IKEA

I also got a flat packed chocolate mousse. I put it together this morning. It's very easy. It's three pieces. Oh, mousse like an animal, not chocolate mousse like the pudding. Yeah, that's correct. It looked really good at first, but like the sun rays came in my window and within like 10 minutes it was melted and broke on the kitchen table. Oh boy, is there an analogy about IKEA furniture in there? I hope not. It was funny though. No, I don't think so. I'm ready if you are. I'm ready. Let's do it.

Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth? Welcome to the Fall 2024 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. When you're running an in-person retail establishment,

you know one thing for sure. If people are going to buy your products, they have to be in your store. And more time in your store generally means they buy more product. So what is a great way to increase time in store? Meatballs, David. Meatballs. Meatballs. And hot dogs. And hot dogs. We'll get there. So listeners, today we dive into IKEA, the company that sells over a billion Swedish meatballs a year.

And a lot of furniture and homewares to go with it. IKEA is an 81 year old company. People visit their stores nearly 900 million times a year. And it's quirky as hell. If you've ever shopped there at your familiar with the crazy maze of showrooms, David, I spent five hours inside the Seattle store last weekend. I went there to prepare for this episode. I didn't realize that I was going to spend the whole day there. But that's what happens when you go to IKEA. God bless you. Did you make you some small land?

I went with a friend who had a kid old enough to take advantage of small land. So yes, perhaps you know the relationship test of can you make it through IKEA together? And that's just at the store. Then you get home and you have to assemble all that flat packed furniture you just bought. But the furniture, it does look good. Even though it's extremely inexpensive. And you do have to build it yourself using the funny diagrams with the funny little man and the funny labels. It ends up looking pretty good.

Hell yeah, it does. And the results of this crazy stew of ingredients is that IKEA has become the world's largest furniture retailer and one of the largest retailers period today will examine why it has worked so well. How its founder became the eighth wealthiest person in the world before shifting his ownership into a foundation. And how all the little innovations have just added up and refined the concept along the way. So whether it's the Poing chair, the lack shelf, the Billy bookcase.

It is very likely that you have something from IKEA in your house right now. This is the story of a mission to create simple well designed low cost furniture accessible to as many people as possible. Take into its absolute logical extreme. Totally.

Well, listeners, after this episode come discuss it with us on Slack and check out ACQ to our second show where we just had Louise fawn on as a guest, the CEO of Duolingo. His company story is pretty unlikely given most investors assumed you could not build a large business in either the education or language learning market specifically.

And Louise has some of the most practical advice I've ever heard for anyone building a consumer startup and have sent it already to a bunch of friends who are building consumer companies. So go check it out. ACQ to available in any podcast player.

And if you haven't taken the acquired 2024 survey yet, please do. It is open for another week and we would greatly appreciate your feedback. Click the link in the show notes or go to acquired.fm slash survey for your chance to win some sweet meta rebands or an ACQ dad hat. We might need to add a Poank chair or something to that. Actually, that be extremely economical for us to offer. Yes, it would be cheaper than the rapids.

Maybe we'll even throw in some at home assembly for you and really gross it up. Well, as we will discuss later in the episode, including delivery and everything that comes with e-commerce, I don't know if it'll be cheaper or it will certainly be impacting IKEA's margins.

Well, before we dive in, we want to briefly thank our presenting partner, JP Morgan payments. Yes, just like how we say every company has a story, every company story is powered by payments and JP Morgan payments is a part of so many of their journeys from seed to IPO and beyond. So with that, this show is not investment advice. David and I may have investments in the companies we discuss and this show is for informational and entertainment purposes only.

Unfortunately, there is literally no possible way for us to have investments or for any human being to have investments in the companies that we discuss here. But we start in the small town of Elmhoote, Sweden, which is in the province of Småland, which despite its name is not so small, but rather a large rural area in the south of Sweden, not too far from Denmark.

And Småland, again, despite its sort of cutesy, friendly IKEA-like sounding name, it's pretty tough place. It's rural, it's agrarian, the soil is pretty barren, it's really rocky. There's a lot of forests and timber and timber wood for shadowing maybe one day when we'll come out of this province in Sweden. It's also cold. Yeah, I mean, it's Sweden. It's really cold.

It's a tough place to grow up. Totally. The farmers in Småland, though, they really have to work hard to scrape out their existence. And there is actually a word in Småland called Lista, which means making do with an absolute minimum of resources appropriate to the province and appropriate to IKEA, as we shall see. So it is there on a farm in Småland in March of 1926 when our protagonist, Fedor Ingvar Comprad, or just Ingvar, as he is known, is born.

And he's born. Where else for the region on a family farm named Elmtarud in an area about 20 kilometers outside of Elmhul to called Agunarud, which apologies to all of our Swedish friends, which I listen to a lot of pronunciations to try to get this right. Now, to give you even more of a sense of this land that we're talking about, Elmhul to the bustling local metropolis, I don't know what the population was in 1926,

but in 2010, the population of Elmhul, the big city, was 9,000 people. And that is including IKEA's major presence there in that town today, including the first sore, the IKEA Museum, the IKEA hotel, etc., etc. I'm imagining maybe 1,000 people live there at this time. Maybe. And Agunarud, the area where the farm is, in 2010, do you know what its total population is? Low hundreds? 220 people. All right, so he's in the sticks. This is the sticks. So, how did the Comrade family come to Smolland?

Well, if you're perceptive and know you're sort of northern and central European family names, you might say Comrade is not a Swedish name, it's German. And actually, do you know what IKEA's largest market is still to this day? It is not Sweden, it's not the US, it's not China. It's Germany? It's Germany. So, Ingvar's grandmother and grandfather had immigrated there to Smolland from Germany only 30 years before Ingvar was born, so in 1896.

And unfortunately, it's not a happy story. So, they bought the farm, Elmhul, site unseen when they were in Germany from an advertisement in a local hunting magazine. And people would sort of joke later that this was IKEA's first mail order purchase, was the farm and moving to Sweden. Hey, oh. So, wait, why would you buy a site unseen farm in Sweden? Especially a not very attractive place to farm in Sweden. This is like pre-World War I Germany too. Yes, so more to the story here.

The stated purpose and idea was that they were going to convert the farm from like an agricultural farm into a timber farm, into a timber forest. Ingvar's grandfather, HM had been connected to the timber trade in Germany, so idea makes sense on paper. Unfortunately, though, it doesn't work out. And the next year after they immigrate in 1897, Ingvar's grandfather, HM, commits suicide.

So, that leaves his grandmother, Francisco, alone to raise three kids, one of which was just born and managed this farm. She's done something about how to farm. It's a really difficult farm to operate in a rural, isolated part of a country that she's not from doesn't speak the language. Totally rough. Really, really rough. And I don't know if this came up in the stuff you were reading. Something I read alluded to the idea that Ingvar's grandfather committed suicide basically out of poverty.

Like his life was so miserable from being totally impoverished that he was clinically depressed and, yeah. Well, yes. So there's a little more to the story. Turns out the actual reason for the family's immigration from Germany was more about Francisco and HM's marriage and Francisco's family. So, HM had been from a noble family in Germany, or at least a family with historically ties to the nobility.

Francisco was a commoner and I think a legitimate child born out of wedlock. So HM's parents and particularly his mother was not happy about this didn't approve of the marriage. And so, part of, or really probably the whole reason for their immigration from Germany to Sweden was to escape this. This is tough. So to plan a seat here, there is a strong cultural thing in this family of don't be poor. Figure out a way to earn a key make wealth deeply ingrained from this.

Yes. Really, really bad situation. Nonetheless, the family perseveres and by the time these children grow up, Francisco has turned Elmterrude into like a real functional farm. They're getting by. It's not going to make them rich, which again, like nobody in small end is rich. Like, they're making it work and they've built themselves into a respected family in the area.

Now, the eldest of these children, the eldest son, Franz Ferdor, grows up and marries the daughter of the biggest merchant in Elmhult. So bringing, you know, now some merchant blood into the family. When he's 25, Francisco asked him and I don't think she asked to come help manage the farm. So Franz Ferdor and his new wife, Bertha, they have two young sons, the elder of whom is Ferdor Ingvar Comrade, our protagonist here.

They arrive at the farm and this is where Ingvar Comrade, the founder, purveyor, janitor, soul embodiment of IKEA grows up. I mean, really, we say this on a lot of episodes, but I feel Ingvar is IKEA, as we shall see. Yeah. He is like Jensen and Mark Zuckerberg all in one singular founder. The company wouldn't exist but for his exact personality, magnified and multiplied into this huge behemoth.

You already see the frugality that we're about to get to the like cleverness of being a merchant. The adversity, the chip on his shoulder, I mean, all of it. Yes. Yep. So when Ingvar is super young, like five years old, this merchant side of his DNA starts to come through and blossom his aunt, the youngest child, the third child of Francesca, helps young Ingvar by bulk sets of matchboxes, mail order from Stockholm, the capital of Sweden.

Ingvar, little Ingvar, five year old, that goes around the countryside selling individual matchboxes to other farms and other families in the area at like a three X markup from what he got them unit price in the bulk package from Stockholm. So he writes later, my aunt didn't accept payment for the postage.

So then I sold the boxes at two to three or each order is like a penny to a coroner at the time in Sweden. So like two to three cents each sometimes even five the whole mail order package of 100 cost 88 cents. Talk about profit margins. I still remember the lovely feeling from that time selling things became somewhat of an obsession for me.

Yeah, the seeds are so in of one of the greatest retailers of all time right here at age five totally. I mean, Sam Walton, Jim Senegal, Salt Price Jeff Bezos, angry Comrade. Absolutely. Yep.

So young Ingvar, he gets a taste of this. He's hooked. He goes on all throughout his childhood. He's ordering bulk items mail order from elsewhere in the country selling all kinds of stuff out to the residents out in the small and country sites like Christmas cards, wall decorations, gardens seeds, you just like random small goods.

