japan.

01:35:51 Speaker_00
laughing using the word uh well we'll come back to another reason why i shouldn't be laughing using the word it's almost like they did blitz scaling you know across europe and even beyond europe in the 70s i mean they went all throughout continental europe

01:36:06 Speaker_00
They expanded to Canada, Australia, Singapore. I mean Ingvar totally got conviction that the newly redesigned store in Stockholm was it and we were going to copy paste it and bring it everywhere.

01:36:17 Speaker_04
And they're rapidly scaling with profit dollars. Right. They're not raising money to do this. Yeah. As we've talked about, they have very thin profit margins.

01:36:25 Speaker_04
And so what it means is they are just doing tons and tons and tons of volume to enable them to do their future growth with their current profit dollars.

01:36:33 Speaker_00
Yep. It's hard to get consistent revenue data on the company because it's a private company still is a private company. But by the 1980s, they're doing two billion dollars a year in revenue.

01:36:46 Speaker_00
So call it 15, 20 years to scale from 20 million to two billion. It's incredible.

01:36:51 Speaker_04
Yeah, it's interesting. It's a company that is rapidly scaling at the same time that in their DNA, they're unbelievably thrifty. You kind of wouldn't expect both of these things to be true of the same company. Totally.

01:37:07 Speaker_04
This is the same guy, like just to quote the testament of a furniture dealer, this is like one of my favorite paragraphs. Ingvar writes, it is not all that difficult to reach set targets if you do not have to count the cost.

01:37:18 Speaker_04
Any designer can design a desk that will cost 5,000 kroner, but only the most skilled can design a good functional desk that will cost 100 kroner. Expensive solutions to any kind of problem are usually the work of mediocrity.

01:37:30 Speaker_04
We have no respect for the solution until we know what it costs. An IKEA product without a price tag is always wrong. It is just as wrong when a government does not tell the taxpayers what a free school lunch costs proportion.

01:37:41 Speaker_04
Before choosing a solution, set it in relation to the cost. Only then can you fully determine its worth.

01:37:47 Speaker_04
It's amazing that this level of thriftiness and paying attention to the details is also the same company that is in a decade expanding all over the globe.

01:37:57 Speaker_00
Yep. And it's totally what enables it to happen because it's almost like Warren Buffett, you know, in the Berkshire Hathaway episodes where as a young man, he's like,

01:38:07 Speaker_00
I cannot spend any money because any money that leaves my bank account will not compound. It's the same thing here with IKEA. They view all of the profits that they are making as like compounded value of future investment here.

01:38:21 Speaker_04
That's an interesting way to think about it.

01:38:24 Speaker_00
So in the 70s, during this, you know, decade of blitzscaling, if you will, for IKEA, Ingvar is in his early 50s. And for a couple reasons, as the company is doing this massive scaling outside of

01:38:43 Speaker_00
Sweden, he starts to become really concerned about succession and what will happen to Ikea when he inevitably dies. Although he would live for another 40 years after this. He lives to be 91.

01:38:58 Speaker_00
Sweden, at the time, had high and rising wealth and inheritance taxes. So, inheritance taxes for large estates, of which the Kampraden estate in Ikea is an asset, would definitely be one, was over 60%.

01:39:18 Speaker_00
And on top of that, there was an annual wealth tax in Sweden at the time, which was 2.5% of your calculated wealth annually. And your calculated wealth included all of the working capital in any companies you owned.

01:39:34 Speaker_04
Whoa, really? Like it's the illiquid ownership of the company plus the working capital in it?

01:39:39 Speaker_00
Yes, especially sitting there in the early 70s, knowing you're about to embark on this journey from, you know, call it a couple hundred million kroner revenue business to a multi-billion dollar revenue business.

01:39:53 Speaker_04
Oh, his net worth would eventually rise to something around 60 billion dollars.

01:39:59 Speaker_00
There wasn't even just going to be like enough capital to pay that two and a half percent annual tax. Side note, by the way, in the mid 2000s, Sweden ended up abolishing completely both the wealth tax and the inheritance tax.

01:40:13 Speaker_00
So actually at the end of his life, Ingvar moves back to small land, moves back to Sweden. Oh, wow. I didn't realize that was part of it. Yeah, and he dies in Sweden.

01:40:23 Speaker_00
Anyway, this kicks off, for Ingvar and the Kamprads, a whole saga of wealth, succession, corporate planning that ultimately has a huge impact on the company. So, in 1973, which is the first year that IKEA expands outside of Scandinavia,

01:40:42 Speaker_00
Ingvar and his family emigrate to Denmark first to avoid the wealth tax, and then a couple years later, in 1978, they settle in Switzerland. Now, Ingvar actually has multiple goals here, though.

01:40:56 Speaker_00
It's not just avoiding taxes, although, I mean, he'll be the first to admit taxes was the, like, first and primary motivation here.

01:41:04 Speaker_00
In addition to that, and I think this really, really was genuine, he's concerned with ensuring IKEA's continuity and survival, and there are multiple parts to that.

01:41:18 Speaker_00
One, he wanted IKEA to be completely independent from any one country's political fate. The political history of Europe that Ingvar lived through, and that we're going to talk about later, is case in point here, right?

01:41:31 Speaker_00
Like, he has lived through not knowing that countries are going to continue to exist, and he doesn't want any of that to risk IKEA. Two, he also doesn't want anything that would happen within his family to risk IKEA.

01:41:45 Speaker_00
So by this point he has three relatively young sons and he doesn't want to set up a dynamic where the three of them are fighting over control or selling off IKEA or etc etc tearing it apart.

01:41:58 Speaker_00
And then I think C, he also wants to ensure that IKEA keeps its focus on the long term and not the short term. And for him, that meant specifically having a huge fear of what would happen if it ever were a publicly traded company.

01:42:16 Speaker_00
He thought that, like, it was just, like, totally incompatible to be publicly traded and have shareholders and be long-term focused.

01:42:24 Speaker_04
I heard a funny quote indirectly from someone who told me that Ingvar once said, going public is a little like wetting your pants. It's warm and comfortable for a few minutes. But then after that,

01:42:37 Speaker_00
Oh my God, what a folksy dude. Wow. So ultimately, after a lot of international lawyers get involved, they decide that what they're going to do is set up a self-owned foundation based in the Netherlands.

01:42:57 Speaker_00
So this is like echoes of our Novo Nordisk episode here. And the reason they choose the Netherlands is that Dutch foundations are, at least according to the lawyers, the most bulletproof and hardest to change the bylaws of.

01:43:12 Speaker_00
And they're going to divide IKEA into two quote unquote spheres. One of which is going to be the physical sphere and company, and that is the actual stores. The operator of the stores. Yep. Operator of the stores.

01:43:27 Speaker_00
And the other one is going to be the quote unquote mental sphere, which is the brand and concept of Ikea. And this is where you end up with this crazy structure where Ikea is two companies today.

01:43:41 Speaker_00
It is Inca Holdings, which is the physical sphere, the technically largest franchise operator of Ikea stores. They own and operate 400 of the 476 Ikea stores in the world today.

01:43:58 Speaker_00
And that is owned by the Dutch Inca Foundation, which is a charitable foundation. This is an actual charitable foundation. And then you have the mental company, the brand company, which is Inter Ikea Systems.

01:44:11 Speaker_00
And Inter owns the Ikea brand, the concept, and then they license the Ikea brand and concept to everyone else who operates the stores as a franchise operator, of which today Inka is by far the largest.

01:44:24 Speaker_00
And in return for that licensing of the brand and concept, Inter Ikea gets a royalty of 3% of gross sales from every store.

01:44:34 Speaker_04
So I'm going to say all of this again in different words just because it is impossibly hard to parse the first time. You can essentially think of it as a franchisor-franchisee relationship.

01:44:46 Speaker_04
The franchisor, who owns the brand, the IP, all that, is Inter Ikea Systems. They work with a company called Inca, who has the privilege of operating the stores,

01:44:58 Speaker_04
and getting access to the intellectual property in exchange for a 3% royalty on their revenue.

01:45:04 Speaker_04
So every year, Inter-IKEA Systems, and this changes a little bit over time, but Inter-IKEA Systems, the parent company, designs furniture and works with manufacturers to have it made and upkeeps the brand and all the corporate stuff.

01:45:20 Speaker_04
Designs the catalog, et cetera, et cetera. sells that furniture to Inca or any of the other franchisees.

01:45:28 Speaker_04
And the reason there's other franchisees is because you want specialized franchisees in different markets where you don't understand the local culture. So that's kind of why there's Inca for a lot of the like Western Europe and English speaking world.

01:45:41 Speaker_04
And then there's specific franchisees that are not Inca for other parts. But just simplify it for now because Inca is like 90% of the stores. And then Inca buys that furniture from Inter IKEA Holdings, pays 3% of revenue, and then runs the stores.

01:45:59 Speaker_04
Yeah. Now, David, I simplified out the part about the foundations that own each of them. I think we should come back to that later, because there's some interesting nuances there. But that's sort of the structure they devise here.

01:46:11 Speaker_00
Yep. And then ultimate foundation owners for both of these two separate companies that get set up. The Comprod family

01:46:20 Speaker_00
At least after Ingvar dies, the Comprad family will be involved, but does not have ultimate control or voting power over either of these companies.

01:46:33 Speaker_00
So today, certain of the brothers are on the board of certain companies, all three of them are on the board of one company or the other, but they are far from a majority and they cannot, even if all three of them get together, influence or control the decisions of either company.

01:46:48 Speaker_00
And that was super important to Ingvar. Yep. It's pretty interesting. And I believe the Inca company and foundation still rolls up to a Dutch parent and the Inter holding company, I believe is a Lichtenstein foundation that owns it.

01:47:08 Speaker_00
It's all like this sort of spread around to ensure this sort of political continuity of the company.

01:47:14 Speaker_00
It's almost sort of like Bitcoin maximalist people who have ripped up their keys into different parts and put it in different safe deposit boxes all around the world. That is exactly what Ingvar is doing here.

01:47:24 Speaker_04
That's a good analogy. Yes, you are correct. Inca, the franchisee who operates the stores, rolls up to a Netherlands-based charitable foundation, where Inter Ikea Systems, the kind of parent that owns the IP, rolls up to a Liechtenstein-based

01:47:42 Speaker_04
Enterprise Foundation.

01:47:44 Speaker_04
Different, like non-charitable is an enterprise self-owning foundation based in Liechtenstein, which for those wondering what Liechtenstein is, it is a country that is sort of landlocked and sandwiched in between Austria and Switzerland with a very small population, but it happens to be very

01:48:04 Speaker_04
good for establishing entities like this from a tax and treaty perspective.

01:48:10 Speaker_00
Yeah, and you said to just sort of an enterprise foundation, I think was the word you used, not a charitable foundation.

01:48:16 Speaker_00
The purpose, this is like a circular function in computer science, the stated purpose and goal and activities of that foundation is to ensure the continued operations and success of IKEA.

01:48:31 Speaker_04
Yes, to secure the independence and longevity of the Ikea concept and the financial reserves needed to ensure this. That is the purpose of the foundation.

01:48:43 Speaker_00
Which is so interesting. Again, the Inka Foundation is a charitable foundation, and they do disperse, I think, now like two, three hundred million euros a year in charitable donations around the world.

01:48:55 Speaker_04
And it's to things you would expect. It's climate, it's poverty, it's charitable causes. But yeah, to your point, the inter-IKEA holdings, the foundation at the top of that is literally to ensure IKEA's continuity.

01:49:06 Speaker_00
It is like a Fort Knox for IKEA.

01:49:10 Speaker_04
Fascinating. OK, so the structure is going to shift a little bit, as I mentioned, like they'll rename things, they'll break some things apart, they'll shift who's responsible for what on the edges.

01:49:19 Speaker_04
But that's largely the structure that is in place going forward.

01:49:22 Speaker_00
Yep. So once this is all done and Ingvar and the family no longer directly own the company, in 1976, he writes this document that is intended to serve as sort of a like forever operating system of the company.

01:49:40 Speaker_04
It's almost like the Bezos leadership principles.

01:49:43 Speaker_00
Yes, exactly. That's exactly what it was like. and he titles it The Testament of a Furniture Dealer, as we've talked about.

01:49:50 Speaker_00
And literally, he's treating this like it's his last will and testament, even though he stays involved in the business for another 42 years and hands on the whole time. It's an amazing document. We'll link to it in the show notes. You should go read it.

01:50:02 Speaker_00
It's on the IKEA website. It's really cool. So it has nine testaments, or sort of commandments, and you already read one, which was the mortal sin of wasting resources at IKEA. The first one, though, number one, The product range, our identity.

