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Thursday, December 2, 2021

IKEA warns that with the impact of cost and supply pressures, prices will rise and profits will fall

The leading company in the IKEA flat-panel furniture retail empire warned that profits will fall for two consecutive years after the group said it would be forced to raise prices due to supply chain crisis and rising raw material costs.

Although online and in-store sales of its franchise system increased by 6% to a record 41.9 billion euros, the net profit of the brand owner Inter Ikea fell by 17% to 1.4 billion euros in the year to the end of August.

The world’s largest furniture retailer is expected to usher in another difficult period. “For FY22 [year to the end of August 2022], We are still focusing on supply disruptions, we are still focusing on the growth of raw materials, we are still focusing on the growth of energy,” Inter Ikea Chief Financial Officer Martin van Dam told the Financial Times. “FY22 will not be easier than FY21, it will More difficult. .. It cannibalized our profits in a huge way. ”

IKEA prides itself on lowering the prices of many products over time, and it has made great efforts to increase its affordability when entering countries such as India, which makes it particularly painful to increase prices for retailers in its franchise system.

Inter Ikea’s price increase will be the first time since 2019, and it may be higher than then, although the rate of increase has not yet been decided. However, van Dam emphasized that this move does not necessarily mean an increase in customers, because it depends on how much retailers such as the main IKEA franchisee Ingka Group and part of the IKEA empire have transferred and how much they have absorbed.

“We really want to keep prices as low as possible. We can’t let this period of time make us different,” Van Damme said, although he added that IKEA has “insufficient supply” in certain products, which limits its growth. And disappoint consumers.

He said that due to the serious shortage of supply chain problems, there is a serious shortage of products, so price increases are inevitable. “We want to absorb as much of these price increases as possible. But one day we can no longer stop it. This is something we don’t like,” he added.

Inter Ikea is a core participant in the franchise system of furniture retailers, responsible for designing and purchasing product lines, and charging retailers 3% of the turnover to use its brands and concepts.

Its gross profit margin-a closely watched indicator of retailer profitability-fell from 15.8% to 13% in the most recent fiscal year. Inter Ikea spent 250 million euros trying to alleviate supply chain disruption, from buying its own containers to transporting goods by train instead of ships.

In the year to the end of August, online sales increased by nearly 75%, offsetting the impact of its store revenue decline. But Van Dam said the switch to e-commerce is a “major shift” for IKEA, because online shoppers are focused on buying specific products and are less likely to make impulse purchases that are common in stores.

“If we lose it from our portfolio, it will become a low-margin product that we sell,” he said. “We hope that they will come to IKEA to buy Pax cabinets, and the profits will be substantial, but we hope that they will buy cushions, linens and candles, which are more profitable.”

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