Ultimately, he finds a niche and a good business importing and selling fountain pens from other countries in Europe. He's like 10, 12 years old at this point. He's selling these fountain pens so fast that he decides like, oh, hey, I wish I had some financing to be able to buy some more of these pens. I know I could make money.

Market fit. I should raise money. I should raise money. So he goes to the village in Delbhool and he takes out a 500 Corona loan from the bank there, Swedish Corona. This is like $63 about at the time. This is in 1938. And in 1938 dollars, $63 is hundreds of dollars today. Yeah, especially for a 12 year old. So imagine your kid walking down the street and going and somehow going back with $500.

That's also part of this story here. He's fatigles like I don't think his grandmother's parents were helping him with this. Right. So he uses that to import 500 fountain pens from Paris. And then I think you know, they sell quickly like repays back the loan pretty quickly. And that listeners is the only capital that ever goes into IKEA. That is the only money that Ingvar would ever raise.

We will flash all the way forward to modern day. Ingvar always owned 100% of IKEA. He built it into the world's largest furniture store and one of the world's largest retailers period without anybody else owning a single share of the company. No outside financing, no debt financing, nothing, nothing. They own, I think all of their real estate today. They own all this. I'm sure they probably use construction financing today, but you know, they have 25 billion euros in the bank.

Like, this is it. This is the background. This is what he comes from 500 Corona loan in 1938 paid back immediately only capital that ever goes into the business. Freakin wild, totally crazy, totally wild. I don't recall exactly like the Walmart story, but I mean, even that I think Sam was like from family and banks and other folks taking money. Yeah, his wife's family, I believe, invested. That's right. His wife family.

The whole thing gets financed off of cash flow from pens. Yes, he literally trades match boxes to Christmas cards to pens to furniture to IKEA nuts. The story of the guy who starts with a paper clip and ends up with not just a house, but like a city. It's not though. It's not really trading. He generates positive cash flow off of the sale of each of those items, then reinvests that positive cash flow in buying the inventory for the next thing.

It's just this like, thank God he's had 81 years to do it. Otherwise, you could never grow to something this large financing your future growth only on the cash flows you've generated so far. It's a good point, although he is a trader for a very long time. I think that is how he would think of himself. It's not like he's getting the better of other folks like he's creating value. He's creating value for suppliers. He's creating value for buyers. He's performing capitalism here.

That's just the definition of capitalism. You sell something. You have excess cash flows in the form of profit margin. You reinvest that in growing your business and he just did that over and over and over again. Okay. In 1943, when Ingvar is 17, he's about to go off to the equivalent of college at the School of Commerce in Gotenburg, which is a much bigger city in Sweden.

It's actually a city in Sweden. Before he goes, he wants to officially start a company, like a firm to formalize all of his trading activities that he's been doing because he intends to expand it while he's in Gotenburg at school. His import export business shall we say. There is one other thing happening during this period of time in Ingvar's life. We will come back to that later.

So before he leaves, he registers an official trading firm with the county of Smolland and names it very creatively. The natural thing that comes to mind, very descriptive term. He names it his name and his mailing address. Ingvar, Comprad, Elmterrude, Agunjard. I, K, E, A, Ikea. I never put together, it was like his mailing address. I always knew it was the two initials of his name and the farm and the city. Well, I think that was his mailing address. That makes sense.

This is the countryside here. It's not like there's any more to the address than Elmterrude, Agunjard. He doesn't have a house number. So cool. So that's Ikea. That's Ingvar Comprad's trading firm. This is it. And he does put the first Ikea logo sign on like a little shed on the property. It's simultaneously labeling the property by address then in addition to saying this is where Ikea does business.

Yes, which is all part of the lore. I'm not sure how much actually happens in the shed besides he puts the sign up there. I think he just stores inventory there. Well, let's talk about inventory. So Ingvar goes off to the School of Commerce. And for the first time there, he's able to do what I think he intended, which was get access in the school library to real actual trade publications import export trade papers and trade publications.

So he starts writing to the suppliers all over Europe who are listed in these trade publications and asks if he can become a selling agent of theirs in Sweden. Now I say agent. At this point, he's running an actually incredibly capital light business. Most things I think he is not taking inventory. Some of it he is he's storing some pens and stuff small goods under his bed while he's a college.

But a lot of it what he's doing is he's finding an aggregating demand in Sweden and sending purchase orders directly to the manufacturers wherever they are in Sweden or elsewhere. And they just fulfill the orders directly to the customers by mail. It's pretty awesome. So like the first drop shipper. Yeah, he's not doing the shipping. He's just an aggregator for a demand. He's an agent.

And he never takes possession of the inventory. It's a fulfilled in real time as he gets the order that supplier puts it in the mail. It's great. Yeah, I think I'm not always you know, sometimes he gets a box of 500 pens or whatever like he's doing whatever is going to make him the most money and be the right arrangement. But being an agent is the best way to do this.

So he starts off you know naturally he continues the pen business he goes from fountain pens to ball points. That's a big hit. Then he gets into wallets cigarette lighters file folders you know all sorts of small goods. And at first he's mostly just kind of doing what a lot of other people are doing at this point in time who are trader agent types.

He's traveling salesman he's going back and forth to Gutenberg and to small land and he's selling to customers that he meets mostly out in the countryside. It's you know hand-to-hand combat. It's ring indoors. It's calling on his network.

Then though he gets the idea is like well I'm getting all my supplier relationships to trade magazines and corresponding by mail and then a lot of times when I'm the agent they're filling the orders by mail. What if I just get into the mail order business myself.

These trade publications are a pretty good way to get business for the suppliers. What if I do that. So he starts a product catalog and he advertises it in publications all around Sweden with the idea being that like oh rather than just what I'm limited to doing myself I can now scale across the whole country.

And I can aggregate a lot more demand it actually doesn't matter if I don't know these people or I don't go to these parts of Sweden. The suppliers don't know him either it's all going to work the same. And he's also learned at this point that if he can aggregate more and more demand and get higher order volumes he's for sure going to get better prices from these suppliers.

Now here in the call of mid 1940s this is not a new innovation that young Ingvar is coming up with and it's basically the story of the series robot catalog you know 50 years earlier in America this is happening all over the world. And there's plenty other people doing the same thing in Sweden at the time. Once you had enough scale to say hey I've aggregated a bunch of interesting products you've started making a catalog and you've nailed out everyone and that was your sort of client base.

I mean it was the commerce industry before the commerce industry. Yeah. Anybody could do it. It was just about aggregating demand. Yep. So Ingvar creates a catalog of his wares called IKEA news eventually he publishes IKEA news on its own with its own subscriber base. But at first he's just inserting it as an advertising supplement in local farming publications all around Sweden.

So by the end of college end of the war like I said he's doing really well like he's doing way better than probably anybody back in small and so after school he returns to the farm to Elmterood and he recruits his family to also start helping him with the business and fulfilling these orders and running all the mail and all this stuff and they're still just running it on the farm.

And then in 1948 Ingvar makes a fateful but again not unique decision which is that he decides to add furniture to his catalog.

Now other competitors of his other rural focused mail order businesses dealers offered furniture at the time and that's actually why Ingvar starts doing it too he had been shopping the competition doing the same Walton thing he's reading all the advertising supplements of all his competitors and he notices that they start offering furniture it seems to be working for them they're promoting it more and more and he says well hey I should try that too he would joke later it was like there was an accident that he found his life's calling.

And the furniture business yep so he does with furniture what he's doing with all like he products at this time which is he goes around he sources some suppliers and he asked them if I can be their agent to sell their furniture now furniture isn't exactly like a fountain pens or wallets it's big you can't just order a box of 500 arm chairs and stuff it under your bed or put it in your little shed all the time.

And the little shed on the farm really what you need to run this model is you need local suppliers or at least domestic suppliers within Sweden yep well fortunately as we discussed small and is full of timber and it just so happens that probably because of that there are a number of furniture makers right there in the province so Ingvar goes around to local small and furniture makers and asks if he can be their agent like hey can I bring you more.

Can I bring you more business they're all like well sure there's one condition which is you'll have to deliver the furniture yourselves is that okay well that's what we do anyway it's part of our business sure yeah now famously and this is part of the law about Ingvar and probably is somewhat exaggerated he love to tell people that he's dyslexic and it totally serves this law of like oh here's this.

Hard Scrabble country retailer I don't know how dyslexic he really was really this was like a thing that I almost that I was going to stump you I was because it comes up later in a key moment of IKEA that he's dyslexic and it's wise some I don't know what you're referring to I'm excited to be surprised so it's why the products are named the way they are rather than having model numbers oh this is exactly what I was going to say yeah it's like part of the

hey I need to have a word for each of these things and yeah this is exactly what I was about say I thought there was like always there another point no okay so where are we going here David well regardless of its veracity or not Ingvar does not like remembering product numbers and codes catalog so he decides that he is going to give a name and not a product code or number to all these furniture pieces and yes this is the beginning of IKEA product naming conventions

do you know though I actually had no idea to I started researching what these sort of general naming conventions are within IKEA today I think so I think different product categories are named after different things like rivers and yes certain furniture is named after certain it's almost like conference room naming companies yes so products are usually named after Scandinavian locations I think Swedish locations are used for so

fuzz and coffee tables like the core part of the line Norwegian locations I think are used for beds Danish locations for textiles and then some of the smaller goods like lamps are season lakes and outdoor furniture is islands I think clever the whole you know schema here with names so Ingvar if he truly was dyslexic would now be having a tough time with all of this so anyway Ingvar decides that he's going to start all this off with his you

know named pieces of furniture in the IKEA catalog that again are not his furniture he's just sourcing them from local furniture makers like other people are doing he's going to start with a test and he puts three pieces from small and in the catalog to arm chairs one of which is a armless arm chair or so it gets just a chair that is intended for baby nursing dude an armless chair for baby nursing sounds awful sounds like torture like that's the time you need the

most hey man different era different era so he writes the response was unambiguous we sold a huge amount of this quote unquote test furniture and Ingvar of course he's a trader he has a nose for business he's like great what more can we add so he quickly sources a sofa bed to add to the catalog famous you know IKEA sofa bed there it is right in the beginning then a chandelier and all sorts of other stuff and it's