01:50:19 Speaker_00
We shall offer a wide range of well-designed functional home furnishing products at prices so low that as many people as possible will be able to afford them. Talked about that earlier.

01:50:29 Speaker_00
Our products must be functional and well-made, but quality must never be an end in and of itself. It must be adjusted to the consumer's needs. This is fascinating.

01:50:42 Speaker_00
He continues, a tabletop, for example, needs a harder wearing surface than a shelf in a bookcase.

01:50:50 Speaker_00
In the first example, a more expensive finish offers the consumer long lasting utility, whereas in the latter, it just hurts the customer by adding to the price. Quality must always be adapted to the consumer's interests in the long. term.

01:51:04 Speaker_00
No effort must be spared to ensure our prices are perceived to be low. There shall always be a substantial price difference compared to our competitors and we shall always have the best value for money offers in every function.

01:51:16 Speaker_00
Every product area must include breathtaking offers. This is before the hot dog analogy in 95.

01:51:22 Speaker_04
It's great. It makes so much sense. It's so great. The analog to software companies is engineering for engineering's sake. There's many examples of sort of architecting the perfect system that's like wildly overkill.

01:51:34 Speaker_04
Anyone who's put together IKEA furniture knows Anything that's not seen, like things on the bottom that face the floor or that face the wall, are not finished.

01:51:45 Speaker_04
And oftentimes, like the back of shelving units or the back of cabinetry is like thin, flimsy. You don't need it to be structurally stable.

01:51:53 Speaker_04
So it's not because they wanted to cut a corner there and make it as cheap as possible because they view that as a value for you, the customer.

01:52:00 Speaker_00
It's not that they don't care or that it's sloppy. They care a lot.

01:52:03 Speaker_04
Right. It's that it would be insulting to spend money on it.

01:52:06 Speaker_00
Yes, exactly. This is the polar opposite viewpoint of the Apple, Steve Jobs, the insides must be beautiful. Yes. But it's actually a lot closer in philosophy than you would think. It is intentionality about it. Yes.

01:52:22 Speaker_00
Nowhere in either company is there sloppiness. But at IKEA, it's we are going to intentionally make the backside and the insides not beautiful so that it is a higher value to you as a customer.

01:52:37 Speaker_04
Yeah, there's so much good stuff in this document. Just to illustrate Ingvar's personality, the fact that he wrote this is, well, here it is. Bear in mind that time is your most important resource. You can do so much in 10 minutes.

01:52:50 Speaker_04
10 minutes, once gone, are gone for good. You can never get them back. 10 minutes are not just a sixth of your hourly pay. 10 minutes are a piece of yourself.

01:53:00 Speaker_04
Divide your life into 10-minute units and sacrifice as few of them as possible in meaningless activity.

01:53:07 Speaker_00
I'm so glad that you brought this up. I wasn't gonna put this in the episode, but I totally highlighted that reading it, and I was like, wow, I need to think about that in my life.

01:53:16 Speaker_04
Totally. And there's so many times where we're like 10 minutes away from a call that you and I are jumping on or 10 minutes away from recording an episode.

01:53:24 Speaker_04
And I'm like, I'm amazed in the amount I could get done in those 10 minutes when I really was forced to. And it's such a good point. Like if you actually force yourself, Hey, just go focus and get 10 minutes of work done.

01:53:36 Speaker_04
You can be astonishingly productive in 10 minutes.

01:53:38 Speaker_00
Totally. I hadn't thought about this, but, um, maybe Ikea and Apple are more spiritually aligned than I even realized. Ikea and Apple are very similar in a way that I will get to later. Oh, okay. I love it. Okay.

01:53:50 Speaker_00
And then another similarity analogy, the last Testament number nine is just so early Jeff Bezos shareholder letter like that. We can't not read it. The title of the Testament is most things still remain to be done a glorious future exclamation mark.

01:54:09 Speaker_00
So he writes, the feeling of having finished something is an effective sleeping pill. A person who retires feeling that he has done his bit will quickly wither away.

01:54:20 Speaker_00
A company which feels that it has reached its goal will quickly stagnate and lose its vitality. Happiness is not reaching your goal. Happiness is being on the way. It is our wonderful fate to be just at the beginning in all areas.

01:54:34 Speaker_00
We will move ahead only by constantly asking ourselves how what we are doing today can be done better tomorrow. The positive joy of discovery must be our inspiration in the future too.

01:54:47 Speaker_04
I share this affliction.

01:54:48 Speaker_00
A hundred percent. Me too.

01:54:50 Speaker_04
I feel for Ingvar that this is his like view on life because anytime anything awesome happens, I'm like immediately onto the next thing and unwilling to acknowledge, like it doesn't give me happiness that something great happened.

01:55:02 Speaker_04
What gives me happiness is working toward the next great thing. If we ever just decided, all right, we made all the good episodes. We're done. I'd be miserable.

01:55:11 Speaker_00
I was going to laugh. I'd be like, this is the story of acquired. It's so funny. But more on the personal life advice from this too, like Ingvar, I think is living proof of this. I mean, the man lives to be 91.

01:55:23 Speaker_00
He clearly didn't think he was going to live to be anywhere near that age.

01:55:27 Speaker_00
And the stories we heard of him visiting stores, being super engaged in board meetings, making decisions, making product decisions up until the last weeks of his life at 91 years old. I think he is totally right.

01:55:42 Speaker_00
He writes, a person who retires feeling that he has done his bit will quickly wither away. That is like, no more perfect example of that exists than Ingvar himself.

01:55:51 Speaker_04
Yeah, happiness for him was making things a little bit better. If he has nothing to make better, what's his reason for being?

01:55:59 Speaker_00
Yep, totally. So this is the mindset that Ingvar and the company are going into the 80s with. And the 80s is just continuing this compounding. So 1981, they open stores in France and Spain. 1983, they go to Saudi Arabia. 1984, they go to Belgium.

01:56:12 Speaker_00
1987, they go to the UK. 1989, they go to Italy. And along the way, in 1985, As we talked about, they opened the first U.S.

01:56:26 Speaker_00
store outside Philadelphia in Plymouth, meeting right by King of Prussia, frequented it often as a child, outfitted my bedroom and my family room and everywhere else. The interesting thing about the U.S.

01:56:40 Speaker_00
though, which I was so surprised reading, because again, IKEA has just been part of my life forever. It actually doesn't work that well for a really long time.

01:56:51 Speaker_04
Yeah, it opens with a bang. In 1985, they do this incredible marketing campaign in the Philadelphia area. Part of it actually was figuring out how it should be pronounced because in Europe it was Ikea.

01:57:08 Speaker_04
The way you would pronounce it as a Swedish person is Ikea. And the ad campaign, they decided, Americans are just going to pronounce it IKEA, so let's lean into it. So it was an I and a picture of a key, dash, U-H. And so, coming soon, IKEA.

01:57:23 Speaker_04
And people sort of knew about it because it had been in Canada for nine years. I think it had started in Nova Scotia.

01:57:29 Speaker_04
And actually, I happen to know, the founders of Costco made a special trip up to one of the Canadian IKEAs even before the founding of Costco, because they had so much respect for IKEA as a brand they admired.

01:57:41 Speaker_04
They wanted to go and see it and experience it. Oh, that's amazing. Yeah, isn't that crazy? So like people in the US, especially merchants and people knew of IKEA from its Canada presence.

01:57:53 Speaker_04
So it's opening the pent up demand in Philadelphia from the cacophony of factors leading to the excitement around it was insane. There was over a one mile long line to get into the store.

01:58:05 Speaker_04
They ran out of merchandise on opening day and they actually had to run radio ads apologizing and announcing that they were restocking the store as fast as they can.

01:58:15 Speaker_00
Whoa, that's wild.

01:58:17 Speaker_04
That said, a failure of IKEA corporate as they were expanding around the U.S. was assuming that the U.S. was homogenous. And so I think they expanded to 10 or 12 stores, and it wasn't going great relative to their other markets.

01:58:34 Speaker_04
And I think it's because they sort of misunderstood that the U.S. has really different needs in really different parts of the country.

01:58:42 Speaker_00
Yeah, that would make sense. I mean, in Europe, not to say all European countries are homogenous, but any given European country is a lot more homogenous than all of the United States of America. And there was also some just basic U.S.

01:58:56 Speaker_00
market-specific stuff. I love this. Softer sofas. Americans like to sit in the sofa, whereas Europeans sit on the sofa. Oh, really?

01:59:06 Speaker_04
Is that part of it?

01:59:07 Speaker_00
Yep, yep. So the sofas are softer in America, you sink into them, whereas in Europe, you know, yeah.

01:59:13 Speaker_04
Funny. Yeah. Around this time, I think when they were observing, the U.S. stores were not in great shape. They were open to the idea of individuals franchising IKEA stores. Now that they had this structure in place,

01:59:29 Speaker_04
they thought maybe this is an interesting thing for former longtime IKEA employees to do to sort of open up a store. So they did an experiment starting in Seattle.

01:59:40 Speaker_04
And the sort of idea from Ingvar was, if you have your own wallet on the floor, how do you do compared to the corporately owned stores?

01:59:48 Speaker_04
And it was essentially like a bake-off and a test to see if the bureaucracy was hurting them, or if they had too many layers of management, or

01:59:56 Speaker_04
if they had more innovative marketing ideas, which the independently owned stores, specifically the Seattle one, absolutely did. Created their own marketing campaigns and it became pretty divergent.

02:00:07 Speaker_04
The Seattle store was actually a leased old Boeing warehouse that ended up being laid out pretty differently than other IKEA stores. And so you kind of get what you ask for.

02:00:17 Speaker_04
If you want different ideas, the concept is going to end up being pretty different. So they only opened one or two more, despite the fact that the locally owned stores, well, the Seattle store actually did way better.

02:00:28 Speaker_04
I think it was the highest performing US store and beat all the corporate owned ones.

02:00:33 Speaker_04
Despite doing another deal in San Diego and another one in Houston, eventually they kind of wanted to bring the learnings back to the mothership to kind of have them all be homogenous. And so all the US stores are now operated by Inca.

02:00:47 Speaker_04
But for anyone in Seattle that during the 12 years of independent ownership visited that store, it actually was a pretty different thing with very different marketing materials than anyone else in the US was getting.

02:00:58 Speaker_00
Was it in the same location that the current one is down in Renton?

02:01:02 Speaker_04
I think that where the original Ikea was is now the parking lot and they've shifted and built this new shiny building next to it.

02:01:08 Speaker_00
Man, I spent so much time in that store when I first moved to Seattle to work for Madrona. I mean, I was moving across country as a young person on my fourth and fifth apartments since graduating from school three years earlier. Wow.

02:01:30 Speaker_00
Man, I was so squarely in the sweet spot for IKEA at that moment in my life. It was almost a weekly pilgrimage that I did to that IKEA store. Wow. And I used to love going to the as-is section.

02:01:43 Speaker_00
Like, I would always start there at the end and be like, okay, what can I get a deal on here?

02:01:46 Speaker_04
Because as-is is like returns and...

02:01:49 Speaker_00
Yeah, broken stuff or showroom floor stuff that they're getting rid of.

02:01:53 Speaker_04
Yeah. Yeah. It's like when I enter a Lululemon, I always go right to the back and look at the clearance rack.

02:01:57 Speaker_00
Yup.

02:01:58 Speaker_04
Even the Lululemon's clearance is horrible. They're like 15% off or something.

02:02:01 Speaker_00
Oh man. Sometimes in the Ikea as is section, you can get some screaming deals. I mean, they would argue everything is a screaming deal.

02:02:10 Speaker_04
But to this point of the reason they were doing this Seattle-specific thing, the individual franchising, Ingvar was obsessed with reducing bureaucracy.

02:02:19 Speaker_04
I get the sense this is still an ongoing battle today, now that they're a bigger company, in figuring out how to be as lean and scrappy as they were.

02:02:29 Speaker_04
When you have more committees and more lawyers and more traditional corporate leaders from other companies and all that coming in, this sort of thing is a helpful antibody against that.

02:02:40 Speaker_00
Totally. There's one other thing that happens in 1985 in Ikea land. Meatballs, baby. It's like the final piece of the puzzle. They add meatballs to the menu. Now, this is what's funny.

02:02:53 Speaker_00
You would think this would be like the capping of his career, the end of the story. You know, it's 1985. They add meatballs. The concept is perfected. In 1986, Ingvar is 60 years old. He steps down as president. of the IKEA store operation of Inka.

02:03:11 Speaker_04
It's the reverse Morris Chang. Isn't that the year he started TSMC? He was 59, something like that.

