- Consumers are feeling the pinch right now.
- In response, Ikea has invested $2.1 billion in cutting prices.
- While the retail landscape is tough, it's benefiting from luring customers away from pricier competitors.
The wild spending days of the pandemic are behind us, and after years of price hikes, consumers are increasingly looking for value.
For Ikea, the king of cheap furniture, this presents an opportunity to shine.
The chain has spent over 2 billion euros ($2.1 billion) on cutting prices on its most popular products to lure cash-strapped shoppers. And while the past year has been challenging, this strategy is paying off, according to Jasper Brodin, CEO of Ikea's parent company, Ingka Group.
Speaking to Business Insider at Ikea's new Oxford Street store in London — which is due to open next year and part of Ikea's push to serve customers who don't live near one of its traditional big-box locations — Brodin admitted that this "has not been the most prosperous year."
"People have the same needs, but they have much less money in their wallet," he added.
However, Ikea has benefited from investing in low prices because it has attracted more shoppers away from pricier rivals.
"We get many more customers that might have gone to more expensive competitors. So we saw more people," he said.
Still, it hasn't been easy. By being laser-focused on affordability, Ikea saw its annual sales drop for the first time since 2020 in the year ending August 31. Sales fall over 5% to 45.1 billion euros ($47.5 billion) in fiscal 2024.
The 2008 feeling
Brodin compared consumer sentiment right now to the days after the 2008 recession.
While inflation cooled, consumption habits have changed since the pandemic, and people are continuing to find ways to cut spending.
DIY projects also appear to have been hit by high interest rates, which make homeowners less likely to borrow money for home improvement projects.
Because of this, he said that Ikea customers are largely engaging in needs-based shopping, picking up the necessities first, like a new bed or kitchen table, instead of non-essential items.
Popular purchases tend to follow life cycles, like what you might need for college or your first child — and these events aren't typically affected by the economic picture, he said.
Same needs, less money
The pandemic sparked higher demand for items such as home furniture, but it also resulted in supply chain issues for Ikea.
"It was hard for us to fulfill all the needs," he said, adding that store closures during lockdowns helped the company to adapt more quickly to online shopping.
"During the last year or thereabouts — and I would say to a certain amount still — the sector of home furnishing in the world is down," he said, explaining that the fall has been driven by higher interest rates and inflation.
But even with interest rates starting to fall and inflation cooling, Brodin doesn't expect an immediate recovery.
"It tends to take a little bit of time for people to come back to open their wallets and to engage financially," he said.
The same can be said for China, where retailers from Starbucks to LVMH have been affected by its struggling economy.
"There is a large stimulus package coming from the government right now, which is helping, but people have been holding on to their money," Brodin said.