off to the races pretty much any piece of furniture or furniture like home goods that he can get his hands on and advertise in the catalog it sells like hotcakes or maybe meatballs so that's too much that's too much so now why is it selling like meatballs here why is there a huge demand before mail order the only way that people out in the countryside could get furniture that wasn't locally made right there or passed down from generations but still that to get made and bought at some

point in time was through dealers like Ingvar used to be like you know traveling salesmen type people and they had very limited access to inventory they were sourcing like individual pieces probably more often than not you know secondhand estate stuff or maybe they're from a distributor or a third party middleman I mean either way we're talking super limited scale very

much more than a lot of the other parts and unreliable product offerings like you need a baby nursing chair and almost baby nurse whatever you need a dining table like the likelihood that your guy had that in his stock was low and so that's just availability but then also the pricing I mean again we're talking about

here's just basically eaking out a living the traveling salesman agent types you know they're trying to eke out a living to their trying to make as much money as they can they're not trying to build scale they don't get like oh hey volume drives prices down low prices drive volume it's like none of the max margin I can extract for this very one off random special sale I'm making totally Ingvar though because of his history in small goods and as an importer he's got a very different

mindset he knows that oh selling goods in bulk in bulk orders like it's all the way back to the match boxes that's how he's approaching the problem he's also young he doesn't have a family like he just in a very different mindset than everyone else here so scale doesn't bother him he's happy to try and drive prices down as low as possible pass that savings along to buyers undercut everyone else get more demand like this is how he operates

and even more than that he realizes furniture is way better than these small goods because even though you know I could sell a cheaper these are still large ticket purchases for people the absolute number of dollars or you know Corona that I'm going to make on any given piece of furniture even if I'm selling it at a low margin is like way more than ballpoint pens here right and not only that but it's also selling

quickly even though these are high priced items because there's this huge unmet demand in the countryside people are starving for this stuff and even better the logistics and distribution for us for IKEA is just as easy as ever the furniture makers are handling it all themselves this is great let's poor resources into this it is crazy he managed to aggregate demand for

something that is very difficult to manage and take inventory of and he managed to sell to those customers without having to deal with the really tough inventory problems and it truly is like the first dropshipper well as we'll see it works for a while and then it doesn't but for the moment in time the furniture makers love it Ingvar and the other folks who are doing this has just expanded their market this is the golden early days for this whole catalog dropshipping industry

so within a couple months Ingvar is getting so many orders from customers and so many furniture makers who want to be in the catalog that is like okay we got to just focus on furniture he starts hiring a handful more of other folks beyond just his family to help out but it's still like a fairly lean operation we're talking 10 people

or so through the 40s they're still running it out of the farm at Elm to Rude and then in 1949 Ingvar decides to go really big he starts buying regularly every week supplement in the big national farmers paper in Sweden which has a circulation of 285,000 copies and I guess we should have talked about this earlier talk about supplements you know advertising you know I'm realizing that a

bit a lot of our audience has no idea what I'm talking about like a supplement to a newspaper yes this is here in America going back to the best circular in the Sunday paper or the target circular or the serious circular I don't get a newspaper anymore but I'm pretty sure this still happens I think this is still a very common advertising

channel totally anyway back to 1949 Ingvar goes big he commits to regular weekly publication as a supplement in the national farmers paper so before this when we said people were subscribed to his catalog how did that work it worked like all these businesses I think did at the time which was if you were a customer you saw something in this advertisement

circular in a paper or somehow got exposed to it you then place an order you then get placed on the customer list so I think once Ingvar's got your address and knows who you are you're in his CRM so to speak now I think you're getting his catalog directly so in this first weekly supplement he specifically appeals to what he ultimately terms this idea of the many

and we'll keep coming back to this is super critical to IKEA so in this first national circular that goes out he writes you may have noticed that it is not easy to make ends meet why is this you yourself produce goods of various kinds milk grain potatoes etc and I suppose you do not receive too much payment for them no I'm sure you don't and yet everything is so fantastically expensive to a great

extent that is due to middleman compare what you receive for a kilo of pork with what the shops ask for it in several areas it is unfortunately true that goods that may cost one or two

to manufacture cost five six or more to buy in this price list we have taken a step in the right direction by offering you goods at the same price your dealer buys for in some cases lower I mean this is it will make it up in volume this is thinness margins possible for the many people with an obsession in cutting out middleman

yep and what's interesting here is I think this is the first time where he's by instinct appealing specifically to the low price aspect like again almost everybody else was appealing to the selection the availability of like oh you can finally get furniture he's now saying like no I know it's hard for you out there I know you're struggling to make ends meet

I'm going to give you the absolute lowest prices on this stuff oh yeah this is worth a pause harken back to our Walmart episode what's the sort of perfect triangle of delivering a retail product its convenience price and selection and what he's basically saying is price price price

and way better selection than you had in the old model convenience probably not as good but price I know you care about price you are struggling to make ends meet yeah a little later we're going to talk about this amazing document that anger rights in 1976 called the testament of a furniture dealer he's so

good at the very beginning of the very first thing reads that the mission of the company is to create a better everyday life for the many people the many by offering a wide range of well designed functional home furnishing products at prices so low that is many people as possible will be able to afford

I mean that's it it's all right there in that sense yep now the interesting question though here and for the rest of the episode is like we said Ingvar is not the only male order furniture company at this point he has plenty of competitors who are doing the same things and probably catching on to this same idea that low prices are also important

but none of them become IKEA and the next reason why none of them become IKEA is none of them have a showroom yes but before we tell the showroom chapter of IKEA now is a great time to tell you about our presenting partner this season JP Morgan payments we've been talking about how IKEA brought simplicity to a complex and fragmented customer experience this is exactly what JP Morgan is doing for payments businesses don't want complexity or to have to roll out the table and we're going to be able to do that.

Is it a city memory or something we're in just about could not say but энергical quality security, a good thing that you're in landscapes and something that are 안에 going to be Capital E are the most attractive quality memory of the world as this company the first player up you you know they are actually storages So you can focus on running your business.

Exactly. And since we're in IKEA land, let's zoom in today on retailers, and specifically on a product that most of you are very, very familiar with, tap to pay. Obviously, there's been a massive shift in the last few years in how consumers expect to seamlessly use their phones to check out. Well, JP Morgan Payments enables this as part of their omnichannel solution. That's likely been running under the hood in many of the in-person checkout experiences that you've had.

And we've reached this tipping point where 50% of global in-person transactions are now contactless, and it's totally essential for companies to offer a great tap to pay experience. I honestly love this, and I've been preaching the virtues of tap to pay for years now. Lister's, I can vouch for that. David was a very early adopter when we would go on morning runs.

I think actually back when you lived in Seattle, and you'd only bring your watch even when we were gonna go get breakfast together afterwards, and I thought it's just crazy. Yes, it's great. It's great for everyone. For merchants, they can easily accept debit and credit cards from the NFC-enabled digital wallets on smartphones. For employees, it's great because they can seamlessly complete payments from anywhere in the store.

And of course, for customers like us, it's great since they get a transparent and secure transaction and pay more conveniently. Yep. For anyone who is at our Chase Center show, this is the exact experience we used for the roaming hawkers selling the hats. So you got to experience this firsthand. And the results were pretty insane. We found out after that they sold 1500 hats in under two hours with a 100% success rate, which means zero declines.

Yep. So any business retailer otherwise benefits from having a frictionless payment experience. Listeners can go to jpmorian.com slash acquired and learn more about tap to pay and check out other payment solutions driving growth for businesses. Are thanks to JPMorgan payments. Okay, so David, how does the first IKEA showroom come to be? So as we alluded to earlier, in the early days of this mail order furniture, catalog, circular type business model, it's the golden era.

Everybody prospers, consumers are happy, furniture makers are happy, there's room for competition, like it's all green field. Everybody's going after new customers, nobody's stepping on each other's turf. Inevitably though, as we get into the early 1950s, competition gets more intense among these mail order businesses like IKEA and price wars start. Yep. So this is the next chapter.

And the thing about mail order was yes, it enabled scale, which enabled selection, which enabled low prices, but there was no governor on quality. And what I mean by that is that anybody who had a mail order business could take attractive looking photos of their furniture and home goods and stick it in their catalog or their circular advertisements and say like, ooh, by my beautiful looking furniture at this really, really attractive price.

And those photos may or may not have any sort of bearing on the reality of what the furniture actually was when it arrived. Not to mention you basically had no recourse because at this point there wasn't modern credit cards, so it's not like you could charge back. There wasn't 2024 style returns infrastructure where you could just get your money back by sending something back weeks or months after it was delivered to you and get a full refund.

Nobody was building these big sort of global brands that were trustworthy. And so it was just a matter of which small local circular brand convinced you that their picture was worth ordering. Right. I actually don't know what their return policies are. I hope they're good, but it's like the T-Moo of 1950s Sweden here, right? Like the disconnect after a couple of years of this between what you think you're getting and what you're actually getting starts to widen.

And so even though Ingvar is focused on quality furniture at the lowest possible prices, the fact that other people aren't is hurting him because it's hurting consumer trust. And I can just deliver low prices if I compromise on quality. Right. So he's searching for a way out of what's starting to become a pretty brutal competitive landscape. And one night as legend has it, he's working late with one of his early employees, a guy named Sven Gota, and they come up with a crazy idea.

And the crazy idea is what if we had a showroom where people could come and they could touch and see and feel the actual items that we are selling in our catalog and then they could convince themselves like, yes, this is the quality, this is the item that I'm going to get at this price. I think if we could just show people, they could see with their own eyes, touch with their own hands, they would see that the quality we're delivering at this price is way better than anyone else out there.

And it just so happens at this moment in time that the local furniture joinery in Elmhult is about to close. He is going to buy the building for 13,000 crooner, which is about $2,500 at the time we're here in like early 1950s. So, you know, not cheap, but not that much money. And that $2,500 investment becomes the first Ikea showroom. I mean, we seriously kid you not listeners, the only money this guy ever raised was that 500 crooner bank loan. Yeah, it's nuts.