02:03:17 Speaker_00
That's right. Yes, he steps down as president in 1986. I don't think anything changed whatsoever in his daily activities. I think he was doing exactly the same things that he was always doing.

02:03:29 Speaker_00
And his successor, a guy named Anders Moberg, does state that I think for 12, 13 years maybe, he would leave at the end of the 90s to go become president of Home Depot's planned European expansion, which then ends up not happening until he would leave Home Depot.

02:03:45 Speaker_00
But yeah, I think he was constantly clashing with Ingvar about like, hey, I'm the president here. No, no, no, there's only one president at IKEA, even if not in name, and that was Ingvar.

02:03:56 Speaker_04
Do you know what Anders Moberg is doing now? Ooh, I do not. Anders is on the board of directors for the IKEA Foundation. Oh, interesting. Yep.

02:04:09 Speaker_00
Well, there couldn't have been that many hard feelings then.

02:04:12 Speaker_04
Right. Yeah, which is the foundation on the Inca side of the tree, the franchisee side. Amazing. With two of the sons, two Comprod brothers.

02:04:22 Speaker_00
Yep. And I think the third son is on the Inter board.

02:04:25 Speaker_04
Yes. Yep, exactly.

02:04:27 Speaker_00
So that takes us into the 90s. Basically, the compounding story continues unabated. In 1994, they enter Taiwan. In the spring of 1998, they enter China. They expect that China will become, obviously, a huge, huge market for them, which it does.

02:04:45 Speaker_00
By the end of the 90s, IKEA is a $10 billion annual revenue business. They'll rock it and roll it. Seriously.

02:04:55 Speaker_04
There is another thing that happens in the 90s that we have to talk about on this episode and happened way earlier in Ingvar's life, but this is the moment where it really intersects the IKEA story.

02:05:08 Speaker_04
The news comes out that in his youth, Ingvar was a part of a Nazi and fascist movement in Sweden. Which, in some ways, is not surprising.

02:05:19 Speaker_04
I mean, his grandparents had immigrated from Germany, had very strong feelings, had lived this horrible life, and Ingvar very much looked up to his grandma and sort of looked to her for political, moral, social guidance.

02:05:34 Speaker_04
And so, unfortunately, Ingvar was a part of this Swedish fascist movement. It was sort of provable that he was attending meetings, helping to organize, raised funds, recruited members. He stayed close to this Swedish leader.

02:05:50 Speaker_04
Even after the war, as late as 1950, he wrote a letter that he was proud of his involvement. The net of all this is, in 1994, when this came out,

02:06:00 Speaker_04
He immediately came out and said that his fascist activities were a part of my life, which I bitterly regret, and the most stupid mistake of my life. He was direct about it.

02:06:11 Speaker_04
In fact, the first employee of IKEA was a Jewish refugee who had fled Austria in 1943. So there's a lot of complex stuff going around here. But the thing that is definitely admitted to, proven, is that he was a

02:06:30 Speaker_04
recruiter, organizer for the Swedish fascist movement during the Nazi regime. Yeah.

02:06:35 Speaker_00
The extent of his involvement in the Swedish fascist movement after the war, actually didn't come out then in the 90s, came out later in the 2000s, and Engvar, I think rightly, took a lot of flack for not fully disclosing how long that went on.

02:06:55 Speaker_04
Yeah, he had a friendship with the Swedish fascist party leader who would go on to be this pretty horrible vocal Holocaust denier and Ingvar maintained that friendship and even at the end of his life went on the record and said this person was a great man.

02:07:09 Speaker_04
So You know, on the one hand, you want to say, look, he apologized and it was 50 years earlier and he was 17 at the time. Can't a person make a mistake when they were younger and admit a mistake and move on?

02:07:23 Speaker_04
On the other hand, you can imagine wanting to give him more forgiveness if he hadn't continued to stand by the Holocaust denier guy, maintain that friendship.

02:07:31 Speaker_00
Or just came clean about that whole thing initially.

02:07:34 Speaker_04
Totally. Or with his vast, vast resources, made a big contribution to a Holocaust museum or the families or something.

02:07:42 Speaker_00
Yeah. This is one of these things that covering these old European companies, like you can't avoid this.

02:07:49 Speaker_04
Totally. My heart dropped and was also not surprising when we first started doing the research and had no idea and came across, it's not hard to find this. You come across it for the first time and you're like, ah, crap.

02:08:00 Speaker_00
Yep. So coming out of the 90s. Coming out of the 90s, in 2000, IKEA starts their next big geographical growth initiative, which is Russia.

02:08:11 Speaker_00
So they reach a deal with the Russian government that IKEA is going to enter Russia, and they're going to use the market, which they expect to be really big for IKEA, to also pilot the quote-unquote mega

02:08:25 Speaker_00
MEGA, all capital shopping center concept, which I think was actually like the brand name of the shopping center that they then later roll out to other places around the world.

02:08:33 Speaker_00
And the idea is IKEA, writ large, has so much capital and so much resources at this point. We've always owned our own real estate and we think that's a key part of securing that future. We have so much more cash resources now.

02:08:49 Speaker_00
What if we also invest in like large retail centers around the Ikea store, which they hadn't really done before. And the idea, this is kind of genius and not novel now because so many other folks do it. We surround the Ikea.

02:09:05 Speaker_00
with lots of partial competitors because ikea sells so much stuff in its range that yes there could be a home depot there or yes there could be a bed bath and beyond there i'm using american terms here obviously these are not russian stores and we compete with them partially

02:09:21 Speaker_04
I realize Russia is where they started this strategy.

02:09:24 Speaker_00
Yeah, Russia is where they started. But because it's now this retail center, if even only, say, 10% of the people that are coming go there for, call it bed, bath, and beyond, might also visit IKEA, well, then that's a found extra 10% customers for us.

02:09:41 Speaker_00
So they pilot this in Russia, which is interesting. And I think it works pretty well.

02:09:45 Speaker_00
Unfortunately for Ikea and everything that would happen in Russia over the next 20 years, they end up completely exiting the market in March of 2022 after Russia invades Ukraine.

02:09:58 Speaker_00
So they had 17 stores total in Russia, 14 of which were these mega complexes. They close all the Ikea stores. They sell off the 14 mega complexes to the Russian, I think, supermarket chain Gazprom Bank.

02:10:15 Speaker_00
So they end up fully exiting the market after 20 years, but it does become pretty large for them and sort of pilots this mega retail center idea.

02:10:23 Speaker_04
Yeah. I mean, as much as 20 years later, they had to sell it all off, or in some cases, I imagine they didn't get a return. They just had to like close up shop.

02:10:33 Speaker_04
It does lead them to this insight, which is we've been building these Disneyland's out in the potato fields. And I've heard a few people refer to the potato fields and I read it in a few places.

02:10:44 Speaker_04
And then everything springs up around, we should probably benefit from the fact that everyone is springing up around it to try to take advantage of the fact that people are driving out for their day at Ikea.

02:10:54 Speaker_04
And so they want to be everyone's landlords who are drafting off the success of Ikea, creating a whole bunch of traffic to this area.

02:11:02 Speaker_04
I think it's a pretty major strategy of theirs now whenever they open a new store to own as much real estate as possible around it and help develop it.

02:11:10 Speaker_00
Yep. I mean, gosh, I think about here in the Bay Area, the Emeryville store across the Bay and the East Bay. I don't know how much of the Emeryville complex they own, but there is so much retail all around that.

02:11:24 Speaker_00
Yes, it would be genius for IKEA to participate in it.

02:11:26 Speaker_04
Yep. So another thing that happens around this era, it's sort of the mid to late 90s, is they really codify these principles with what they call democratic design.

02:11:37 Speaker_04
They had always believed in optimizing form and function, like they wanted things to have beauty but also incredible purpose. But they added three more pillars. So they now have these five pillars.

02:11:48 Speaker_04
So you've got form, function, quality, sustainability, and low price. And we've talked about the quality, we've talked about, again, quality is not maximum quality, it's appropriate amount of quality for the object.

02:12:03 Speaker_04
Low price, we've talked a lot about. Sustainability, they weren't extremely early. This is before anybody's mentioning ESG or anybody, like most people are mentioning climate.

02:12:13 Speaker_04
they are making heavy investments even in the late 90s when it was kind of viewed as heretical. They probably wouldn't have been able to do it if they were a public company, but starting to invest in renewable energy and other things.

02:12:24 Speaker_04
And now this is like a huge, if you go to ikea.com, it gets a lot of real estate and everything they do is their sustainability efforts. But their goal is to optimize across these five vectors and weigh the trade-off in between them.

02:12:37 Speaker_04
And so their idea of democratic design is that everyone, regardless of their income, can access well-designed products to improve everyday life.

02:12:46 Speaker_04
And every time they iterate on a product, every year, they should be further optimizing some set of the products in the range to get a little cheaper, or find a little better way to manufacture it, or develop

02:12:59 Speaker_04
some way to serve more customers with the same product to get a little bit better scale economies, or to do something in a slightly greener way. You could imagine a five-point diagram where they have sort of a score on each of these five.

02:13:12 Speaker_04
They want the total area to be as high as possible for everything they do across those five vectors.

02:13:19 Speaker_00
You sound like a McKinsey consultant now.

02:13:22 Speaker_04
I am confident that diagram has a name, and I am proud that I don't know it.

02:13:25 Speaker_00
Yes, me too. I've seen them before, and I don't know what it's called, and I don't want to know.

02:13:31 Speaker_04
But yeah, that is democratic design.

02:13:33 Speaker_00
Jumping forward to 2007, they hit $20 billion in revenue in 2007, up from, you know, call it $10 in 99-2000. So growth is really still going here. And then they hit a rough patch. Part of that, obviously, is the financial crisis in 2008 and onwards.

02:13:54 Speaker_00
But it's also e-commerce. So IKEA makes the, like, considered and deliberate decision here in the mid-2000s is e-commerce is taking off not to participate Or at least to participate only as minimally as is required.

02:14:13 Speaker_04
Which you can understand, it is against every other element of their DNA.

02:14:18 Speaker_00
Totally. And I'm sure still to this day, very much less profitable for IKEA than in-store visits.

02:14:25 Speaker_04
I bet e-commerce is not a profitable business for them.

02:14:29 Speaker_00
I suspect that is right.

02:14:49 Speaker_04
It's, oh, I don't need the back to look good. It's every single way in which the customer makes the deal with Ikea to, yeah, lower the price a little bit. Ecommerce blows it all up. The overhead, the cost structure required

02:15:03 Speaker_04
for e-commerce, I mean, shipping things to your house, having the delivery network, figuring out a whole new supply chain. Like, should it come from the store every time? Should it not come from the store every time? Should we box them differently?

02:15:15 Speaker_04
Should we use third-party logistics? Should we use our own, et cetera, et cetera. It goes in the opposite direction as everything they've been trying to optimize for the last 50 years.

02:15:24 Speaker_00
Totally. And even more than that, we alluded to this much earlier in the episode, It also breaks the beautiful sort of closed loop ecosystem of controlling both the demand and the supply chains.

02:15:36 Speaker_00
In an internet e-commerce post catalog world, IKEA no longer controls the demand chain in the way that they did before. Right. So for the next four years, between 2007 and 2010, revenue is basically flat.

02:15:51 Speaker_00
Growth falls off a cliff, like zero growth for four years. In 2011, they do start growing again. Revenue hits 25 billion euros. They enter Latin America. So they're starting to open up new markets again.

02:16:06 Speaker_04
Yeah, but 2014, they decide to shift strategy, but not to start doing e-commerce. The strategy shift is to start opening small stores in cities, starting in Hamburg, Germany. They have now embraced this and launched in dozens of cities.

02:16:24 Speaker_00
Yep, including San Francisco.

02:16:26 Speaker_04
Yeah, it's this smaller set of products. So it's pretty interesting observing this trend toward urbanization and trend toward buying online. As of 2014, they still don't really have e-commerce.

02:16:39 Speaker_01
Yep.

02:16:39 Speaker_04
And on the one hand, maybe that's the right strategy. Maybe they never should have done e-commerce. I don't really know.

02:16:45 Speaker_04
Because they're not a public company and because they don't break out segments, we don't really get to know if e-commerce is a profitable business for them. What we do know is that over time, their revenue keeps growing.

02:16:59 Speaker_04
At least if you look at Inka, the operator of these stores, their operating profit does not. In fact, over the last several years, it's been declining. So as a percentage of their revenue, the operating profit of these stores is going down.

02:17:15 Speaker_04
And David, I think where you're sort of going with this is they really start going down once IKEA does meaningfully start investing in e-commerce starting in 2018 is when they really put their foot on the gas.

