Ikea is slashing the price of its Lagkaptens despite shipping problems in the Red Sea
As many retailers face inflation and raise prices, Ikea says it’s doing the opposite even as shipping difficulties ramp up in the Red Sea. The store, known for assemble-it-yourself desks and chairs, is dropping the prices on some popular products in what experts say is an attempt to lure in cost-sensitive shoppers.
The company’s Canadian website already features hundreds of items it claims have lower prices, ranging from cookware to lighting to the well-known “Billy” bookcase.
For example, a Billy with glass doors is listed as previously being $249.00 and is now selling for $199.00 on ikea.ca.
Doug Stephens, founder of the Retail Prophet consulting firm in Toronto, pointed out that because Ikea has more ownership of what goes into its products than other companies — it’s involved in everything from manufacturing to shipping to the retail stores.
This gives Ikea a greater ability to unilaterally control costs, according to the retail analyst, with “control over virtually every aspect of the supply and value chain,” according to Stephens, who pointed out he believes the company would want to leverage that.
Stephens suggested competitors might have difficulty catching up.
“There aren’t many companies that would have the kind of leverage and leeway within their operations that Ikea has. And this is a big sword to wield … certainly a very difficult thing for virtually any competitor to match,” Stephens said.
Furniture prices in Canada actually deflated in 2023
Ikea’s move comes as furniture prices in Canada have dropped, according to Statistics Canada.
While the consumer price index showed that overall inflation was 3.4 per cent from December 2022 to December 2023, the rate of inflation for furniture over the same amount of time was -2.7 per cent.
Canadians have been paying more for everything as prices surged during the pandemic. But as inflation eases, prices will remain high and some economists say that’s a good thing.
This means that furniture prices actually didn’t show the effects of inflation, but the opposite — deflation.
That being said, some of Ikea’s price decreases are more substantial than that rate of deflation. The dark blue Billy bookcase with glass doors, for example, is dropping in price by about 20 per cent.
But not all bookcases — BIlly or otherwise — are dropping in price, either.
Ikea admitted that “many factors” go into whether a price can be reduced in a statement emailed to CBC News. The company said it’s investing $80 million in lowering prices on more than 1,500 products.
“This investment is not a time-limited sale or offer,” wrote the company.
Ikea’s profit up over the past year
Ikea could be leaving money on the table by making this move, according to marketing professor Nicole Rourke.
“The finance person at Ikea, you’re probably a little nervous,” said Rourke, who teaches marketing and business administration at St. Clair College in Windsor, Ont.
“There is the downside that you’re not making as much per unit that you’re selling.”
However, Ikea may have room to manoeuvre in that respect. The company’s retail sales and profits went up substantially in its 2023 fiscal year, which ended Aug. 31. In Canada, sales increased by nearly 11 per cent to $2.9 billion.
Worldwide, it was a similar story. According to the company, while inflation increased its costs, global profits also rose to $2.39 billion by the end of the fiscal year — up from $1 billion the year before.
The company partly attributes this to a “reduction in global supply disruptions,” saying that as international supply chain problems eased, transportation and inventory costs improved for them.
More volume could balance out lower prices
“I think what they’ve done here is actually a brilliant marketing and public relations move,” said Stephens, the retail analyst.
Customers who come away from Ikea with a positive impression may shop there more. That could balance out the reduced profit from price cuts — or actually contribute to an increase in total sales.
“The offset in volume might actually provide some cushion against the reduction in profit margins,” said Stephens, who believes Ikea may see an increase in total sales.
Rourke, the marketing professor, shares that perspective. She pointed out that Ikea may gain valuable market insight from how consumers react to the discounts.
“If, all of sudden, they see they just sold 5,000 more lamps because they lowered the price by $20, they’re going to get some real concrete data that says, ‘These are the consumers that are price sensitive, and we’re going to target our ads to them,'” she said.
Red Sea issues won’t change plans: CEO
Attacks on ships travelling the Red Sea by Houthi militants in Yemen, who say they are acting in solidarity with Palestinians, have disrupted global commerce. Some shipping giants are rerouting vessels around the southern tip of Africa, a longer and more expensive journey.
Those higher transport costs have spurred fears of new inflationary pressures just as consumers were getting some relief from prices starting to come down. But Jesper Brodin, CEO of Ingka Group, the parent company that owns most Ikea stores, said he still sees “quite significant deflation” in the company’s supply chain.
While lowering product prices may hurt profits, Brodin also said IKEA tends to take market share when consumers are under financial pressure.
“This is not a year for us to optimize profits,” he said in Davos, Switzerland, in mid-January, ahead of the World Economic Forum’s annual meeting.
“This is a year to try to navigate on a thinner profit, but to make sure that we support people.”
