The big challenge ahead for Ikea

Ikea boss Jesper Brodin wants to make the business more sustainable. Photo / Getty Images

Jesper Brodin will be shopping for a new car in the near future – thanks to his three teenage children. The head of Ikea is being made to start at home after pledging to take the world's biggest furnishings chain fossil fuel-free.

"I drive a bad car, a petrol Mini," he says a bit sheepishly. "But we will probably change that quite soon. I probably underestimated its importance. To be honest, I saw my role in my job as the important change. But my kids have reminded me that we are role models, so we are putting solar panels on the roof of our house in Sweden and I will not buy a combustion engine again."

The chief executive of Ingka Holding – which controls 374 of Ikea's 423 stores – may not have long to wait, with BMW putting an electric version of the Mini on sale this quarter. However, his more pressing corporate concern is a much larger undertaking than calculating carbon neutrality, offsetting credits or planting a few hundred trees.

Founded in 1943, Ikea is now a global company with annual revenues of $37bn (£28bn) and 166,000 employees, that has transformed home design. With that comes a formidable logistical challenge. Ikea had a carbon footprint of 26.9 million tons in 2018, which keeps rising as the group expands.

To combat this, Ingka has committed to eliminating fossil fuels from its global operations by 2030, investing €2.5bn (£2.1bn) over the past decade in solar and wind energy. It has 534 wind turbines in 14 countries, and nearly a million solar panel units on stores, distribution centres and offices.

In Portugal, it has invested in generating three times as much energy as it consumes, but in some other markets it is a long way behind.

Next is Ikea's home delivery network, which plans to go 100pc electric within five years. The group has already achieved this in Shanghai and plans to add Paris, Amsterdam, New York and Los Angeles next year. London is also on the list.

Evolve or perish

When we meet, the youthful-looking 51-year-old Swede is at an Oslo skateboard park for the Xynteo Exchange, an annual gathering attended by chief executives who want to change the world. In his trademark jumper, Brodin looks like he is picking his kids up from school rather than being about to address a business audience, but he is unequivocal.

"Our customers will deselect us unless we are good in this regard," he declares. "The only way we can exist as a business model tomorrow is to be sustainable, so it's not about how we pay the premium to do it. It's the only way we can be the low-cost company of tomorrow."

He has spent most of his working life at Ikea, joining in 1995 as purchasing manager in Pakistan.

Chief executive since 2017, he believes Ikea – and the world – is at a crossroads. "We are a network from the forest to the customers that was partly built on a 1900s consumption model where we all thought that resources were endless," he says. "Now, we're moving from seven billion people to maybe 10 billion. People are moving to cities and want to be able to afford a better home, so these homes will be furnished.

"The question is how you serve that in a sustainable way. If you do it with a business model where you're dependent on virgin raw material and there are going to be more people sharing the same resources, you're probably going to get more expensive.

Brodin is committed to reducing Ikea's carbon footprint. Photo / Getty Images

"In a company like Ikea where 65pc of the cost is basically raw material, we are very afraid that we would then lose customers and not fulfil our vision to serve the many people with thin wallets. So it makes all the sense in the world to be resource-smart and in that equation we need to be energy-smart and invent new and better ways to use resources and find ways to prolong their lives. It's about re-inventing our business model."

Can Ikea do it? "I hope so," Brodin replies. "We're working on it." It's a process that involves many thousands of small decisions and a few large one.

One was what he calls a "brave" move a few years back to phase out selling incandescent lighting – a decision taken without the company actually knowing what it would do to its lighting business. Ikea ended up achieving the goal while bringing down the costs by a factor of seven.

"At the point of decision, we had no clue, no plan," he says. "We just believed that technology was going to develop and that scale would change the equation so we went for it and it worked better than we thought. The annual saving as a result is the energy consumption of Amsterdam."

Underscored by pragmatism

At the other extreme of the equation, the decision to move faster into renewable plastics looked to be expensive in 2008 when oil prices more than halved. The calculations changed over a few months, so Ikea slowed down the transition.

"Had we been as forceful as we originally decided, maybe we would have been successful in sustainability but we wouldn't have been business-wise," says Brodin. "So we divided it into chunks and took it step by step. I also think that was a good decision.

"Nobody gains if you do the right thing and put yourself out of business. If we had not been at the forefront of sustainability, I think we would have had issues with both growth and profits."

Ikea is taking this further by phasing out all single-use plastics next year. Brodin recognises that, while millennials are demanding sustainable products, they are mostly not willing to pay a premium for them.

However, Ikea's structure as a series of private firms owned by trusts offers some protection, certainly from impatient shareholders. Last year operating profits fell 10pc to €2bn despite a 5.3pc rise in revenues. Pre-tax profits jumped almost a fifth to €2.5bn on higher investment returns.

UK sales increased by 8pc to £2.1bn, mostly due to a surge in online business. Ikea has 21 UK stores.

"We're owned by a foundation which can only do two things with the money – save it for us in case we have a bad year or put it into the Ikea Foundation," Brodin says. "If you're in a quarterly reporting structure with shareholders, these things are not naturally easy."

The structure also helps Ikea grow. The group, which historically has an aversion to debt, has no loans, owning its stores, distribution centres and other properties. "We have only one policy which is that we have to earn the money before we spend it," says Brodin. "So the pace of our expansion is set by how much we grow and how much profit we can generate."

New frontiers

Brodin views India, where the first Ikea opened in Hyderabad in August, as the group's most significant growth opportunity. Three more stores are being built in India and Ikea aims to be in all major Indian cities by 2025.

There are 28 stores in China while Africa is another new frontier, with branches in Morocco and Egypt but none further south. Ikea also announced a deal last year for its brand to be operated in South America by a Chilean-based company.

Ikea has become a cultural phenomenon around the world. Photo / Getty Images

Could the spread of its retail sheds go too far, leaving Ikea open to criticism for the scale of its footprint?

Brodin doesn't think so. "You always have to be humble to what will happen ... but that's not the angle that we take. We like to think that we are not driven by a main idea to be a transactional platform for sales. We have been trying to create a space that's about making homes better and the target group is people with big needs, and great dreams but thin wallets. That's been the key to our success."

Brodin won't say if he is on the waiting list for the electric Mini. He is clear, however, that role models can change only so much: "Symbolic acts can be an inspiration, but if a company like ours just does symbolic acts and fundamentally does not change the business model then it is not helping anybody.

- Telegraph