02:17:26 Speaker_00
And today, 2024, e-commerce is 26% of revenue.

02:17:31 Speaker_04
Right. So it is what their customers want. So you can't bury your head and say, look, forever, we're not going to do e-commerce because it doesn't really fit with our model.

02:17:41 Speaker_04
If it's what your customers want and the fact that 26% of people are doing it today, clearly you do have to go do that. But I'm not sure yet that they have a profitable way to do that with their model.

02:17:51 Speaker_00
I mean, simply just inferring from the financial statements, they don't because revenue is growing. E-commerce share is growing and operating income is flat to declining.

02:18:02 Speaker_04
Yeah. My only skepticism on it is like before truly issuing judgment there is maybe there's something we're missing since we don't have full financials and we're just looking at Inca, which is the franchisee that operates the stores.

02:18:14 Speaker_04
Maybe there's I don't know. But yeah, I mean, you and I ran the numbers. I'll pull up the spreadsheet real quick.

02:18:19 Speaker_04
Starting in 2017, revenue continues to grow on the order of five-ish percent per year, but their operating margin drops from eight percent, six percent, five percent, and kind of hovers in this three to five percent range the last few years. Yep.

02:18:37 Speaker_04
So something is happening that is making them less profitable.

02:18:40 Speaker_00
Yep. And seems like a fair assumption. It's e-commerce. Yep. 2018, two big things happen. One, they enter India. Two, Ingvar passes away in January 2018 at age 91. And, you know, like we said, he's working right up to the end.

02:19:01 Speaker_00
One sort of poignant story we heard in the research is, after one of the last board meetings that he was part of, he sort of took the rest of the board members and management aside and said, I'm so jealous of you.

02:19:12 Speaker_00
He knows he's coming to the end of his life, that you get to keep working in IKEA and running this business and I don't. It's like, This was his life.

02:19:21 Speaker_04
Yep, absolutely. So, 2021, they finally discontinue the catalog. It's a sad, sad time. At peak, 220 million copies were printed across 69 different versions, 32 languages, and 50 markets.

02:19:39 Speaker_04
I mean, they really used to have their own proprietary relationship with customers. And in this new era on the internet, any time that I have a thought, oh, I need to go buy something, I Google it. I look at a bunch of retailers.

02:19:55 Speaker_04
I am not specifically IKEA's customer in the way that in 1970, you would have been an IKEA catalog subscriber. and they don't really have a way to engage people as strongly as they once did.

02:20:08 Speaker_04
I mean, email marketing is just not the same as what the IKEA catalog was. No, not the same kind of catalog. Now, on the one hand, they're competing on equal footing.

02:20:17 Speaker_04
On the other hand, I've spent thousands of dollars at IKEA over the last few years since moving to a new house, having a baby.

02:20:24 Speaker_04
Yesterday morning, I bought $700 worth of IKEA merchandise, in part to prepare for this episode, but in part, I needed stuff.

02:20:32 Speaker_00
Right? I mean, hell, I've got the Ikea high chair that I've used across two kids now.

02:20:38 Speaker_04
Yep. Oh yeah. My son's crib is Ikea. Oh, and by the way, that $700 was spent on e-commerce.

02:20:44 Speaker_00
Oh, you didn't spend that on your trip to the store?

02:20:47 Speaker_04
No, I had two big Ikea transactions in the last week.

02:20:50 Speaker_04
I mean, I wouldn't have gone to the store if I wasn't preparing for this episode, but the stuff that I bought online, that was stuff I needed and I probably wasn't going to go to the store to buy it.

02:20:59 Speaker_00
Man, so you willfully and intentionally cost IKEA margins. literally took money out of their foundation's profits.

02:21:11 Speaker_04
I could have taken more time and gone to the store, but this episode would have been worse. I wouldn't have had as much time to research.

02:21:19 Speaker_00
Oh, there we go. This is like the version of, you know, when you Google for products, you want, you know, click on the organic results. Don't click on the ad result, even though it's the top of the page to save your you know, favorite company's money.

02:21:33 Speaker_00
Don't buy Ikea online. Go to the store if you love Ikea.

02:21:37 Speaker_04
At some point, it'd be great to talk to somebody at the company about this. I'm sure they don't like lose money, but they don't make as much money. Maybe they do lose money on online orders. I don't know.

02:21:45 Speaker_00
I don't know. Ingvar isn't alive anymore. I don't know. It's true.

02:21:49 Speaker_04
I will say, a thing that illustrates every point we've been making on this episode really, really well is, so they bought TaskRabbit for a small amount, $50 to $75 million, somewhere in there, a few years ago.

02:22:02 Speaker_00
Yep, 2017.

02:22:03 Speaker_04
And I checked the little box, like, provide me an estimate of what it would cost for a TaskRabbit to come to my house and assemble all this stuff. 350 bucks on a $700 order.

02:22:16 Speaker_00
So half of your purchase.

02:22:17 Speaker_04
Yeah, that is the perfect encapsulation of how much money customers save by the IKEA flat pack, pick up yourself at the warehouse model. In fact, it's more than that, because I think it was like 30 bucks or 50 bucks in a delivery fee.

02:22:33 Speaker_04
So call it $400 that you're saving by buying something the IKEA way versus a fully assembled delivered at your house. I'm saving over a third of the total purchase price by doing it the IKEA way versus the traditional way.

02:22:49 Speaker_00
which I'm laughing, brings up what for me was the ultimate IKEA hack for many years of my life. I think I talked before on the Met episode about how much I love Facebook Marketplace and Craigslist before that.

02:23:02 Speaker_00
I decided probably, I don't know, 10, 15 years ago, hey, IKEA furniture, despite the fact that you have to assemble it yourself and whatnot, it actually is pretty durable.

02:23:12 Speaker_00
On the one hand, it gets the rep of disposable, but if you take care of it, it'll last a long time. Even through a disassembly and a move, Oh, I can attest to that. Not just through the move.

02:23:22 Speaker_04
Really? Because my whole thing with it is, to me, it feels like once you assemble it, it is good. But then when you disassemble it and put it together somewhere else, it always feels like it's a little wiggly.

02:23:32 Speaker_00
Well, my hack for quite a number of apartments and houses was just buy secondhand Ikea on Craigslist and Facebook Marketplace and be cool with it.

02:23:42 Speaker_04
Oh. So you could successfully move the Ikea and it wouldn't.

02:23:45 Speaker_00
Yep. Not so much to save money, but more to save on the assembly.

02:23:50 Speaker_04
That was the reason I was doing it. Huh. And they hold their resale value pretty well. Well, first of all, they can't really go down in value. So they're fully depreciated when you buy them for a $10 lack table.

02:24:02 Speaker_00
Right. I was not buying lack tables on Craigslist.

02:24:05 Speaker_04
But there are some things that are super durable and some things that aren't. Like a lot of the press board stuff, once you pull it apart, I wouldn't expect to be able to put it back together. But they do now sell like

02:24:16 Speaker_04
$1,000 dining tables made out of solid oak. First of all, I didn't realize you could get just the materials to make that for $1,000. That's like a $4,000 or $5,000 table at other retailers. But something like that, I expect to survive moves very well.

02:24:30 Speaker_04
I think it's just unfair to say everything from this retailer is throwaway or everything from this retailer is infinitely durable. Neither are true.

02:24:39 Speaker_00
Yeah, what I really used to do my heck with was the Hemness line, Hemness bookcases. We have had so many Hemness bookcases in our homes over the years. Jenny did a PhD, so she has lots of books.

02:24:50 Speaker_00
Lord knows I have tons of books now as my vocation, our vocation. And Hemness bookcases, they'll last if you take care of them and you can disassemble, reassemble. Fascinating.

02:25:01 Speaker_04
All right, should I take us through to the state of the business today and then we'll get into the analysis?

02:25:05 Speaker_00
Let's do it.

02:25:07 Speaker_04
Awesome. But before we do that, we have one more of our favorite companies to tell you about. The climate-aligned AI infrastructure company, Crusoe.

02:25:16 Speaker_00
Yes, Crusoe is the vertically integrated cloud platform built specifically for AI workloads and was recently named the gold standard of AI cloud providers by Dylan Patel over at Semianalysis. Crusoe is just such a cool story.

02:25:32 Speaker_00
They build and operate enterprise-grade GPU data centers that are specifically designed for AI workloads, and each one is powered by low-cost, stranded energy that otherwise goes to waste or, worse, gets emitted as greenhouse gases.

02:25:46 Speaker_04
Yep. They've totally reimagined the traditional data center architecture to support the huge power cooling and compute density needs of AI.

02:25:55 Speaker_04
And kind of like Ikea, they've done it all with a focus on getting the lowest cost of inputs possible, in this case energy, which enables them to offer better prices to customers, which leads to signing more long-term contracts, which leads to Crusoe building more capacity faster, which just makes the whole flywheel spin over and over again.

02:26:13 Speaker_04
And it's not just better on cost, it's also super fast and reliable. Thanks to innovations across virtualization, networking, and other areas of the stack, they can do things like boot up a VM in under 90 seconds.

02:26:25 Speaker_00
Totally. Power demand in GPUs is increasing dramatically, which means that one, the traditional data center design and engineering of the hyperscalers is no longer optimal.

02:26:36 Speaker_00
And two, energy, not compute, is actually becoming the limiting factor in scaling AI.

02:26:42 Speaker_04
So Crusoe's infrastructure, unlike the hyperscalers, is built from the ground up for GPUs with elements like high-density racks and direct liquid-to-chip cooling, which enables them to support the most demanding AI workloads that traditional data centers just cannot.

02:26:56 Speaker_00
Yep, and because Crusoe can build with this unique access to stranded energy, they're able to bring massive amounts of compute online all at once.

02:27:05 Speaker_00
They currently have 15 gigawatts in their development pipeline, and their coming Abilene Texas facility alone has over 1.2 gigawatts planned, which will make it one of the largest clusters in the entire world.

02:27:18 Speaker_04
Yeah, it's just an amazing company. The net of all this is Crusoe can provide nuclear levels of power for less cost than other cloud providers and with low or in some cases actually negative emissions.

02:27:29 Speaker_04
David and I are super proud to be working with them and also to both be investors. To learn more about Crusoe, go to crusoe.ai slash acquired.

02:27:37 Speaker_04
That's C-R-U-S-O-E dot A-I slash acquired or click the link in the show notes and just tell them that Ben and David sent you. Our thanks to Crusoe. All right, so the IKEA business today. We'll start with a quick refresher on structure.

02:27:53 Speaker_04
There's two branches of IKEA to think about. There's inter-IKEA systems. This is the corporate entity that owns the brand and the IP. And as of 2016, they also do all the product development, supply chain, all that stuff.

02:28:08 Speaker_04
So they own sort of all the inventory and the franchisees take possession of it almost on like a real-time basis as they need it. So InterIKEA does three things, franchise, the range, which is the products, and supply, which is supply chain.

02:28:25 Speaker_04
And the way that I would sort of think about this is, there are like two things in one. One, they're a company that designs and makes products to sell to franchisees. And two, they're a licensor that takes a 3% rake effectively on all sales, which

02:28:39 Speaker_04
It's pretty fair.

02:28:40 Speaker_00
Totally. 3% of your revenue for the Ikea brand and concept. That seems very fair.

02:28:45 Speaker_04
But also like if you're selling razor thin margins, it's actually a huge percentage of your profit pool. It's kind of like payment processing. You're like, Oh, what's 3%? And then you look at the profits on a retailer.

02:28:56 Speaker_04
You're like, Whoa, I'm shipping half my profits to.

02:28:58 Speaker_00
Yeah. What did you say? Um, operating income margin is these days, like six, 7%, if I remember right.

02:29:04 Speaker_04
That's high.

02:29:05 Speaker_00
It's like four or five percent. Four or five. Okay. So, yeah, they're taking basically half of your operating income.

02:29:11 Speaker_04
Yeah. On the other hand, like, are these really different companies? Like, there's not really a deal between the two. That's, yeah.

02:29:17 Speaker_00
And there's actually a specific tax reason, right? Why it's a royalty on sales.

02:29:23 Speaker_04
From what I could tell, I'm not a tax expert, I think royalties are tax deductible.

02:29:29 Speaker_04
So by shipping money around between two entities instead of having it just be one simple C corp that runs the whole company, they are actually able to deduct those royalties off their taxes. Yeah, it is helpful for tax purposes.

02:29:46 Speaker_04
That parent company did $27 billion in sales of goods, and they made $1.4 billion from franchise fees. That number pencils pretty well. IKEA as a whole did $47 billion in revenue.