And the funny thing about this, it is a showroom. It's not like a store. Our business model continues to be this catalog thing, but we have a place where you can just kind of touch and feel the furniture. I think Tesla does this today or has done it for a while. Or Bonobo's or. Yeah, yeah, there's a store in them all that you can go see the cars or see the pants, but you can take it home. Right. So, let's illustrate why this is a completely nutty idea.

Hey, there's the obvious you can't take it home. B, the old point of the mail order business was that buyers and sellers can now access each other across the whole country. All of Sweden as a market, all the rural areas everywhere in the country and Sweden has a pretty big geographical country.

What Ingvar is doing here, they're opening a showroom in one singular remote part of this country, you know, in a town with like 1,000 people who live there and their business model is to sell to the other towns of 1,000 people all over the rest of the country. Why on earth would opening one showroom in one little town work? Here's the thing. I mean, by God does it work? I don't know that the customer base in the town of Elmhul was that important to IKEA itself.

People come from all over the country to go to the showroom. This is a wild. So, Ingvar advertises that they're opening this for months leading up to the actual opening, which is in March of 1953. So, all of his customers and everybody getting the circular advertisements in the weekly paper all across the country, they're hearing about this showroom in Elmhul.

On opening day in March of 1953, there are over 1,000 people from all over the country who show up and wait in line to get it, like take the train, they somehow make their way to Elmhul to see the furniture. They're not even buying anything, it's crazy.

Ingvar and the team, like they're still worried about this, that they don't know that the floorboards on the second floor of this old joinery are like, you know, it's like an old building here that are like gonna stand up to 1,000 people being up there plus all the furniture that they have as, you know, the showroom. They had also advertised in the circulars that they were gonna offer free coffee and morning buns to anybody coming to shop.

Yes. The very first time there's a food at an IKEA is the very first time there's an IKEA. That's right, there's always, always been part of the concept. But yeah, Ben, as you say, like there's no warehouse, there's no flat pack furniture, everybody's just there to like see the stuff, and you could also fill out an order form while you're there to then buy it by mail later. So Ingvar has a quote about this. At that moment, the basis of the modern IKEA concept was created.

And in principle, it still applies. First and foremost, use a catalog to tempt people to come to an exhibition, which today is our store. Come and see us in Elmhut and convince yourself, we wrote on the back of the first catalog, two very important words there, convinced, and the other one is exhibition. Already, they were seeing this idea, and the fact that he marketed to the whole country and offered food, I mean, we're not just offering you a store that you can walk into and buy something.

We are creating an exhibition. Yes, it is an experience. It's almost like you're getting a free ticket to this experience, this exhibition. Yes. Great retailers have more in common with PT Bardem than poor retailers. Totally. Oh my God. So this is, I think, an Ingvar thinks he writes this. This is the very first time anywhere in the world that a mail order business is combined with a physical show.

Oh. So you might think, oh, a series in the US, obviously, that's a mail order business, and they have sears stores. No, no, no, they're different. The sears stores, you buy the stuff at the stores and you walk out. It's not a showroom. Here with IKEA, for the first time, it is that concept you just described, Ben. It's like, we tempt you to come see this exhibition that then you order by mail. I don't think anybody had ever done this before because again, it was a crazy freaking idea.

But of course, it becomes an enormous success. So within the first couple of years of the Elmhul showroom store, it's not a store being open. A huge portion of IKEA's catalog subscriber base, they've now formalized it as the IKEA catalog. About half of their catalog subscriber base, which is hundreds of thousands of people now at this point in time, make the pilgrimage, tell Elmhul, and they visit the showroom. This tiny little village, hundreds of thousands of people are now coming there.

And you might ask yourself, what's the big deal with the catalog? Why are people so interested in getting a catalog? It was really inspirational. I mean, it hadn't quite made this shift yet, but especially in the 60s, after Britta Lang took over from Engvarr, because Engvarr is like everything right now. He's like art directing the photography. I think you might even be taking the pictures and writing the copy. But it turned into this thing with these vibrant, beautiful living room settings.

And people are anticipating the arrival of the IKEA catalog. And it positioned IKEA as this brand, this lifestyle, it illustrated a life you could be living if you participated in the IKEA story. Yep. That really, really becomes the thing in the 60s with modernity and when the target customer becomes the urban and suburban customer. But even with the real customer, like it still works, they lean into this model heavily.

So they arrange for any IKEA customer to get discount tickets on Swedish railways to make the pilgrimage to Elmhult. And then they also set up this program where customers who come from another location and commit to furnishing a whole house, they call these the setting up house customers, they get free dinner at the hotel in Elmhult that night. Like this is hokey stuff, but to your point, PT Barnum, that's what this is.

Yep. So within a year, they pass one million Corona in sales at this showroom, which has got to be by multiples the largest business ever built in Elmhult in like human history. In 1954, so the next year after this has been open, they passed three million Corona in sales. I think the exchange rate was about five to one, at this point in time of five Corona to one dollar.

1955, they double again to six million in sales, the number of IKEA catalog subscribers around the country passes half a million. And all this is done with still less than 30 employees, the business still being run out of the combination of the family farm and this one showroom. It's wild the skill they get to. It's amazing. Yeah, so it's one of these things that, you know, on the one hand, we are, how many years into IKEA was founded in 43, and we're approximately in 53, 54 here.

So we're 10, 11 years in. But the thing that is really working is this thing that just got started the previous year, which is the combo of the catalog and the showroom. That proves to be this like amazing winning combination that they just realize, oh my God, we need to scale this. Yep, totally. This is it, I would say like generation three of the IKEA business. You know, generation one is just small goods trading company. Matches and pens. Generation two is furniture plus catalog.

Now we're here in version three of like furniture catalog plus showroom, and that's what's really exclusive. Yep. But here in the 50s though, the target customer base we referenced this a minute ago, and the product mix is still geared towards these rural farmland families. Like, hey, I'm outfitting my farmhouse. Yep. And when you look at the old catalogs, you can tell. Totally. It's not this simple Swedish design that we think about as IKEA as today.

It's like pretty rugged, robust, heavy furniture. Yes. So when the 1960s come around, Sweden, like pretty much all of Europe, starts rapidly and inexorably urbanizing. The automobile becomes commonplace. Farms are closing down. Young people are moving into cities and suburbs. They're taking jobs in factories. They're taking white collar jobs, other blue collar jobs.

I think there was some stat in the IKEA story that during the decade between the mid 50s and the mid 60s, I think three quarters of the farms in Sweden closed down. Whoa. It's wild, but this is happening all over Europe. Huh. And so the customer base for IKEA and all their competitors starts to majorly, majorly shift. It's no longer families setting up their farms or taking over the farm from the elder generations.

It's now like a whole new lifestyle, modernity in the cities, in the suburbs, smaller houses, modern houses, electricity, apartments. Not to mention, it's kind of impossible to do the traditional thing of just pass down the furniture to the next generation, which is how most people got their furniture up into this point because they were living very close to their parents or perhaps taking over the house from their parents. Totally. This is, oh, I'm getting an apartment in Stockholm.

A kind of need to start from scratch and the furniture needs to be pretty easy to move or put together. Yes, yes, indeed it does. So on the one hand, this is like a total existential threat to IKEA's business. It's like, well, your customer base is shifting. The products that you are selling are no longer one that they're going away.

On the other hand, there has never been a bigger opportunity in the history of furniture making and selling throughout all of human history than what is about to happen here. And IKEA, even though it's currently serving what is effectively the parent generation of these new customers with a little bit of adaptation has the perfect model for these new young urban and suburban families. Yep. But to get there, Ben, I know you're it's in to tell this story.

There's one more element of the IKEA model that needs to fall into place. And ironically, even though it is totally identified core part of the company today, it's a reaction to competition that drives it. And that is designing its own furniture and specifically flat packing. It is astonishing that so far in the story, they've been shipping like full-sized, fully assembled arm chairs in order to get them to your house. Well, remember IKEA's not shipping it. The suppliers are shipping it.

But that it's taking up a huge amount. Think about a flat packed chair that you're ordering versus a fully assembled chair and how much room that takes up in the truck. Yep. In the early days, this doesn't really matter to IKEA. Like, hey, it's all great. That's my supplier's problem. As the business is scaling though, this becomes IKEA's problem because it's a limit to scaling. Yep. Okay. So where does flat packing come from?

So it's totally intertwined with IKEA taking on the furniture design itself. And I said it was driven by competition. It's not driven by competition because any of the other players do the same thing. It's actually the opposite problem. IKEA has become so dominant in Sweden at this point in time that it's monopolizing like a huge portion of all the furniture makers production output. And so the rest of the industry starts organizing against IKEA.

And IKEA is philosophically trying to drive down prices. They want to create the furniture for the many and their competitors are all trying to maximize margin and have kind of small businesses because the whole furniture landscape, in fact, to this day is very, very fragmented. It's tons of players serving niche local use cases.

And so you've got the whole Swedish furniture industry that's pissed at IKEA for going to the furniture manufacturers and saying, what's the very best deal you can give me? And then turning around to customers and saying, I'm going to make very little margin and sell you all of this manufacturer's capacity at extremely low cost. So the competitors are feeling it from both sides.

They're saying, okay, the manufacturers have no capacity to manufacture for me and no customers want my stuff because you're selling it cheaper. It's freaking wild. IKEA does not have a direct competitor today in 2024. There is not a single other globally scaled furniture business in the world. Put a pen in it. I have a thesis on why. Oh, okay. So what do the competitors do? They start locking IKEA out of trade fairs, trying to limit their access to suppliers.

They start pressuring IKEA's existing suppliers into not selling to IKEA. They say, oh, we're all collectively going to boycott other orders from you. And IKEA's not yet big enough where that fails. That actually works. And the manufacturers just come to IKEA and say, sorry, the collective leverage of all your competitors is too large and we're not going to serve you.

