Investments, raw material prices weigh on main Ikea retailer's profit

Full-year operating profit at Ingka Group, which owns most IKEA stores, fell 10% as savings and increased sales failed to make up for higher purchasing costs and large investments as it adapts to digitalization and fast-changing shopper habits.

The world’s biggest furniture retailer on Tuesday reported an operating profit of 2.03 billion euros ($2.24 billion) for its fiscal year through August.

The budget brand, known traditionally for its large out-of town self-service stores, is in the midst of tweaking its strategy, investing in digital and other services and smaller, more accessible store formats.

Ingka, which owns 374 traditional Ikea stores, online retailing and a growing number of new smaller store formats, said capital expenditure totaled 2.6 billion euros in the year, nearly as much as last year.

“We’re investing more than ever in our business with new city stores, a stronger digital meeting and more affordable service offers to our customers,” Ingka said in a statement.

In an interview at an Ikea kitchen showroom in the center of Stockholm, Ingka Chief Financial Officer Juvencio Maeztu said results were in line with the company’s expectations.

“We are transforming and performing, and this is not easy to do at the same time,” he said. “It gives a confidence boost. With all things going on in the retail industry, we feel good.”

Maeztu said investments would be higher in the current fiscal year than in 2018/19, spent primarily on more inner-city planning studios and stores, followed by digital technology.

“Besides that, we will keep acquiring companies at the edge of Ikea that can help us make Ikea better,” he said.

Ingka has over the past couple of years made its first-ever investments in external companies, such as British startup Winnow whose artificial intelligence technology helps its restaurants reduce food waste.

Brand owner Inter Ikea, which is in charge of supply, raised the prices it charges store owners during the year due to high costs for raw materials such as wood, but will this year lower them as the raw material costs have come down.

Maeztu told Reuters Ingka had not passed on Inter’s price hikes to shoppers, and it would this year lower its prices.

Ingka last year announced plans to cut 7,500 jobs, and in September reported a 5.0% rise in full-year local-currency retail sales to 36.7 billion euros.

It expects sales growth to accelerate going forward.

Despite a jump in online sales, the number of visits to traditional stores held up and like-for-like sales grew.

“It’s the totality that works,” Maeztu said. “You need to touch and feel. We are offering online, but the store will play a massive role in future. It’s not online or offline, its both.”