02:30:02 Speaker_04
So when you think about it, the parent company sells $27 billion of goods to the franchises who then have their own top line of $47 billion. You can kind of start to understand the margin structure a little bit.

02:30:15 Speaker_00
And then they get that call it one and a half, two billion ish sort of effective cashflow back in the royalty of that $47 billion total revenue. That's exactly right.

02:30:27 Speaker_04
Okay, so where does money go when it comes up to the Inter-IKEA Foundation? This is, again, the parent company, the one who owns the IP, the one who develops the product range, all this stuff, but they don't operate the stores.

02:30:40 Speaker_04
That company is owned by the Inter-IKEA Foundation in Liechtenstein. The main purpose, as we talked about, is to ensure the independence and the longevity of the IKEA concept and to own and govern the IKEA group.

02:30:53 Speaker_04
The Inter-IKEA Foundation is a self-owned entity. That's a new thing that I didn't know existed.

02:31:00 Speaker_00
Is the Novo Nordisk Foundation also self-owned? Maybe. This is sounding familiar to me.

02:31:05 Speaker_04
Yeah. And there is no, nor can there be, any individual beneficiary. Funds held by the foundation can only be used in accordance with the foundation's purpose, which again, the purpose is ensuring the future of IKEA.

02:31:19 Speaker_04
So, David, you were doing some napkin math on this. What sort of cash do you think is held by the inter-IKEA foundation in Liechtenstein?

02:31:29 Speaker_00
Right. So it was reported around 2011 that it had roughly 15 billion euros in assets. And that does not include the value of the company. So that's just like cash and marketable securities, call it, sitting on the balance sheet of this foundation.

02:31:49 Speaker_00
In the 13 years since then, if you can sort of infer from the financial statements, and I think they actually do disclose now how much the operating holding company sends in cash up to the foundation every year, it's like a billion euros in cash every year that gets sent to the Inter-IKEA Foundation.

02:32:10 Speaker_00
So just add 13 more billion euros in cash every year, you're up to call it close to 30 billion euros in assets there. That's assuming no investment return compounding.

02:32:22 Speaker_04
But 2011 to today is among the best investment returns in history, assuming they were just at market beta.

02:32:28 Speaker_00
Totally. And it's like 50 billion-ish seems like a wildly conservative estimate for the amount of assets in this foundation, you know, arguably closer to 100. We don't know.

02:32:41 Speaker_04
It's not a charitable foundation. Let's be super clear. This is an enterprise foundation and their purpose is to ensure the continuity of IKEA. What do you do with 50 plus billion dollars?

02:32:53 Speaker_00
Well, you start investing in retail centers.

02:32:56 Speaker_04
Right. This is not including the ownership of Inter IKEA itself, the company. This is in addition to the value of your ownership of that enterprise.

02:33:06 Speaker_00
This is like, remember we were joking at the arena show that the Forbes net worth estimations of Taylor Swift are laughable because they're just looking at like, what is her bank account? You know, and they're not enterprise valuing Taylor Swift.

02:33:18 Speaker_00
This is like the bank account of the foundation, not valuing Inter Ikea, the company at anything. It's fascinating. Yes. One of the largest entities in the world by assets. And then if you include the value of Ikea, I mean,

02:33:34 Speaker_00
My God, what do you value Ikea at as a company?

02:33:38 Speaker_04
Yeah. It's funny, I had done some napkin math on if I were to buy all of Ikea, including Inter and Inca, what would I value it at? Maybe now's a good time to share that. So the whole company does something like $45 billion a year.

02:33:55 Speaker_04
It's growing at about 5% per year.

02:33:58 Speaker_00
But operating income, at least for the moment, is not growing.

02:34:01 Speaker_04
Right. There's another company out there that grows at about 5% a year, that has a net income margin that bops around the 3% range. That's also a retailer. And that company is Walmart. Ooh. Walmart is valued at about 1.1x sales.

02:34:18 Speaker_04
So you could value all of Ikea, again, this would be Inter plus Inca plus the other franchisees, at about $50-60 billion.

02:34:27 Speaker_00
That feels low to me just given the durability and defensibility of IKEA, but you could also make an argument that it's fair.

02:34:37 Speaker_04
Yeah, but call it 50 to 100. I don't really care about slicing it inter versus Inca. I think this is all silly, but it is interesting to think like there's a cash pile that the

02:34:50 Speaker_04
inter-IKEA foundation has to ensure the continuity of IKEA that is approximately equal in value to all of IKEA itself.

02:35:00 Speaker_00
Right. Yes, that cash pile is almost certainly between 50 and 100 billion euros, dollars, whatever you want to say. Similarly, the value of IKEA is somewhere between 50 to 100 billion euros, dollars.

02:35:15 Speaker_04
Yes. Totally fascinating. So then flipping over to the Inca side of the house, this is the largest franchisee with 90% of stores. That is the 400 different Ikea stores out of the, what did you say it was, 470 total? 76, I think. that they operate.

02:35:31 Speaker_04
They also have what they call Inca Centers, which is this shopping center concept we talked about. They have 44 of those experience-oriented shopping centers across Europe and China, and more are on the way.

02:35:44 Speaker_00
And they're also applying that concept to the small city stores here. So like, interestingly, in San Francisco, the Ikea here in downtown San Francisco, Ikea bought the building. It's not just like they leased some space in downtown San Francisco.

02:35:59 Speaker_00
It was actually an empty building. It was empty for a long, long time on Market Street. They bought the whole thing. They put Ikea in, and now they're putting other tenants into this complex.

02:36:09 Speaker_00
So they're like, Ikea is participating in San Francisco downtown urban renewal, which is kind of wild. But like, I think it's all part of this, hey, we need to make some investments with all this cash.

02:36:19 Speaker_04
Yep. So they have this arm, Inca Investments, that basically allows them to invest in other companies that they think will in some way be additive to their core business. So it's like effectively super large scale corporate venture.

02:36:34 Speaker_04
And then their owner, this is again the franchisee that operates 90% of the stores, Inca's owner is the Stitching Inca Foundation based in the Netherlands. The other one was Liechtenstein. This one's the Netherlands.

02:36:49 Speaker_04
And this one is an actual charitable foundation that has a specific focus on climate and poverty. And with this one, Inca sends about 15% of their net income up to that charity, and then they use the other 85% for reinvesting in the business.

02:37:05 Speaker_04
So call it 200 to 300 million euros a year that Inca actually ships up to their charitable foundation. And from what we can tell, it seems like the charitable foundation then does about 200 million euros of grant-making every year.

02:37:21 Speaker_04
So, hard to know exactly what the endowment size is of the Stitching Inca Foundation's net of the asset itself. Like, any estimates that float around kind of include the enterprise value of Inca.

02:37:38 Speaker_04
But there exists some cash pile there that probably grows modestly because they're doing so much donating. out of the endowment.

02:37:48 Speaker_00
All that reminds me, there's another big cash pile that we forgot about. Oh, the actual balance sheet? The balance sheet of Inka. Yeah. Inka has $25 billion in cash on hand. Yeah. Cash is not the constraint here. No.

02:38:02 Speaker_00
And that cash, again, is at Inca totally separate from that, call it 50 to 100 billion of cash and securities we can estimate that is over at Inter.

02:38:12 Speaker_03
Yeah.

02:38:13 Speaker_00
Anyway, one way to think about this company is basically as like the Berkshire Hathaway of Europe.

02:38:18 Speaker_04
Yeah, if you wanted to sum some things together and just pick some midpoints, let's say you got $75 billion for the enterprise value of the whole kit and caboodle.

02:38:28 Speaker_04
Then you've got another $25 billion on the balance sheet, so call it $100 billion for the IKEA business. Then let's say another $75 billion for the Inter-IKEA Foundation's cash pile. So that's $175.

02:38:43 Speaker_04
And then the question is, what is the cash size of the endowment that the Stitching Inca Foundation has? I'm going to guess it's smaller, $10-ish billion. But we're still approaching $200 billion here in value, all created with no equity investment.

02:39:01 Speaker_00
No debt investment.

02:39:02 Speaker_04
I mean, this is just 81 years of selling things that provide value to customers and reinvesting the dollars to do that again on a grander scale.

02:39:13 Speaker_00
I truly don't think there is anything like this in the entire world.

02:39:18 Speaker_04
Yeah, I wonder if that's true, that this is the only business like that.

02:39:22 Speaker_04
And if we define it as like $200 billion scale, built from nothing with no investment, exclusively investing the cash flows of the business for growth, like there has been no inorganic growth. Right. No material in organic growth.

02:39:36 Speaker_04
I mean, with Berkshire, they traded a paperclip for a house many times. With LVMH, they did the same thing.

02:39:42 Speaker_04
He had like three years where he turned some small amount of money into $600 million to get the whole thing started, if I'm remembering our LVMH episode correctly.

02:39:51 Speaker_00
Yep. But LVMH, certainly capital, both from Bernard and the family and other sources, went into the business. Berkshire, maybe you could make more of an argument it was trading paperclips, but either way, it was all inorganic growth.

02:40:05 Speaker_04
Right. Hermes is a pretty good... I mean, it's been around twice as long.

02:40:11 Speaker_00
That's a good point. Doesn't have as much cash, is worth the same or maybe arguably more. Right. But doesn't have the ludicrous cash pile that Ikea has.

02:40:24 Speaker_04
Meta didn't use much of their cash. Otherwise, you could say Meta is this example, but they have a lot of other. Mark is not the only shareholder the way that Ingvar was.

02:40:33 Speaker_00
And it took venture capital to build that business. Yeah. And debt capital, as we talked about.

02:40:38 Speaker_04
Yeah. That to me is like the most impressive thing about this whole business, is that it was just one foot in front of another, take your money, keep plowing it into the next thing. Yep. More stats on the business today. They have 216,000 employees.

02:40:54 Speaker_04
They call them co-workers. It's a slight decrease year over year from last year. IKEA is in 63 markets worldwide. Last year, they welcomed 860 million people to the store. Sometimes they say store visits. Sometimes they say visitors.

02:41:12 Speaker_04
So I don't know if it's 860 million unique people or 860 million times a person walked into the door, but whatever, either way. It's crazy. The demographic of their customer base is 20 to 36.

02:41:24 Speaker_04
So there is an age where you kind of like churn out of Ikea and they know this. This is measured in a bunch of external surveys.

02:41:34 Speaker_00
I'm surprised to hear you talking about how you're doing so much active buying right now, perhaps because you have your first child. It's a nursery and yeah. I've totally aged out as much as I love IKEA.

02:41:46 Speaker_00
It's been such a huge part of my life for a long time. Now that we're on to kid number two, we're reusing a lot of stuff. I don't actually buy from there that much anymore.

02:41:54 Speaker_04
There's a great study that Ernest did that we'll link to in the show notes that shows IKEA's peak customer age is 24. It's like they start churning after that.

02:42:05 Speaker_04
It's interesting to see the distribution, like Creighton Barrel's peak age is 31, West Elm is 33, Williams-Sonoma is 33, then you start to get into like Restoration Hardware is 44, Pier 1 Imports is 45, Home Depot is 48, Lowe's is 54.

02:42:24 Speaker_04
This is like the cycle of life.

02:42:28 Speaker_00
I love it. You go from sort of the IKEA semi-self-construction or I believe self-construction to then the I'm just buying consumer furniture to then, no, I'm actually building this stuff myself.

02:42:43 Speaker_04
Yes, exactly. Well, you go from furnishing your apartment to furnishing your home to fixing your home.

02:42:48 Speaker_00
Yeah, that sounds right. Yeah.

02:42:51 Speaker_04
So geography, Europe is still their core. 71% of sales even still come from Europe, even with the US as a huge and developed market.

02:42:58 Speaker_00
And Germany is still bigger than the US, I think.

02:43:02 Speaker_04
71% is products in stores, 26% is e-commerce, 3% is services to customers. I assume that basically means TaskRabbit.

02:43:09 Speaker_00
I assume so, yep.

02:43:10 Speaker_04
The majority of the revenue is still products sold in stores. Growth is pretty slow, 5% or so, not so different than Walmart. I decided I wanted to do a sales per foot analysis the same way that we did on our Costco episode. It's a private company.

02:43:26 Speaker_04
They don't break it out and they're limited in what they have to report to you.

02:43:29 Speaker_04
But if you assume all their revenue is spread over their 473 stores and you estimate it's about 300,000 square foot per store, that gives you 320 euros a foot, which is like, I don't know, 350 bucks a foot or something like that. Yeah. Yeah. Yeah.

02:43:45 Speaker_04
Restoration hardware is 900. Okay. Williams-Sonoma is $1,300. But if you've ever been at a Williams-Sonoma store, that makes sense. It's overpriced and it's very small.

