Why Brexit hasn't dismantled IKEA's UK ambitions - yet

Despite expensive imports, the Swedish furniture giant retains lofty ambitions.

by Arun Kakar
Last Updated: 15 Nov 2017

Sales up 6% to £1.8bn. Six consecutive years of growth. Online revenues rising 10%. Market share up 50 basis points to 8.1%. You’d think IKEA UK would be happy with its 2017 financial year, but Brexit-shaped clouds are looming.

Like many firms that rely heavily on imports, Ikea finds itself reckoning with the drop in sterling. According to a statement from the company, the cost of bringing products to market has risen 13.7%, which it attributes mainly to the performance of the pound. ‘We absorbed most of these costs, increasing prices by just 3.6%,’ said IKEA UK and Ireland boss Gillian Drakeford.

IKEA hasn’t released its profits, which were £140m before tax in 2016, but squeezed margins can hardly have improved matters. Despite this, however, the firm continues to expand in the UK in pursuit of its goal of reaching 15% market share over the next decade. It created 1,000 jobs this year and is launching stores in Greenwich and Exeter, employing a further 850 people.

Why should IKEA be so unfazed? In part, it’s because inflationary pressures are easing.  ‘Producer Price Inflation, which measures the cost of raw materials used by manufacturers to make goods, has retreated to 4.6% from last month’s 8.1%,’ says Jake Trask, FX research director at OFX.  

Perhaps more importantly, it’s well-placed to handle the current troubles. Currencies can be hedged and large, profitable companies like IKEA can usually withstand the odd shock. Besides, the sterling hike will have affected most of its competitors too, which – given IKEA’s commitment to growing market share – might explain why it’s not passed on more of the cost onto consumers.

That’s not to say IKEA can just rest on its flat-pack laurels, however. ‘Should negotiations break down in December, then we could see another sell-off in sterling, which could lead to future price rises in the medium to long term,’ adds Trask.

Beyond currency shocks, the very uncertainty implicit in the Brexit negotiations has caused many a corporate headache. Investment is risky enough, after all, when you know the lay of the economic land. But perhaps we shouldn’t be surprised to see companies like IKEA taking such uncertainty in their stride.

 ‘It is not a problem limited to one industry, it’s a "whole industry" problem, everyone’s problem - and as such the push now is to gain efficiencies throughout businesses to shield customers from these rises, and also we’re seeing a push in even smaller businesses to diversify their footprint globally, taking advantage of the reduced export cost,’ says Vikas Shah, founder of Thought Economics and professor of entrepreneurship at MIT Lisbon.

‘People often talk of unpredictability as if it’s a new phenomenon, but we have to realise that a lack of predictability is very much the new normal for most of our industries.’

In this ‘new normal’, IKEA has shown that it is still able to plan. Whilst certainty is something all businesses would prefer to have, ultimately sound businesses should be able to find a way of making it work. 

Image credit: Kirakiraouji/Wikipedia

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