Yep. Competitors even go to the Swedish government and they lobby the Swedish government to limit IKEA's ability to circulate its catalog. I don't know on what grounds. It's like the most European thing ever that the regulation should. This is too good for consumers. Yes, exactly. Oh, man, we could make a billion jokes about European regulation. Yep. Anyway, to your point, it starts to work and this becomes a real problem for IKEA.

So Ingvar, the company, they're like, all right, well, how are we going to design our way out of this one? And it turns out design is the answer. So they start going to the suppliers to the furniture makers and they say, like, okay, we hear you that our competition does not want you to give your pieces to us like you're also giving to them.

What if we give you a new set of designs for different furniture and you make those designs just for us, separate lines, open up separate lines, could you do that? And most of them say, well, yeah, I think I could do that. And this is the beginning of IKEA in-house designed furniture. Now, the first quote unquote designer who Ingvar sets to work on this is a former advertising draftsman named Gillis Lungren.

And Ingvar had hired him originally to help Ingvar do the set layout and the photo shoots for the catalog as is like assisting. Lungren starts cranking out sketches of furniture designs for the manufacturers. And so then as legend has it, all this is going on. And then one night, the two of them, Lungren and Ingvar are taking down the set from a photo shoot. And Lungren says while he's putting a table away, he's like, oh, God, this thing is so heavy. What a huge amount of space it takes up.

Let's just take the legs off the table and put them under the table top and then we can store all this stuff better. And Ingvar is like a bolt of lightning has hit him. He's like, oh my God, I have just received, like the last commandment from God about how to run this business. Like, yes, we take the legs off and it takes up a lot less space. My God, we can design these things to come off on purpose.

And then when we have our manufacturers ship the tables to customers, they're gonna be able to fit a hell of a lot more of them in those trucks. Yep. And it's kind of apocryphal. I am sure something along the lines of this insight happened. There were many other companies that were doing flatpacked furniture before this, including the company we've talked about multiple times on this episode, Sears Robuck was flatpacking in their catalog distribution in America.

But certainly the company that gets credit for popularizing and growing the volume of flatpacked furniture being shipped 100x, 1000x around the world is IKEA. That is a nice little story. But I think what IKEA does is they go all in on this. So the first flatpack product that they design is the max table in the mid 1950s. But by the end of the 1950s, flatpack and then self-assembly by the customer is expanded across the entire range, like all of IKEA's furniture.

Not obviously some stuff you can't flatpack, but as much as possible. And because they had for separate reasons started doing their own designs with manufacturers, they can do this. Yep. So flashing forward a little bit to today, but it's interesting to look at all the downstream things that happen from flatpacking. One, it enables this space saving in trucks. It enables you to do more volume for the same cost. Two, there's a cost reduction since customers can do the labor and transport.

Before you had to have someone at your company put the chair together and that costs a lot of labor, now you're putting that on the customer. You're also making it so the customer has the capability to transport the merchandise in a way that they couldn't before. They had to have a truck. Right, mail order was the only way to make this happen. You're not going to drive away or get on a bus with a table. Yep, absolutely.

There's a further cost reduction since it decreases the broken merchandise in transit. So there's this third amazing benefit to flatpacking. Ultimately, they pass all this along to the customers, meaning now their products are definitely the least expensive on the market for their quality. And psychologically, it gives this feeling of accomplishment and increases your fondness for whatever object you assembled because of the labor, the blood, sweat, and tears that you just put into it.

You feel like I made this. Yeah. We almost broke up, but we didn't. And four hours later, I have the cabinet together. What are the articles I was reading for research called it the Lego for Adults? Totally. That's totally right. Yeah, another great Scandinavian company. We'll have to cover it someday. I have a fun story for you, David, on flatpack that I haven't told you yet. Ooh, light on me. So there's another word for this. Do you know what it is? Do you hear it anywhere?

It's kind of an old school, retailer merchant phrase. Ooh, no, I don't think I did. Knockdown. Ooh, no. And it was referred to as KD. So in preparation for this episode, I talked to Jim Senegal, who's the co-founder of Costco, because I was asking about IKEA and the similarities. And he said he used to love going to IKEA to look at the KD furniture that they stocked. And I thought this was like a brand. I was like, oh, maybe this was like a brand that IKEA used to stock.

At some point, I realized in our call, oh, no, this is like what people used to call the flatpacked as KD furniture. Ha, ha. That's amazing. Yeah. The inner wovenness with Costco is really interesting. Another research call was with Bjorn Bailey, who ran IKEA in the US in the late 80s. And he mentioned that Ingvar always looked up to Costco and thought they were like the greatest retailer in the world. So there's a lot of shared admiration there. Oh, man. We're going to talk about hot dogs.

And I'm going to be like, oh, man. You think I'm joking. I'm not. All right. Let's go. OK, before we get there, though, so KD, this innovation knocked down flatpacked, this is also, though, what enables this shift in the product mix for the new modern young urban and suburban customer who doesn't want the same kind of furniture can't use the same kind of furniture that their parents were using back on the farmlands.

So legend has it that right around this time as the whole IKEA range is shifting to flatpack, Ingvar goes on a trip to the Milan furniture show in Italy. And while he's there, one of the suppliers, a carpet supplier at the fair, offers to take him around the city and Ingvar wants to see how people live. And he's like, sure, I'll ask a bunch of my employees who work in my urban, modern, mechanized factory here in Milan if you can just go into their homes.

And so Ingvar goes into their apartments and he's just appalled by the furniture that he sees there and how different it is from the new modern city living designs he's seeing at the furniture fair. It's all the old rural farmhouse big, heavy, dark furniture that takes up a lot of space and isn't practical in the city.

And so supposedly this is the moment when Ingvar really gets religion of like, oh, this is our new customer and this is our opportunities to design the low price high quality, affordable furniture for this target market. All these people that are moving to cities for the first time, this is modern middle class living. Yep. So we're all familiar with the simple Scandinavian design that IKEA furniture is and it's become extremely popular, basically universally adored.

I just accept it as like the standard of what modern furniture is. Right. So the question is, is there something intrinsic to simple Scandinavian design that makes it universally applicable or is it IKEA's success that now we all sort of look at and have some reverence for it? Because it really is beneficial to IKEA that we all like simple designs instead of ornate designs at this point because it makes it work much better for flat pack, for reducing cost, for making transportation easy.

I mean, imagine chunky ornate furniture with intricate hand carved designs still being the cremde la crème of here's what you should have in your house and it's basic and expected. It kind of makes the business model work that it's these simple designs. Yeah. I think these things are inextricable.

I mean, I'm not an expert in design history and people who are might contradict me here, but I don't think there was necessarily that much about Scandinavian or Swedish design that was particularly light, simple, minimal before IKEA. Yeah, listeners, join us in the Slack. I'm curious if someone has traced the lineage of this sort of Scandinavian aesthetic in a pre-1950s world where this sort of comes from. Who are we all copying?

Because there's definitely some lineage of designers that all of this is sort of trying to emulate.

Yeah. So Engbeur writes to this, he says, a design that was not just good implied unlike what the Milan factory workers previously had in their homes, but also from the start adapted to machine production and thus cheap to produce, which Ben is exactly the point you're making, with a design of that kind and the innovation of self-assembly, we could save a great deal of money in the factories and on transport and keep the price down to the customer. There it is.

So entering into the 1960s here and all the demographic change that's happening, IKEA is perfectly positioned and it's just explosive growth for the company. And to capitalize on it, they obviously need to ramp supplier production significantly.

So they've had these battles in Sweden with competition, they've gotten around that with their own designs, but now they need to ramp up so much, Sweden itself, even if they didn't have these problems, just doesn't have enough capacity for all this new furniture that IKEA needs to source. Yeah, just to illustrate your point about 1955, they did six million crooner by 61, they did 40 million crooner. So that's almost a seven X in six years.

Yes. So Ingvar starts looking around elsewhere in Europe to expand supplier production. And then in 1960, Ingvar reads in the Swedish newspaper that the foreign minister of Poland is coming to visit the Stockholm Chamber of Commerce with the express purpose of developing business relationships with Swedish companies. And you might be like, okay, this kind of stuff happened all the time. What's the big deal? Well, Poland at the time was a communist country behind the iron curtain.

Yep. So this was odd. And Ingvar is like, well, you know, if we could find a way to work with the communist, we could probably lock up a lot of production capacity that nobody else is gonna go through the trouble of getting. Yep. And I bet they can also produce things pretty cheaply over there and in pretty high volumes. Yep. So in 1961, IKEA goes to Poland to help local manufacturers, state-sponsored manufacturers there, set up furniture production of the IKEA designs.

And by the end of the decade of the 60s, Poland is producing 50% of IKEA's furniture, including some of the first modern classics like the Billy Bootcase, the Agla Cafe Chair. It's the sort of wooden, sort of curved back. Oh, yeah. Chair that you know, the iconic one. Yeah, that's, I think, if I have it right, I think that design is actually based on like a Polish chair design. Oh, interesting. It becomes, yeah, one of the biggest selling products for the company in history.

The other thing that they're doing here is, IKEA is investing in bringing up these factories. They're trying to build really close supply relationships here and basically make sure that those factories are gonna be successful for the long run so they can kind of bet their business on it.

Totally. And I mean, they get really, really intertwined to the point where eventually in the, this is a little later in the 70s, after IKEA invests a ton in developing a board on frame, quote unquote, technology or sandwich board construction, as it's called, this is the lack table. So listeners probably many of you know for those of you who don't, you definitely have seen this thing. You've probably owned it, the lack coffee table. Or lack shelves or.

Yeah. Poland is where they produce this coffee table that they use particle board, you know, sandwich board construction inspired by how doors are made, sort of more cheap, not solid wood doors. Today in 2024, the lack table retails for $9.99 in America. This is a table that you can buy for less than 10 bucks. It's astonishing how they've driven price down on some of these things. Totally astonishing. And in fact, I think it's worth a little sidebar on the coffee table right now as an example.