02:43:56 Speaker_00
These are also small stores too. I mean, well, Restoration Hardware is huge complexes, but few of them.

02:44:02 Speaker_04
And they're these weird palaces. It's a crazy business.

02:44:05 Speaker_00
Have you been to the one in San Francisco?

02:44:06 Speaker_04
No.

02:44:07 Speaker_00
It's freaking wild. You would think it's like a tech company headquarters. But no, it's the Restoration Hardware building.

02:44:12 Speaker_04
Really? Yeah, they've been on quite the transformation, sort of going upmarket over the last couple decades. Lazy Boy is $157 a foot. None of this is on a spectrum of bad to good, because IKEA is intentionally not trying to maximize

02:44:30 Speaker_04
their dollar per foot here. There are trade-offs they're willing to make instead of maximizing that. Now let's compare it to the companies we mentioned on our Costco episode. Costco is $1,800 a foot. They are trying to maximize their dollar per foot.

02:44:48 Speaker_04
Walmart is about $600, Target is about $450, and then these crazy businesses, just to compare it to the all-time greatest, Tiffany is $3,000 a foot for jewelry, and Apple is $5,500. Much smaller footprint.

02:45:03 Speaker_00
Yeah. I should remember this from our Hermes episode. Do they report sales per square foot? I don't remember. I don't think we talked about it. I don't think we talked about it either. It doesn't feel like a thing they would report.

02:45:16 Speaker_00
But I got to imagine, though, that it is as high, if not higher, than Apple.

02:45:22 Speaker_04
You think it's higher than Tiffany?

02:45:23 Speaker_00
Yeah.

02:45:24 Speaker_04
Yeah, you might be right.

02:45:26 Speaker_00
We've spent a lot of time in Hermes stores recently.

02:45:30 Speaker_04
We have.

02:45:30 Speaker_00
Can attest to some of the behavior that we have observed in there.

02:45:35 Speaker_04
You're raising their price per foot.

02:45:38 Speaker_00
No, I think I'm lowering their price per foot.

02:45:42 Speaker_04
It's interesting. I don't really know how to think about this 350 number. Like they have a huge amount of square footage. They intentionally try to sell things as inexpensively as possible.

02:45:50 Speaker_04
The ultimate maximization function is it's almost like it's not margin dollars. I think it's like number of items sold profitably at all. They want to sell more things to more people.

02:46:04 Speaker_00
Yeah. I think it comes back to this concept of the many, which again, maybe is a little hokey, but like, I actually think it is true.

02:46:13 Speaker_04
They've built our a hundred billion dollar business on the idea of the many. It's not hokey at all.

02:46:16 Speaker_00
Yeah. It is the many that is the optimization. And so I think you're totally right. I don't think they're trying to optimize sales per square foot at all. I think it's just like. the square feet are all in function of the many.

02:46:31 Speaker_00
And they own all the real estate, so it's not like they're paying rent. They choose the location strategically, and then they become a landlord to other people in these new mega shopping centers.

02:46:41 Speaker_04
Yeah. The optimization function is they want to provide as much value to as many people in the world as possible.

02:46:47 Speaker_00
Here's another reason why this metric doesn't make any sense at all for IKEA. With the exception of Costco, which is its own thing, none of those other businesses also have their warehouses in their stores. Right.

02:47:03 Speaker_04
Right. So then the last thing in the sort of snapshot of the business today is the market. Today, In 2024, with $47 billion in revenue, IKEA holds only a 5.7% market share. This is an astonishingly fragmented market.

02:47:24 Speaker_04
It was when Ingvar started the company, and it is today still. Right.

02:47:28 Speaker_00
Which is so wild. And they are by far the largest player. Yep.

02:47:33 Speaker_04
I mean, even if you look around, where else do people get furniture that gets the job done, looks good enough, and is a good value to them? Target, Amazon, Wayfair. But then you start to get quickly into, like, more expensive. CB2, Pottery Barn.

02:47:52 Speaker_04
I mean, Walmart sells furniture, but... Oh, yeah.

02:47:56 Speaker_00
I've been chomping at the bit all episode to talk about this. This is, like, the craziest thing to me about this whole story.

02:48:03 Speaker_00
IKEA has proved, beyond a shadow of a doubt, that furniture and home furnishings is an extremely large, extremely global, very attractive market. One.

02:48:17 Speaker_00
Two, IKEA and a whole set of other retail companies, Costco probably being foremost among them, have also shown that becoming a scale global player in a consumer market is a good position to be in.

02:48:32 Speaker_00
IKEA has no competitors in the Venn diagram of those two things. They are the only globally scaled furniture and home furnishings company. That's crazy.

02:48:46 Speaker_04
Yeah. Okay, so I'm foreshadowing power. As we move into analysis here, power is going to be our next thing we examine. But just to name it, this company is scale economies.

02:48:59 Speaker_04
And so now that they have reached escape velocity, like they're through the takeoff phase in Hamilton's parlance, you can't compete directly with them because there's no chance that you could beat them on price or on quality for price.

02:49:13 Speaker_04
So it's almost like if there was going to be an IKEA competitor, they would have needed to start 50 to 80 years ago, a direct IKEA competitor. So the most credible way to compete with them is doing something different.

02:49:27 Speaker_04
I mean, probably the best competitive strategy is Wayfair, something that's born on the internet, that does something with a completely different cost structure than they're capable of.

02:49:37 Speaker_04
Wayfair is not a high margin business, but they have built the whole business around the idea that they sell online, whereas Ikea needs to figure out how to do that.

02:49:48 Speaker_00
Which, as we've talked about, e-commerce is a challenge for Ikea. If you make it your strength, yes. But you really got to squint today to see Wayfair becoming a global business on the scale of IKEA.

02:50:02 Speaker_04
Wayfair is a $5 billion market cap company.

02:50:05 Speaker_00
Yeah. Yeah. Long way to go. Now, it's interesting, as I was saying, that part of me is like, that's so crazy. But you're right. Let's think through, how would you actually Compete with IKEA if you wanted to build a globally scaled furniture brand.

02:50:20 Speaker_00
Well, an obvious one that pops out to me is, OK, give the low and low medium ends to IKEA and then compete at the top end like Restoration Hardware is doing.

02:50:32 Speaker_00
The issue with that though about going global is that tastes at the high end are way more heterogeneous and fragmented, especially across geography than they are at the middle and low ends.

02:50:45 Speaker_04
Yep. That's a great point. You can't have a narrow product range.

02:50:49 Speaker_00
Yep.

02:50:49 Speaker_04
So you have a more expensive overhead in producing a wide variety of SKUs.

02:50:53 Speaker_01
Yep.

02:50:54 Speaker_04
Probably the most credible competitor from my perspective with me as a customer is Target.

02:51:01 Speaker_01
Yep.

02:51:02 Speaker_04
I probably would look at Target.com and see if there are, because they partner with all these designers, they have like a reasonable sense of taste.

02:51:08 Speaker_04
It's not like high-end furniture and never will be, and it's not the best designs, but it's like, okay, this is going to get the job done for a commodity thing in my house. They don't just sell furniture, but Target's a $70 billion company.

02:51:21 Speaker_04
I don't think it's global in the way that Ikea is. Again, it's like, to your point, competing on just furniture and competing at global scale, that's tough, tough nut to crack.

02:51:33 Speaker_00
Yep. I totally agree with you that within the US or in North America, Target feels like the closest competitor to IKEA. However, exactly that. Target is a North American company. It is not a global company.

02:51:50 Speaker_04
Yep. So we're pretty squarely in power here.

02:51:54 Speaker_04
Normally, when we try to assess power, we say, what is it that enables the business to achieve persistent differential returns, or put another way, be more profitable than their closest competitor and do so sustainably?

02:52:05 Speaker_04
We're asking a slightly different question here, which is, What enables this business to own this market?

02:52:13 Speaker_00
To almost uniquely exist, yeah.

02:52:16 Speaker_04
Yeah, when no one else is really competing with them directly, or at least competing with them across everything they do.

02:52:25 Speaker_00
Yeah. I'm trying to think if we've encountered a business like this before.

02:52:29 Speaker_04
You would have to counter position them because no one else can outscale economies them. Maybe Amazon would be the most credible because they have the scale if they were to make a real run at it. I assume there's an Amazon basics line of furniture.

02:52:42 Speaker_00
Yep, Amazon definitely has furniture.

02:52:45 Speaker_04
There's not switching costs from a customer perspective.

02:52:49 Speaker_00
It's funny, I'm thinking through that now, like, yes, Amazon definitely has furniture.

02:52:53 Speaker_00
Amazon is more or less global, more so every day, but there's a supply-side scale economies moat here for Ikea, which is how on earth, if you're Amazon, even if you're just a retailer, you're not designing or sourcing any of this furniture yourself, how on earth are you gonna do the logistics around the world in the way that Ikea does?

02:53:18 Speaker_04
Not to mention, at this point, IKEA, I think 10% of their furniture is actually made in-house at IKEA. They own their own manufacturer.

02:53:27 Speaker_00
Yes. And specifically, they own their own manufacturing for their highest volume and most strategic products, for the hot dog products.

02:53:36 Speaker_04
Hmm. Yeah, normally when we do a power analysis, we're like looking at the competitors.

02:53:43 Speaker_00
Yeah, there's nobody to look at here.

02:53:45 Speaker_04
Right. I guess we should assess it versus Target in North America.

02:53:50 Speaker_00
And I think it really is just local competitors in any given market.

02:53:54 Speaker_04
Right. They're not in the same segment as Williams-Sonoma or Restoration Hardware, any of these other furniture companies.

02:54:00 Speaker_00
Who, by the way, also are not global. Yeah.

02:54:04 Speaker_04
Ultimately, it's scale economies. Everything about this is the same scale economies as Costco.

02:54:09 Speaker_04
They take every dollar that they're not shipping up to the foundation, one of the two foundations, and they're not using to try to figure out e-commerce, and they try to deploy it in, how do we further increase our fixed cost base to reduce variable costs?

02:54:25 Speaker_04
Like, what are the ways in which we can design it better or manufacture it better or invest in another factory or something to reduce the price for customers over time?

02:54:36 Speaker_00
Yeah. And I think that really is the only one that matters. I was tempted to say like, oh, brand's important here, too. And like, yeah, the IKEA brand. Great. But compared to scale economies.

02:54:47 Speaker_04
Well, and the definition of branding is that you're willing to pay more for it because it's from that brand. Right. The definition of the IKEA brand is you're paying less. It's always cheaper. Yeah. Right. It's scale economies.

02:55:00 Speaker_04
It should be cheaper every time because of scale economies. Yep.

02:55:04 Speaker_00
That's it.

02:55:04 Speaker_04
And the interesting thing is cash really isn't the constraint. This is a lot like the big tech companies. It's kind of like what we were talking about with Meta. They have way more cash than they could ever strategically deploy.

02:55:15 Speaker_04
And so the way for them to obtain more power is just grow even more, but they're already using their cash maximally to the extent that they can grow without ruining some part of the business.

02:55:27 Speaker_04
And so time is kind of their constraint because time needs to march on in order for them to grow at whatever the rate they feel they can optimally.

02:55:36 Speaker_00
Which also kind of comes back to their wackadoo crazy structure that Ingvar set up.

02:55:41 Speaker_04
Right. To make it as durable as possible.

02:55:44 Speaker_00
You know, there's a method to his madness here. Yep. Time is arguably the thing that the company is most optimized for. Yep.

02:55:53 Speaker_04
So one question I have for you right before we move to playbook is, what is IKEA? Is it primarily a store, like a retailer or merchant? Or is it a furniture brand that happens to have vertically integrated stores?

02:56:08 Speaker_04
I always thought about it as like, oh, it's kind of Costco-esque, because they're in locations kind of like Costco, and in some ways their business model and their obsession with thin margins and serving many people in high volume is Costco-esque.

02:56:22 Speaker_04
But they're not a merchant, really.

02:56:24 Speaker_00
I think they're a merchant at heart and Ingvar was a merchant at heart in the same way that Sam Walton and Jim Senegal and Sol Price and Jeff Bezos were and are. It's the whole PT Barnum aspect that we were talking about with the early days.

02:56:40 Speaker_00
It's the showroom.

02:56:42 Speaker_04
Right. shop the competition, incorporate their best ideas.

02:56:46 Speaker_00
Yep. That was the ethos. And I think also that's where this focus on value for the many, it's a very merchant, retail-y type idea.

02:56:57 Speaker_04
You're right. But the way that it actually manifests is this vertically integrated furniture and homewares brand that happens to have a really great experience for you to go and buy their products.

