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Thursday, April 21, 2011

Style over substance

Gail and I made our first visit to an IKEA store three years ago. The location was Atlanta, where a steel mill near Georgia Tech has been razed and redeveloped as a stunning high-density project with mixed office, residential, and retail. Since that time, IKEA has opened a store in Charlotte.

Back in the 1980s I worked on a project with BellSouth to study the applicability of advanced telecom services to a big-box retail environment. A senior executive at Macy's told me that "retailing is theater". I've never forgotten that.

Obviously IKEA agrees. It's a remarkable shopping experience, down to the Swedish delicacies... better than Costco's gold standard of a $1.50 hot dog and soft drink. I can see why my female friends ooze with delight at the very mention of IKEA.

But the truth is, IKEA sells a lot of cheap furniture. Not everything they sell is cheap, but I suspect most of their volume comes from the low-end. Qualitatively it's better than the furniture sold at K-Mart or Target, but not by much. Of course, the shopping experience at IKEA is incomparable. IKEA management has achieved a startling triumph of style over substance.

That triumph is tricky to sustain, however. To exploit the cost differences between manufacturing in Sweden and manufacturing locally, IKEA opened a factory in Danville, Va. Like many cities in the former tobacco and textiles belt, Danville needs good jobs. Indications are, however, that the Danville factory has serious problems. Ikea's corporate culture of style over substance apparently doesn't extend to the U.S. manufacturing realm.

Has IKEA peaked? In the U.S., quite possibly. The demand for cheap furniture from 20-somethings and 30-somethings is only so high, and the IKEA business model doesn't support market saturation like Home Depot. On the other hand, the demand worldwide will probably keep IKEA expanding for decades.