It perfectly illustrates the new consumer dynamic and demand explosion that a key is about to head into. The lack coffee table is the first example of this idea that Ingvar starts to develop of the item with the breath taking price, quote unquote. And every product that I key a sales and its range should be high quality, great value, ideally way better on both dimensions than any competition. Have beautiful form, I think that's a part of it too, is it's supposed to have the form and design.

It's not just build quality, but actually the form is should be elegant to look at. Yes. But over and above just kind of like the standard products in the range, Ikea should always have a few products that are these breath taking price products. And these products should also be high quality, but they should be priced at least 50% below any competitive or substitutive products out there. And ideally well less than 50%. I mean, a $10 table today, that's breath taking, that's astonishing.

And so Ingvar says like, it's our job to figure out, start with that and goal in mind. And then design backwards from that of like, how are we gonna make that happen? And he would later write and describe, the whole idea is based on the substantial price difference, the easily understood price by the consumer. We don't lose on the deal, nor do we make much profit, but at least we make a little. And in the end, that's what matters. We can't actually lose money on these products.

And thus we need to design like, not just what the furniture looks like, the manufacturing process, the transport process, the raw material sourcing process, like everything end to end about how are we gonna sell? The product is the whole supply chain. Yes, a $10 coffee table. And so the way they do it, at least in the case of the lack, is like, we're gonna wholesale reinvent the manufacturing technology process for this. We're not gonna make a solid wood coffee table.

We're gonna use board on frame construction. And what are the raw inputs for that? Well, we can use the leftover scrap wood chips. And then eventually now I think it's like, pulp material from the timber. That's actually gonna be like 90 plus percent of the material that goes into the product is our waste products from our other things that we're making. A, that's super cheap. B, it's super lightweight, even though they're pretty solid and sturdy. And then C, we can just scale this indefinitely.

Today, Ikea sells almost 20 million lack tables every year and has been for decades. I mean, they've sold hundreds of millions of these things. So like you can optimize the freaking crap out of your whole supply chain to do this. That is wild. I think they have multiple skews at that scale. So later, once he, like Charlie Munger got turned on to the virtues of Costco, Ingvar would hilariously formalize this idea, this manifesto, in 1995 as the hot dog product policy.

Because in 1995, they copied Costco and they start selling hot dogs in the stores. Okay, so I brought this up with Jim when I was talking about similarities between Costco and Ikea, he did not believe that Ikea copied the Costco hot dog. And here is his rationale. There's no way. It's 100% a copy. I don't believe him. I know Ikea started doing it in 1995. There is a rich Swedish tradition in hot dogs. Swedish hot dog carts are freaking everywhere.

I don't think you had to look at Costco to observe we could probably sell hot dogs at a Swedish store. Jim is a very kind and generous soul, despite being one of the greatest retailers of all time. So I'm just gonna chalk this one up to that. The Ikea hot dogs today are priced at $1, which is cheaper than the buck 50 at Costco. Well, no, David, the buck 50 is a combo. That's what I was gonna say. I think though you can only get the buck 50 combo at Costco.

Yeah, I mean, I don't know if you could walk up and try to order a hot dog that's less than a dollar, but it is $1.50 for a hot dog and a drink. And there's no menu item of just a hot dog. Right. We talked about all this on the episode like part of how they do this is including the drink. It's a bundling, yeah. Anyway, I refuse to believe that the ability to buy just a hot dog at Ikea is not a nod to the Costco deal because Ikea also has the hot dog and drink combo for $1.50.

And it's right after checkout, just like Costco's is, and it entered the store about a decade after Costco started selling the hot dog. There's no way. There's no freaking way that Ingvar wasn't just like, all right, we got a copy of the hot dog. Yeah. The even more amazing thing is he codifies this into the official policy of the company, which is we must have at least at first its 10 quote unquote hot dog products across the range he later ups it to 20. And it's yes, it's like the lactable.

It's an impossible price for ideally one product in every category that we sell that is just it's criminal not to buy this thing. Yeah. And the fact that they just keep whittling it down year over year over year, great example of this is the Poing Chair. Yes. Another hot dog product. Absolutely. I think they sold 30 million of these since 1976. They've just been benignical about optimizing. So the initial Poing Chair, which was originally called the Poem, not the Poong, I didn't know that.

In inflation adjusted dollars was $350 in 1988. By 2016, they had it down below $100. And it's effectively flattened out. It's now $130, but with a little bit more inflation. It's astonishing you can get this chair that is a living room chair for $130. Comparable chairs are like $2 to $3,000. Right. You're not going to buy a Poing Chair and have anybody mistake it for a Herman Miller recliner? No, but that's not what they're trying to be. But it's pretty darn close for the delta in price.

I mean, a Herman Miller recliner is what, $5,000 I think? Something like that. Yeah, maybe this performs the same function, but you're not going to aesthetically mistake it for a Herman Miller chair. Oh, I guess my point is like the delta in the design aesthetics is also way closer than $4,770. Yes, that's a great point. It has this wow price. When you drive home with it and you set it up, you can marvel at the fact that it'll cost you $130.

Yes. Okay, which brings us to the other, I think really uniquely, Ikea piece of this hot dog policy that even Costco doesn't really have. I just love it, that dog policy. Ikea, thanks to the catalog, controls all parts of the demand and the supply chain. They control the supply chain, obviously, as we've been talking about. But the catalog for decades is the primary marketing and demand driving channel. So it's not like they're having to buy advertising. They fully control the marketing channel.

And so they can use these hot dog products strategically and promote them in each market in the catalog to then drive the visits to stores, drive the huge demands, position them with other products, then they do the layouts in the showrooms. It's just, it's genius. It all works together. It's kind of amazing that because in many ways, they are their own customer acquisition channel with the catalog that they never turned into a customer acquisition channel for other businesses.

They should sell advertising. I mean, it's the Amazon play, right? Of once you reach scale and you have enough customer eyeballs, you can staple on a near 100% margin advertising business for free. And I flipped through decades worth of Ikea catalogs, unless I missed something, I'd never noticed like an emergent advertising business in there. Yeah, that's interesting. But that doesn't actually surprise me.

I think being very probably a view that as a short term optimization and that is like antithetical to how he wants to run the business. Yeah. So now what's also interesting though is like, this element that I was just saying of they control the whole demand and supply chain is no longer true in the internet world. Like in the catalog world, absolutely was true in the internet world. No, and the company. Well, no spoilers, no spoilers. Okay, okay, we're getting way ahead of ourselves.

So I'm going to take us back to 1958. There's a few more key pieces of the puzzle that needs to come together. But first, this is a great time to talk about friend of the show, Statsig. So as we've been talking about Ikea's big innovation was finding a way to make high quality, well designed furniture available to anyone at crazy affordable prices.

And you know the three ways they did this, sweating design and functionality, having a radically different delivery model and offering great prices through crazy scale, which we are sort of getting to here in the story. Now it might not seem this way at first, but Statsig is sort of doing the same thing for their category. Hmm, okay, lay down me here. All right, and bear with me listeners. You probably know the rough story of Statsig by now, but here's a quick refresher.

They were founded by a team of engineers at Meta who wanted to build a complete set of data and engineering tools like those that powered the growth at Facebook and make all of those available to anyone at any company. Okay, so back to the Ikea similarities, design and functionality. Statsig's tools were designed and built from the ground up for engineering, data science and product teams by world class people in the same functions.

This means their tools come with things that aren't really available anywhere else like advanced statistical treatments over 30 high performance SDKs and the ability to deploy your own data warehouse. Now the second piece, a radically different delivery model, unlike legacy vendors, Statsig bundles all of their products, which means that when your team starts to use Statsig, they get access to everything, experimentation, feature flags, analytics, session replays, everything.

And so rather than charging for seats or licenses, you just pay for what you use. This is super different than legacy vendors who are focused on maximizing revenue from just one product line and because it's all sort of an interconnected set of tools, you can consolidate your spend and save time on configuration. So that's the second way. Third, Statsig makes their products super affordable because like IKEA, they make it up on volume.

They power companies like OpenAI, Atlassian, Microsoft, Figma, and they process over a trillion events per day and they've got a great engineering blog on how they do this. This scale helps them basically give away their product for free to small companies and startups and help larger companies cut their SaaS spend. I love it, I love it. I get where you're going now. Statsig is the IKEA of product tools.

Yes. Well, listeners, if this sounds interesting to you, there's a bunch of great ways to get started. Statsig has an insanely generous free tier for small companies, a startup program with a billion free events. That's $50,000 in value and significant discounts for enterprise customers plus the team is just awesome. They're so great. To get started, go to statsig.com slash acquired or click the link in the show notes and just remember to tell them that Ben and David sent you.

Okay, so David, I'm taking us back here to the late 50s where we have a few more pieces of the puzzle of modern IKEA that are coming together. So in 1958, they expanded, remember we said there was just like some cold food and coffee. Yeah. They expanded that. They added hot food, they added self-service. It's more like you see today. This is all at the showroom in Elmhul. Yeah, exactly. And the philosophy behind this is the Martin should never exceed 10% at the restaurant.

They want to use it to attract customers to retain and delight, but they want to make their money on furniture. And it's kind of like David, these hot dog items you're talking about, they don't want to lose money. Just like Costco, they're sort of opposed to loss leaders. I don't know if it's as religious, but they are looking to make money on everything they sell. I think it's equally religious for different reasons. I think Costco was about not insulting your customers.

I think at IKEA, it's Ingvar, just his background in being religiously opposed to losing money. Right, his unbelievably frugal. Oh, man, we gotta tell that amazing story. We heard in the research, he was doing a store visit somewhere in Europe. In Germany? Yeah, I think it was in Germany at night. And the store manager was like, okay, you know, come on in, I'm gonna turn the lights on. He's like, dear God, don't turn the lights on. Do you know how much that costs?

And it wasn't a store manager, it was like a really junior person. Yeah, that's right. Do you know how much it costs? I'm gonna use this flashlight and they spend hours going through the store with flashlights. And because he's also like obsessive about details and a micromanager, he finds like 30 little things wrong all with a flashlight and, you know, ask for all of them to be fixed by morning. Amazing.