02:57:11 Speaker_00
Yes. Which is funny, most merchants that are vertically integrated are focused on higher margins. They are not.

02:57:18 Speaker_04
That's an interesting point. Like Apple, this is the way in which Ikea is a lot like Apple. An Apple store sells Apple products and a few other things. An Ikea store sells Ikea products and a few other things.

02:57:28 Speaker_04
But Ikea is focused on minimizing margins and Apple is focused on maximizing margins. Yes. Super interesting. Okay, playbook. We've talked about some of this already, but just to underscore, this crazy corporate structure basically only helps them.

02:57:44 Speaker_04
When I was first digging into it, I was like, oh, this is going to have lots of trade-offs and pros and cons. I mean, in the way that it helps them, it minimizes taxes, protects them from takeovers, ensures their durability.

02:57:56 Speaker_04
They have the benefits of being a non-profit corporation. There's no shareholders to appease, which enables longer-term thinking. They're protected from transitions of government power.

02:58:05 Speaker_04
You know, the tax savings, the European Parliament Green Party estimated that they saved a billion dollars in taxes between 2009 and 2014 alone. There's all these benefits.

02:58:15 Speaker_00
Not to mention it neutralized what probably was realistically the biggest risk to the business, which was now or future family squabbles in generations to come. That's just off the table.

02:58:27 Speaker_04
Absolutely. The only way in which it hurts them is access to capital, but they don't need money.

02:58:33 Speaker_01
Right.

02:58:34 Speaker_04
I mean, can you come up with another way that the corporate structure is a con? I mean, it's a con for society, I guess. It deprives people from the tax dollars that they would have to pay otherwise.

02:58:45 Speaker_00
Or the participation as a index fund holder or equity holder in like the building of this business.

02:58:52 Speaker_04
Right. Oh, that's true.

02:58:54 Speaker_00
But yeah, I mean, that's kind of where my mind was going of like, well, maybe there's some like reputational hit to the company by having this crazy structure and. For a long time, people believed it was, you know, tax dodge, which it may also be.

02:59:06 Speaker_00
But at the end of the day, with Ikea's customer base, like it doesn't matter. Nobody knows or cares about that.

02:59:11 Speaker_04
It's kind of true. If imagine they're 10 times more successful and they are worth a trillion dollars. Well, it's a real shame that the public is deprived from being an owner of all that value creation.

02:59:22 Speaker_01
Right.

02:59:23 Speaker_04
Yeah. Fascinating. The other big playbook theme here is all of this is basically only possible because Ingvar built a business by reinvesting solely the business's own cash flows. All this other stuff kind of does rely on that.

02:59:40 Speaker_00
If there had been external capital and thus de facto external stakeholders, even if it was debt capital along the way, it's hard to imagine history playing out like this.

02:59:52 Speaker_04
Right. Costco managed to make it work, even though they raised a bunch of money.

02:59:55 Speaker_00
Yep. But they're not structured like this.

02:59:57 Speaker_04
Right. But they can make a lot of the same sort of long term thinking decisions. And in fact, Costco even runs on thinner margins. Ikea's gross margins are like mid 30 percent and Costco's are 13 percent.

03:00:11 Speaker_04
There is definitely this thing that we've talked about a few times, frugality as an edge.

03:00:16 Speaker_04
They originally built in the potato fields as a way to save money, but it ended up kind of creating and inspiring their business model that they need to create this destination experience. Yeah, the culture of frugality is interesting.

03:00:29 Speaker_04
Trying to buy materials at a discount, minimal sales staff, no finishes on unseen surfaces, flat packing. No one has assistants. I think actually the CEO is the only person at the company with an assistant. No one flies first class.

03:00:43 Speaker_04
They print on both sides of the paper.

03:00:45 Speaker_00
Oh yeah. And the assistant thing, the CEO may have an administrative assistant these days, but for years Ingvar had an assistant. But it wasn't an assistant like an administrative assistant. It was like his, you know, sort of chief of staff, like COO.

03:01:00 Speaker_00
Didn't he become CEO after?

03:01:02 Speaker_04
Yeah, exactly. But it kind of does actually beg this, so frugality as an edge, but could they run leaner? Why is it that Costco can have 13% gross margins, but Ikea marks their goods up more? Is Ikea bloated?

03:01:16 Speaker_04
Is the fixed costs of running the business, has it just gotten high to the point where you need high gross margins in order to pay for all that overhead?

03:01:24 Speaker_00
I think there's an explanation here, which is that Costco, let's put Kirkland aside, Costco is selling other companies' products, so therefore, at least with the non-Kirkland products, Costco can take a lower margin because they're reselling those products.

03:01:46 Speaker_00
They don't have to develop them. Whereas Ikea is designing, developing, producing.

03:01:50 Speaker_04
So they should have a lot higher overhead. They should have a lot higher fixed cost base.

03:01:55 Speaker_00
Yup. Exactly.

03:01:56 Speaker_04
Huh. Still feels like a big gap.

03:01:59 Speaker_00
Whereas like in Costco, there's actually, again, Kirkland aside, third party products in Costco, there are two margins happening. There's Costco's gross margin, but then there's also the supplier's gross margin.

03:02:14 Speaker_04
Yeah, that's the right way to think about it. We're looking at the sum of two margins when we're comparing.

03:02:20 Speaker_00
IKEA and Costco.

03:02:21 Speaker_04
Yeah, you're right.

03:02:22 Speaker_00
Yep.

03:02:23 Speaker_04
Fair. This is kind of a funny one. They lean into Sweden.

03:02:28 Speaker_00
Super hard.

03:02:30 Speaker_04
Most companies that go international try to embrace the local market and let their origin fade into the background. But that's just the opposite of the strategy that IKEA runs.

03:02:41 Speaker_04
I mean, in the meatballs, there's this little Swedish flag that sticks out of the top of them. Every time you buy them, you walk into the store and it says, hey, HEJ.

03:02:51 Speaker_00
Which is so funny. IKEA has become the greatest Swedish ambassador.

03:02:55 Speaker_04
So true. So David, you're going to love this because it's like, it's from the complete other side of the spectrum. Here's what Ikea does. They sell a sense of place.

03:03:08 Speaker_00
Oh wow. Hermes and Ikea separated at birth. There we go. There we go.

03:03:16 Speaker_04
For listeners that haven't listened to LVMH and Hermes episodes, this borrows from the luxury playbook. And luxury companies sell a sense of place and mark their goods up 10 to 13x on the cost of materials for that sense of place.

03:03:33 Speaker_04
And IKEA does the complete opposite.

03:03:36 Speaker_00
Ben, you got a mic drop there. We should just end the season right there. It's not going to get any better than that. No, it is not. Kia sells a sense of place. Amazing. Amazing.

03:03:48 Speaker_04
I do have one more, which is not nearly as poetic, but I'll just finish my section off. they have a very contrarian view on working capital.

03:03:58 Speaker_04
And this didn't really come up in the story because I couldn't really find the right place for it, but most companies' common wisdom is you should keep your inventory low.

03:04:07 Speaker_04
and you should minimize the amount of your capital that's locked up in working capital. And IKEA has a very different optimization function.

03:04:14 Speaker_04
Theirs is about cost for the end consumer and ensuring availability of products at all times to keep customer confidence high.

03:04:22 Speaker_04
So they're willing to do things like build up excess inventories during certain periods if it means getting a favorable rate from a manufacturer who might have extra capacity, as long as it means eventually their customers will save money when they do buy it.

03:04:35 Speaker_04
And I think a huge part of this is the foundation ownership. And the other part of it is the scale and the timelessness of their product lines. They sell these things forever. So they know they'll eventually sell through that inventory.

03:04:49 Speaker_04
So if there's a good price on it, yeah, give me a thousand. Sure.

03:04:53 Speaker_00
The Billy bookcase is never going out of style.

03:04:56 Speaker_04
Right. Honestly, if I describe a Billy bookcase to you, there's not a simpler way I could describe it. It is straight lines with no facade. The simplest bookcase that you could draw on a piece of paper, that's the Billy bookcase. That's the Lack shelf.

03:05:09 Speaker_04
That's a Lack table. So in their reporting, you kind of dig into it. You see pretty high levels of working capital tied up, but they just don't care. Capital is not a problem.

03:05:18 Speaker_04
They can't deploy the capital that they have, and so they may as well use it strategically. And the other benefit that dovetails out of this is they get to be really, really supplier-friendly.

03:05:30 Speaker_04
they can do things like net 30 terms when the rest of the industry is on net 60 or net 90 because they're just not cash constrained. So they sort of invest in the relationship with their manufacturers. And that's why they have, what is it now?

03:05:44 Speaker_04
1600 suppliers, 55 countries. And the average supplier relationship is 11 years long.

03:05:50 Speaker_00
Yup. To pick up on that point, I was just thinking about what is my biggest complaint about IKEA? And as a customer over several decades of my life, when have I been most frustrated with the company?

03:06:03 Speaker_00
It's when I go to the store and they don't have what I want in stock. And I'm sure they know this too. That is my number one biggest complaint, biggest negative experience I would ever have as an IKEA customer.

03:06:15 Speaker_00
So like, yeah, tying up more working capital and inventory for the sake of the value to the customer. Very worthwhile investment. Yep.

03:06:25 Speaker_00
Okay, one more I wanted to add on this same vein that similarly didn't have the right place to put it in the story is their supply chain and just how really, really smart and strategic.

03:06:37 Speaker_04
Oh yeah, didn't you read a whole book?

03:06:39 Speaker_00
Yep.

03:06:39 Speaker_04
There was like three or four books that we read, but you read a whole book on their supply chain.

03:06:43 Speaker_00
Yes. So there's a book called Strategic Outsourcing and Category Management, Lessons Learned at IKEA by Magnus Carlsen. And Magnus was a senior executive in Ikea supply chain for 25 years. This book is awesome.

03:06:59 Speaker_00
This is like the luxury strategy for supply chain. I haven't read that many supply chain sort of business school textbooks. But you hadn't read that many luxury books before either. I hadn't read that many luxury books either. I can vouch.

03:07:11 Speaker_00
This thing is amazing. If you are at all interested either for like your own edification or if it's relevant to your business in supply chain, like buy and read this book, it is so good.

03:07:23 Speaker_00
And it talks a lot about how they like became more and more strategic in their supply chain and specifically their sourcing over time at Ikea.

03:07:33 Speaker_00
And it's the kind of stuff you talked about of like, hey, you would think ordinarily we want to squeeze our suppliers on terms, but actually what we really care about is continuity of supply, depth of a relationship with these manufacturers.

03:07:48 Speaker_00
Let's do the opposite and embrace them. That was sort of like one level.

03:07:52 Speaker_00
And then the next big transformation is when they stopped thinking about sourcing and supply chain in terms of individual products and moved instead to like product packages, suites of products, and then whole categories, they could say like,

03:08:10 Speaker_00
Oh, rather than sourcing the Poeing armchair, that's a bad example because I'm sure they make that in-house now, but like whatever product, let's take like a whole set of armchairs that are pretty similar and let's bid that out globally

03:08:25 Speaker_00
rather than in individual markets. And then that'll let us, you know, A, sure, get the best price and then pass that on in value to consumers.

03:08:33 Speaker_00
But B, build the deepest and most strategic relationship with the suppliers who are going to make that for us. And then we can also transfer technology to them, too.

03:08:43 Speaker_00
So stuff like the board on frame construction, they've done dozens and dozens of these technology advancements in fabrication, factory layouts and all sorts of stuff over the years, and they transfer that to their supplier partners.

03:08:56 Speaker_00
So it's super cool. Then stuff like their distribution center strategy. So you would think tautologically, almost like Costco, the stores are the warehouses.

03:09:05 Speaker_00
Well, over time they found that, oh, actually it doesn't totally make sense that we keep 100% of our products stocked at all of our stores. Instead, let's focus to my, what I was talking about, my complaint.

03:09:19 Speaker_00
Let's make sure that the 50% of our products that account for 90% of our sales are like really in stock at all of our stores. And then for the, Second half of our product catalog that accounts for the tail end of the power law, you know, 10% of sales.

03:09:35 Speaker_00
Let's do that across pan geographical distribution centers and keep actually a minimum of that in the stores with constant restocking so that we can maximize the space for the products that we know people are going to want.

03:09:48 Speaker_00
Anyway, lots of really, really, really great stuff.

03:09:51 Speaker_04
Fascinating. Stuff you can only do with 81 years of history and a lot of scale.

03:09:56 Speaker_00
And a lot of money, a lot of cash. Yeah. Right.

03:10:00 Speaker_04
All right, David, The Quintessence.

