Online furniture fight: IKEA drops prices by up to 50%, but report warns profits to become rarer
Tuesday, October 16, 2012/
Iconic furniture retailer IKEA is cutting prices across the board by up to 50% and expanding its store footprint in a move that highlights ongoing competition in the furniture sector as online players continue to dominate the space and put more pressure on supply chain costs.
The announcement also comes as a new report from IBISWorld into the online furniture scene claims online-only seller Milan Direct and Harvey Norman dominate the space – but that online players will continue to drive down costs and the possibility of turning a profit.
IKEA local managing director David Hood also made some complaints that are no stranger to retailers – the high cost of doing business in Australia.
”I was looking at all our countries, and our cost of doing business is right up there with the Japans of this world. It’s not cheap,” Hood told Fairfax this morning.
The company will nevertheless expand its store count to 11, after having purchased two more locations in Melbourne and Sydney.Â
However, the founder of online furniture retailer, Dean Ramler, says those now entering the online space will have trouble making up lost ground.
“We’re seeing industry prices dropping,” Milan Direct founder Dean Ramler told SmartCompany this morning. “And we’re happy about that.”
“We’ve already offered bottom prices from day one…and IKEA is going to struggle to compete.”
Price Prophets chief executive Jon Manning told SmartCompany this morning that to cut prices by as much as 50%, even with prices already so low, IKEA must be obtaining significant cost savings in the supply chain.
“They must be flexing procurement muscles in order to substantiate a 50% price decrease…they would be getting enormous cost savings somewhere.”
Ikea managing director Hood said the company will be cutting prices by as much as 50% on some 900 products, following on from last year when it made similar cuts.
Hood also said the company made a mistake when it first entered Australia by opening small-format stores instead of its iconic warehouse-sized locations. It intends to remedy that over time.
He said the costs associated with employing staff were as big an issue as hourly rates.
”It’s more costly to employ people in Australia,” Hood said. ”I look at hourly rates and all the other bits and pieces, it’s not just the pay you get per hour to work.”
The price decrease won’t do much to help the high labour costs. As the new IBISWorld report into the online furniture sales market shows, the industry is under significant pressure.
The health of the furniture market is largely tied to property sales. As property remains weak, household furniture sellers like IKEA are put under pressure.
But online players continue to do well. IBISWorld expects revenue to grow by more than 12% over the next year, especially as consumers get used to buying furniture online. The biggest players, Milan Direct and Harvey Norman, maintain the largest share.
And Ramler argues they’re likely to stay in that place for some time.
“I think Harvey Norman is going to struggle. They’re never responsive, still keep high margins. They’re forced into the situation they’re in now.”
Milan Direct is turning over $12 million every year, while Gerry Harvey himself has said about $18 million of his company’s money comes from the internet – across all categories.
But it’s not all good times in the online furniture sector. The same IBISWorld report claims profit will become even harder to obtain as prices fall.
“There is a prudent consumer operating right now,” says Manning. “And IKEA is going to have to squeeze as much as they can in their supply chain and pass that along to consumers.”
“It’s a fallacy that they can just execute a 50% price decrease and make it up with volume.”
Dean Ramler is similarly wary.
“I think IKEA is a great business,” he warns. “But it’s going to struggle to compete.”