But this whole restaurant thing, they really find religion on this is here because we need to make it worth your while to come all the way to this store. It has to be an attraction. They develop this phrase, it's tough to do business on an empty stomach. And so it's early days, it's not like prolonging time in store the way that it is today. But it is, hey, we wanna add a Disney land effect and add perceived value to your trip here.

Yep. Today restaurants, just to flash all the way forward, it is technically the world's sixth largest restaurant chain measured by number of customers. In 2017, they had 700 million people per year eat at their restaurants. Now, I think that's not de-duplicated. Like if I eat multiple times per year, that might be counting me. Otherwise, it's kind of unfathomable. It does 10% of the world really eat in Ikea's. Even more wild, there are only 476 Ikea's in the world. Right.

So whether that's de-duplicated or not, 700 million customers across only 476 locations is wild. Totally wild. 30% of people who visit Ikea do so just to eat. I love it. A lot of meatballs. I have done that many times in my life. Most recently in downtown San Francisco. I don't have many of these stories and I was trying to figure out why.

Like I was talking to my wife and she was talking about, oh my God, I loved getting the catalog growing up and oh, I've furnished so many apartments in Ikea and I was kind of thinking like, actually until the last few years, I haven't really. And like I've never eaten in Ikea just to eat lunch and I kind of realized, oh, Ohio did not get an Ikea for a really long time. Like I grew up without an Ikea near me.

And even when I went to college in Columbus, they got one in Cincinnati, but it was until after I left Columbus that they got one there. So until I got to Seattle, I don't think I'd ever experienced Ikea. And the Seattle Ikea is so great. Yeah. Well, I have a question for you then. What year did your family leave Delaware? 96. You grew up very close to an Ikea and you just didn't realize it. Oh, really? Because Ikea has been part of my life pretty much my whole life.

And again, I didn't realize why. The first US store was in Plymouth meeting, Pennsylvania, right outside Philadelphia, which opened in 1985. I was born in 1984. I grew up with, you know, Billy Bookcases and all this stuff. It's just been a constant. My entire life. I mean, I went to the small land. I played in the ball pit, all this stuff. All right. It is funny how I've developed an appreciation as an adult, but it was not like a form of thing like for you and so many others. Ha, ha, ha.

All right. So into the 1960s, David, they opened a bigger store where? Yes. So they actually had opened a showroom in Norway in Sweden's next door, neighbor country to be able to sell in Norway. But that was, you know, same concept as the Almau showroom, not really a store. By the mid 60s, though, all of this, you know, new urban consumer, all really, really taking off. In June of 1965, IKEA opens its second showroom location very different than the original.

This one is almost 500,000 square feet. What? Yeah. That's like even still probably their biggest store or among their biggest few. I think it is still, I believe, the flagship IKEA store. Because even today, they're like three, 400,000 when they build new stores. It is a circular building inspired by the Guggenheim Museum in New York City. Whoa. I think even this one is no longer circular. That does not last in the IKEA playbook.

It costs 17 million Corona to build or roughly $3 million compared with the original Almau location that Ingvar bought for 13,000 Corona. God, they must have done so much business out of that catalog and that little, you know, those two tiny showrooms in order to leap to this and spend all that money on this store. Well, by this time, the business was call it about a hundred million Corona a year by the mid-60s when the second store is opening. So 20 million USD at the time?

So a $3 million USD investment in this store is a lot, because I don't know what their profit margins were, but like a big investment, but they could handle it. So it's probably like a year or two of all of their profits go into this. Yes. Most importantly though, is the location. It is on the outskirts of Stockholm, the biggest and the capital city of Sweden. And for the first time, they actually stock items in the store.

By now, Flatpack is really rocking and rolling like they're trying to fit as much in the store for customers to buy cash and carry out themselves. And this is the first real modern IKEA. On the first day that they open it in June of 1965, they have 18,000 customers come through. And then in that first year, that store alone does 70 million Corona in sales. So it doubles the company's revenue.

They also at this store for the first time, now have the setup where customers fetch the products themselves from the warehouse. Yes. And a few more elements of this Stockholm store that you might recognize if you're an IKEA customer today, it's located on the outskirts of the city with good highways leading to it and lots and lots and lots of parking spaces.

Its opening hours are 11 a.m. to 7 p.m. so that both you as the customer and the employees, the co-workers there are not battling morning rush hour to get there when who's going to be shopping at 9 a.m. in the outskirts of the city anyway, but it's open late after work. So you finish, you know, you can work, you finish your shift at the factory, you finish your white collar job, whatever you're doing. Great. Hop on the bus, hop in your car, go on over to IKEA, buy some furniture.

And yes, Ben, as you say, you can buy and carry away the flat packed furniture right there. The fact that you don't need employees to go and fetch things for you can just grab them off of shelf yourself after you kind of wind through showrooms. It's like further compounding their cost structure advantage. Totally. So then this is tragic, but ends up being great for the company.

Five years later, this beautiful design, Guggenheim Museum inspired store in 1971 night, the Neon IKEA sign on top of the building, catches fire and the building burns down. I don't know if it totally burns down. It's a major, major damage. I believe the insurance claim resulting from this was at the time the largest insurance claim in Swedish national history.

Oof. But I think this is really part of the culture of IKEA, the company, and certainly Ingvar's mindset is like every challenge is an opportunity. When they reopened the store a year later, it's got the full customer self-service checkout that you know of IKEA today, where like yes, there are co-workers there helping you check out, but like you're wheeling the stuff up, you're scanning the stuff, you're putting it through.

It's got more capacity for more and larger flat-packed items in the warehouse. And this is really the beginning of the end of the mail order business here. I mean, it still exists, obviously, for a long time, but the share of the business that is mail order versus cash and carry in the stores goes way, way, way down.

To the add a children's playroom at the front of the store with a ball pit for kids to be entertained while your parents shop, because Lord knows, how on earth are you gonna do your IKEA shopping with your crazy little kiddos running around? Which is also a genius way to prolong time in store. I mean, you're just gonna buy more stuff if your kids are looked after. I will say the small end at the Seattle store, the idea is a little bit better than the execution.

It was a two hour wait once you get there to get your kid into the small end and they only allowed five kids at a time. It was sort of this odd, like, I was all built up for, oh, small ends gonna be this amazing thing. I suspect this is something that, you know, hey, a different era when we were growing up, like things were, it worked a little better and you can't get away with these days. Totally, like one person watching 40 kids or something.

Yeah, chop your kid off, go knock yourself out, come back with 10 fingers, 10 toes. Yeah. Can't do that today. Yep. And then finally number three in the newly redesigned Stockholm store. Yes, they had opened a restaurant at Almhult at the showroom a couple years ahead of time. But this was the real like cafeteria. The real cafeteria, like we know and love it today with the traditional small end style menu. Yes. And so this is basically it.

There is a lot that happens after this, but the core concept of the store and why the business model works and all that is pretty baked here by the mid 60s. Yep. And certainly by 1971 and this sort of V2 of the Stockholm store. Yep. So across the 60s, they opened more Denmark and Norway stores in the 70s. They opened in Japan, Australia, Austria, Canada, Germany, Hong Kong and Singapore. In 75, they entered Japan for the first time.

They try real hard for 12 years to make it work, but it fails and they withdraw in 1986. A few of the reasons are the furniture's too big. They just didn't understand the needs of that market well. Self assembly was kind of anathema to Japanese culture. And the delivery industry hadn't really been built out in the way that they need it to be.

There's like a necessary precondition to IKEA entering a market, which is there's robust delivery services to make it work if you're going to rely on the catalog model. Otherwise, people have to be able to drive to the stores and use this store concept where you grab it off the warehouse, put it in your big car, drive home. In these dense urban areas in Japan, that's not really possible. And so they pull out after 12 years.

They did eventually go back in in 2006 and make a bunch of changes to make it work today. But I think Japan was kind of this after they saw success in all these other markets. It was a little bit of humble pie for them not seeing it work there. And I think it spooked them a little bit for further global expansion. Yeah. It is amazing in the 70s, really until they go to Japan, laughing using the word, well, we'll come back to another reason why I shouldn't be laughing using the word.

It's almost like they did blitz scaling across Europe and even beyond Europe in the 70s. I mean, they went all throughout continental Europe. They expanded to Canada, Australia, Singapore. I mean, Ingvar totally got conviction that the newly redesigned store in Stockholm was it. And we were going to copy paste it and bring it everywhere. And they're rapidly scaling with profit dollars. Right. They're not raising money to do this. Yeah. As we've talked about, they have very thin profit margins.

And so what it means is they're just doing tons and tons and tons of volume to enable them to do their future growth with their current profit dollars. Yep, it's hard to get consistent revenue data on the company because it's a private company, still is a private company. But by the 1980s, they're doing $2 billion a year in revenue. So call it 15, 20 years to scale from 20 million to $2 billion. It's incredible. Yeah, it's interesting.

It's a company that is rapidly scaling at the same time that in their DNA, they're unbelievably thrifty. You kind of wouldn't expect both of these things to be true of the same company. Totally. This is the same guy, just to quote the testament of a furniture dealer, this is one of my favorite paragraphs, Inva writes, it is not all that difficult to reach set targets if you do not have to count the cost. Any designer can design a desk that will cost 5,000 crooner.

But only the most skilled can design a good functional desk that will cost 100 crooner. Expensive solutions to any kind of problem are usually the work of mediocrity. We have no respect for the solution until we know who it costs. An IKEA product without a price tag is always wrong. It is just as wrong when a government does not tell the taxpayers what a free school lunch cost proportion. Before choosing a solution, set it in relation to the cost. Only then can you fully determine its worth.

It's amazing that this level of thriftiness and paying attention to the details is also the same company that is in a decade expanding all over the globe. And it's totally what enables it to happen because it's almost like Warren Buffett in the Berkshire Half-Thaw-A-E episodes where as a young man, he's like, I cannot spend any money because any money that leaves my bank account will not compound. It's the same thing here with IKEA.