03:10:03 Speaker_00
Ooh, The Quintessence. I've been thinking about this one.

03:10:05 Speaker_04
This is our new... Yeah, for anyone who didn't listen to the meta episode, David and I renamed this section because we've been struggling with how do we land the play? What's the end of an episode look like?

03:10:15 Speaker_04
And David, you came up with this term, The Quintessence.

03:10:17 Speaker_00
Yeah, we boil it down after all this work we've done on the company.

03:10:21 Speaker_00
long recording like what is the essence what is the quintessential factor of this company i had been planning to say this idea of the many and i think that there's a reason ingvar had it as testament number one in testament of a furniture dealer

03:10:37 Speaker_00
But man, the more we talk about this, I really think it's something a little more meta quote unquote, which is like this is an end of one company. There is no other company in the world like this. It is so esoteric in so many ways.

03:10:52 Speaker_00
There is nothing else like this out there.

03:10:55 Speaker_04
Yeah. Or put differently, I think mine is the combination of never taking a single outside shareholder plus Ingvar's personality and the desire to serve the many equals this company.

03:11:13 Speaker_01
Yep.

03:11:14 Speaker_04
All of those are necessary conditions. And there's many more too, but those are really necessary in order to create what IKEA ended up becoming.

03:11:25 Speaker_00
and the structure that it ends up with. I guess maybe do. put an even finer point that this is an N of one company. The N of one term is a little overused, you know, post zero to one and, you know. Yeah.

03:11:37 Speaker_00
And like, we make the argument all the time, like every company we cover on Acquired is unique. Meta is an N of one company. Amazon is an N of one company, you know, et cetera, et cetera. But that's the point. That's all true.

03:11:48 Speaker_00
I think this is like even another level. All the big tech companies, yes, they are all unique. Yes, they are all individual, but they're all big tech companies. There just is no other IKEA. There's nothing like it.

03:12:00 Speaker_04
That's interesting. No other vertically integrated retailer brand of this scale in any category.

03:12:06 Speaker_01
Yep.

03:12:07 Speaker_04
Huh. It's Apple, but if they serve the many instead of the few.

03:12:11 Speaker_00
Yep. Well, I guess arguably they do serve the many, but they have very high margins. Right.

03:12:19 Speaker_04
Well, but they specifically could serve five times more people than they do serve if they were willing to forego margins. And maybe eventually they will. They might be on a path to that.

03:12:31 Speaker_00
That's a good point. This company is Apple if they decided to also be Android, essentially. Like, we're going to own the whole market.

03:12:40 Speaker_04
It seems like your definition is a brand that is vertically integrated, that is at $50 billion a year scale, and serves philosophically the many. Yeah. Hmm. In some ways, that's what Tesla is aiming to be. I mean, these are not high margin cars.

03:13:04 Speaker_04
They're sold at the price where they can be the best selling car in America. It's hard to compete globally on EVs since the US and China are becoming pretty fragmented ecosystems.

03:13:15 Speaker_01
Yeah.

03:13:16 Speaker_04
But everything about Tesla is rate manufacturing, drive prices as low as you can, vertically integrated. They don't sell through any analysis. There's no channel. There's no middleman. Yeah.

03:13:26 Speaker_04
But like a brand of consumer good that is vertically integrated and sold at low margin to the many.

03:13:32 Speaker_00
Globally. I'm just having a really tough time thinking about it. Like I could think of retailers for sure.

03:13:36 Speaker_04
Yeah. Super fascinating. All right. We have reached it. The quintessence of IKEA. Yes.

03:13:45 Speaker_00
I think so. I'm so glad we did this company. It was, in many ways, sort of off the wall. It's like this private, weird structure. Nobody can invest in it.

03:13:53 Speaker_04
Totally. And I will tell you, for some reason, I'm just not as fired up about it as compared to a Costco or an Hermes. But you study it. It's really interesting. And it totally is N of 1. Yep.

03:14:06 Speaker_04
I think the future to me is like, not quite as clear as some of these other companies.

03:14:10 Speaker_04
I think there's like, certainly a lot of question marks around what do they look like in an e commerce world in a world that's shifting to urbanization and a world where they're now a big company. Yep.

03:14:21 Speaker_00
What are they going to do with all this cash, etc, etc.

03:14:23 Speaker_04
Right. That's the reason watching them is going to be fun over the next decade or two.

03:14:26 Speaker_00
Yep. All right, carve outs.

03:14:30 Speaker_04
All right. I've got two. One is a show on Netflix called Detroiters. I think a previous carve-out of mine was the show I Think You Should Leave with Tim Robinson.

03:14:42 Speaker_04
This is his first show with his buddy who's sort of the... I think he's like a co-producer. He appears in I Think You Should Leave also.

03:14:50 Speaker_04
It's a little bit more story-driven and less skit-driven than I Think You Should Leave, but it's like totally the same Tim Robinson sense of humor. It has me like dying laughing, so I highly recommend Detroiters. The second one, I have a device.

03:15:04 Speaker_04
I just recently bought the new super thin 11 inch iPad Pro. Oh, how is it? It is awesome.

03:15:12 Speaker_00
I've been, it's so sexy.

03:15:14 Speaker_04
There's something like really amazing about the promotion scrolling on a big screen where when I'm just sitting there and it feels impossibly thin.

03:15:22 Speaker_04
I mean, I know that's a marketing slogan, but like you feel it in your hands and you're like, how, how is there an all day battery life in this? And the screen is much more enjoyable to sit and read things on it on there than looking at my computer.

03:15:34 Speaker_04
In fact, in particular, for each of these episodes now, I read the Worldly Partners research on the company we're covering from a friend of the show, Arvind, and I was able to

03:15:44 Speaker_04
read the whole thing, take it in, in a much more enjoyable way when reading it on the iPad versus sitting at my computer scrolling. It feels really good.

03:15:53 Speaker_04
And by the way, we'll link to that research in the show notes for anyone who wants to go read 50 to 100 pages analyzing, in a very structured way, the business of IKEA.

03:16:03 Speaker_00
Listen to four hours and then read another 50 to 100 pages.

03:16:07 Speaker_04
But yeah, I love it. This iPad is like so great.

03:16:10 Speaker_00
I'm so tempted because, you know, I mean, we both have the iPad minis that we got for when we do things live with guests. Yeah, this is too big to use on stage. Oh, oh, no. I was going to say the iPad mini suck.

03:16:21 Speaker_00
And the thing that's worst about them is the screen.

03:16:23 Speaker_04
It's awful. Apple doesn't love it at all.

03:16:26 Speaker_00
Yeah. Yeah. Like they really suck. It's a terrible product. We need it for that specific use case.

03:16:32 Speaker_04
And it was fine when it came out, but it just feels like the leftover parts bin now. I almost bought the new one and I'm like, it's the same screen. It's like last year's dead end processor from the iPhones. It's just a weird Franken device.

03:16:46 Speaker_04
The size is very compelling. I wish it had the iPad Pro screen. I wish it was thin. It doesn't have to be thin, but like try. I wish it had a new processor. I don't know. I just, it's a bummer. They don't care and it's clear.

03:17:00 Speaker_00
Yeah. They don't care. I don't even know why they make it, but I mean, I'm glad they do. Cause we can use it for our use case, but like, right.

03:17:06 Speaker_01
Yeah.

03:17:07 Speaker_00
Anyway. All right. I also have two carve outs. My first one. is a re-carve-out, admittedly, but I've been enjoying so much this season, the QB's cool.

03:17:18 Speaker_04
I thought that was where you were going.

03:17:20 Speaker_00
Man, it is so awesome to have the QB School specifically, but stuff like this on YouTube where, you know, for folks who don't know, this is a YouTube channel called the QB School. J.T.

03:17:33 Speaker_00
O'Sullivan, who was a journeyman NFL quarterback for a decade, he breaks down film of quarterback performances every week. Like, breaks down the actual film from the whole, you know, as they would do it in a NFL quarterback's room.

03:17:48 Speaker_00
But like the all 22 quote-unquote camera angle where you see all 22 players on the field as opposed to what you see when you're watching highlights or watching a game.

03:17:56 Speaker_00
When I first started watching and I had it as my carve-out the first time, I was like, oh, it's just cool to see this. Like, I don't understand 90% of what he's talking about.

03:18:04 Speaker_00
I now understand a lot more and it's so awesome that consumers, like I'm never going to play football again and certainly never going to play in the NFL, but being able to appreciate and understand what quarterbacks are doing and what teams are doing and players are doing at this professional level just increases my enjoyment so much more.

03:18:25 Speaker_00
And especially this season when there's so many quarterback narratives going on, I don't even listen to the talking heads anymore talk about

03:18:32 Speaker_00
X, Y, you know, Anthony Richardson or Bryce Young or whatever, because, like, even if those talking heads were NFL players and they know what's happening, they need to dumb it down for the mass audience. I'd rather just watch the film with JT.

03:18:46 Speaker_04
Oh, dude, I feel like that with Tom Brady. He just, like, sits there in silence, because whatever is going on in his head is not at the right level for what needs to be said.

03:18:54 Speaker_00
And it's like, I want to know what's going on in your head. Yep. Anyway, really enjoying it. It's been great this season.

03:19:01 Speaker_00
And then my second carve out, another sports media related one, was did you watch Ice Cube's performance during the World Series at the Dodgers game? I did not. Oh man, it was so good.

03:19:13 Speaker_00
I mean, I'm a Giants fan, so it sort of pains me to say this, but so Ice Cube, I think it was game two of the World Series at Dodger Stadium, performed at the start of the game, and he just walks out from the center field fence,

03:19:27 Speaker_00
and then performs two songs, raps two songs while walking to home plate. It's just him and a cameraman. And like, I mean, you and I now have like performed in an arena and we know what that is like. And one person, Ice Cube,

03:19:43 Speaker_00
with no backing vocals, live, on a mic, walking the length of a baseball field up to home plate and just holding the stadium in the palm of his hands. It's like one of the most incredible performances I've ever seen.

03:19:56 Speaker_04
Oh, I gotta watch it.

03:19:57 Speaker_00
In broad daylight. Yeah, it's awesome.

03:19:59 Speaker_04
Ice Cube.

03:20:00 Speaker_00
Ice Cube.

03:20:02 Speaker_04
Well, listeners, thank you so much for going on this journey with us. A huge thank you to our partners, JP Morgan Payments, Statsig, and Crusoe.

03:20:11 Speaker_04
Please check out the link in the show notes to learn more about any of those companies and their fantastic products that we talked about earlier in the episode.

03:20:18 Speaker_04
We want to give three special thank yous to Jim Senegal, the co-founder and former CEO of Costco, for his chat about IKEA.

03:20:29 Speaker_04
as we were doing the research, to Bjorn Bailey, the former president of IKEA U.S., and to Lars Johan Jarnheimer, who is the chairman of the board of Inca Group. Is that right, David? Or I guess it's the IKEA Group within Inca.

03:20:45 Speaker_00
Yes, I think that's right. It's of IKEA Group, which I think is the sort of operating entity within Inca Holdings.

03:20:51 Speaker_04
Yep.

03:20:52 Speaker_00
The Inca side of the company.

03:20:53 Speaker_04
And you read all of Leading by Design, right? That's sort of the most canonical sort of autobiographical book.

03:20:59 Speaker_00
Ah, yes. This is the confusing one. The updated version of the book is called the IKEA story. The first edition of the book is titled leading by design, but it's the same book.

03:21:10 Speaker_04
Yeah. And it probably has the best detailed account of the blow by blow that we went through. Anyway, if you liked this episode, go check out our episodes on Costco on Walmart or on Amazon.

03:21:21 Speaker_00
Or Hermes.

03:21:22 Speaker_04
Or Hermes. It's true. That wasn't on my piece of paper here because, uh, I did not expect it to come up that way. After this episode, come discuss it on Slack. Check out ACQ2 with Luis von Ahn from Duolingo. It'd be super fun.

03:21:35 Speaker_04
Find ACQ2 in any podcast player. And seriously, I'm sending it to anyone I know running a consumer startup. I mean, there's just so many practical lessons. If you haven't taken the survey yet, please do. We'd really appreciate it.

03:21:47 Speaker_04
It takes three to five minutes. Acquire.fm slash survey, and you might win Meta Ray bands or an ACQ dad hat, or David might mail you a poeing, perhaps with some assembly. So thank you, David, for volunteering that on air.

03:22:01 Speaker_00
I'll truck it across country. Awesome.

03:22:04 Speaker_04
Well, with that, listeners, we'll see you next time.

03:22:07 Speaker_00
We'll see you next time.

03:22:11 Speaker_02
Is it you, is it you, is it you who got the truth now?