They view all of the profits that they are making as compounded value of future investment here. That's interesting way to think about it. So in the 70s, during this decade of blitz-galing, if you will for IKEA, Ingvar is in his early 50s. And for a couple reasons, as the company is doing this massive scaling outside of Sweden, he starts to become really concerned about succession and what will happen to IKEA when he inevitably dies.

Although he would live for another 40 years after this, he lives to be 91. Sweden at the time had high and rising wealth and inheritance taxes. So inheritance taxes for large estates of which the Compradin, a state in IKEA as an asset would definitely be one was over 60%. And on top of that, there was an annual wealth tax in Sweden at the time, which was 2.5% of your calculated wealth annually. And your calculated wealth included all of the working capital in any companies you owned.

Whoa, really? Like it's the illiquid ownership of the company plus the working capital in it? Yes, especially sitting there in the early 70s, knowing you're about to embark on this journey from, you know, call it a couple hundred million and corona revenue business to a multi-billion dollar revenue business. Oh, his net worth would eventually rise to something around 60 billion dollars. Yep, there it wasn't even just going to be like enough capital to pay that two and a half percent annual tax.

Side note, by the way, in the mid 2000s, Sweden ended up abolishing completely both the wealth tax and the inheritance tax. So actually at the end of his life, Ingvar moves back to small land, moves back to Sweden. Oh, wow. I didn't realize that was part of it. Yeah, and he dies in Sweden. Anyway, this kicks off for Ingvar and the Comprads, a whole saga of wealth, succession, corporate planning that ultimately has a huge impact on the company.

So in 1973, which is the first year that IKEA expands outside of Scandinavia, Ingvar and his family emigrate to Denmark first to avoid the wealth tax. And then a couple of years later in 1978, they settled in Switzerland. Now, Ingvar actually has multiple goals here, though. It's not just avoiding taxes, although I mean, he'll be the first to admit. Taxes was the like first and primary motivation here.

In addition to that, and I think this really, really was genuine, he's concerned with ensuring IKEA's continuity and survival, and there are multiple parts to that. One, he wanted IKEA to be completely independent from anyone country's political fate. The political history of Europe that Ingvar lived through and they're working to talk about later, is a case in point here, right?

Like he has lived through not knowing that countries are going to continue to exist, and he doesn't want any of that to risk IKEA. Two, he also doesn't want anything that would happen within his family to risk IKEA. So by this point, he has three relatively young sons, and he doesn't want to set up a dynamic where the three of them are fighting over control or selling off IKEA or et cetera, et cetera, tearing it apart.

And then I think, see, he also wants to ensure that IKEA keeps its focus on the long term and not the short term. And for him, that meant specifically having a cute fear of what would happen if it ever were a publicly traded company. He thought that there's just like, totally incompatible to be publicly traded and have shareholders and be long term focused. I heard a funny quote indirectly from someone who told me that Ingvar once said, going public is a little like wetting your pants.

It's warm and comfortable for a few minutes, but they're for that. Oh my God. What a folksy dude. Well, so ultimately, after a lot of international lawyers get involved, they decide that what they're going to do is set up a self-owned foundation based in the Netherlands. So this is like echoes of our Novo Nordesk episode here. And the reason they choose the Netherlands is that Dutch foundations are, at least according to the lawyers, the most bulletproof and hardest to change the bylaws of.

And they're going to divide IKEA into two quote-unquote spheres, one of which is going to be the physical sphere, and company, and that is the actual stores, the operator of the stores. Yup, operator of the stores. And the other one is going to be the quote-unquote mental sphere, which is the brand and concept of IKEA. And this is where you end up with this crazy structure, where IKEA is two companies today.

It is Inka Holdings, which is the physical sphere, the technically largest franchise operator of IKEA stores. They own and operate 400 of the 476 IKEA stores in the world today. And that is owned by the Dutch Inka Foundation, which is a charitable foundation, which is the actual charitable foundation.

And then you have the mental company, the brand company, which is inter-Ikea systems, and inter owns the IKEA brand, the concept, and then they license the IKEA brand and concept to everyone else who operates the stores as a franchise operator of which today Inka is, by far, the largest. And in return for that licensing of the brand and concept, inter-Ikea gets a royalty of 3% of gross sales from every store.

So I'm going to say all of this again in different words, just because it is impossibly hard to parse the first time. You can essentially think of it as a franchiser, franchisee relationship. The franchiseeor, who owns the brand, the IP, all that, is inter-Ikea systems. They work with a company called Inka, who has the privilege of operating the stores and getting access to the intellectual property in exchange for a 3% royalty on their revenue.

So every year, inter-Ikea systems, and this changes a little bit over time, but inter-Ikea systems, the parent company, designs furniture, and works with manufacturers to have it made, and up keeps the brand and all the corporate stuff. Designs the catalog, et cetera, et cetera. Cells that furniture to Inka or any of the other franchises. And the reason there's other franchises is because you want specialized franchises in different markets where you don't understand the local culture.

So that's kind of why there's Inka for a lot of the Western Europe and English-speaking world. And then there's specific franchises that are not Inka for other parts. But just simplify it for now, because Inka is like 90% of the stores. And then Inka buys that furniture from inter-Ikea holdings, pays 3% of revenue, and then runs the stores. Now, David, I simplified out the part about the foundations that own each of them.

I think we should come back to that later, because there's some interesting nuances there. But that's sort of the structure they devise here. Yeah. And then ultimate foundation owners for both of these two separate companies that get set up the Comprod family, at least after Inva dies, the Comprod family will be involved, but does not have ultimate control or voting power over either of these companies. So today, certain of the brothers are on the board of certain companies.

All three of them are on the board of one company or the other. But they are far from a majority, and they cannot even if all three of them get together, they're influenced or control the decisions of either company. And that was super important to Ingvar. Yep. It's pretty interesting. And I believe the Inka company and foundation still rolls up to a Dutch parent and the inter-holding company. I believe is a Lichtenstein foundation that owns it.

It's all like this sort of spread around to ensure this sort of political continuity of the company. It's almost sort of like Bitcoin maximalist people who have ripped up their keys into different parts and put it in different safe deposit boxes all around the world. That is exactly what Ingvar is doing here. That's a good analogy. Yes, you are correct.

Inka, the franchisee who operates the stores, rolls up to a Netherlands-based charitable foundation where inter-Ikea systems, the kind of parent that owns the IP, rolls up to a Lichtenstein-based enterprise foundation. Different, like non-charitable as an enterprise self-owning foundation based in Lichtenstein, which for those wondering what Lichtenstein is.

It is a country that is sort of landlocked and sandwiched in between Austria and Switzerland with a very small population, but it happens to be very good for establishing entities like this from a tax and treaty perspective. Yep. And you said to you to sort of enterprise foundation, I think it was the word you used, not a charitable foundation. The purpose, this is like a circular function in computer science.

The stated purpose and goal and activities of that foundation is to ensure the continued operations and success of Ikea. Yes. To secure the independence and longevity of the Ikea concept and the financial reserves needed to ensure this. That is the purpose of the foundation. Which is so interesting. Again, the Inka Foundation is a charitable foundation and they do disperse, I think, now like two, three hundred million euros a year in charitable donations around the world.

And it's to things you would expect. It's climate, it's poverty, it's charitable causes. But yeah, to your point, the inter-Ikea holdings, the foundation at the top of that is literally to ensure Ikea's continuity. It is like a Fort Knox for Ikea. Fascinating. Okay, so the structure is going to shift a little bit. As I mentioned, like they'll rename things, they'll break something's apart, they'll shift who's responsible for what on the edges.

But that's largely the structure that is in place going forward. Yep. So once this is all done and Ingvar and the family no longer doirgretti own the company, in 1976 he writes this document that is intended to serve as sort of a like forever operating system of the company. It's almost like the Bezos leadership principles. Yes, exactly, exactly what it was like. And he titles it the Testament of a furniture dealer, as we've talked about.

And it literally, like he's treating this like it's his last will and testament, even though he stays involved in the business for another 42 years and hands on the whole time. It's an amazing document. We'll link to it in the show notes. Like you should go read it. It's on the Ikea website. It's really cool. So it has nine testaments, sort of commandments. And you already read one, which was the mortal sin of wasting resources at Ikea.

The first one though, number one, the product range or identity. We shall offer a wide range of well-designed functional home furnishing products at price is so low that as many people as possible will be able to afford them. Talk about that earlier. Our products must be functional and well-made. But quality must never be an end in and of itself. It must be adjusted to the consumer's needs. This is fascinating. He continues.

A tabletop, for example, needs a harder wearing surface than a shelf in a bookcase. In the first example, a more expensive finish offers the consumer a long-lasting utility. Whereas in the latter, it just hurts the customer by adding to the price. Quality must always be adapted to the consumer's interests in the long term. No effort must be spared to ensure our prices are perceived to be low. There should always be a substantial price difference compared to our competitors.

And we shall always have the best value for money offers in every function. Every product area must include breathtaking offers. This is before the hot dog analogy in 95. It's great. It makes so much sense. It's so great. The analog to software companies is engineering for engineering sake. There's many examples of sort of architecting the perfect system that's like wildly overkill.

Anyone who's put together IKEA furniture knows anything that's not seen, like things on the bottom that face the floor or that face the wall, are not finished. And oftentimes, like the back of shelving units or the back of cabinetry is like thin, flimsy. You don't need it to be structurally stable. So it's not because they wanted to cut a corner there and make it as cheap as possible because they view that as a value for you, the customer. It's not that they don't care or that it's sloppy.

They care a lot. Right. It's that it would be insulting to spend money on it. Yes, exactly. This is the polar opposite viewpoint of the Apple Steve Jobs. The insides must be beautiful. Yes. But it's actually a lot closer in philosophy than you would think. It is intentionality about it. Yes. Nowhere in either company is their sloppiness. But at IKEA, we are going to intentionally make the backside and the insides not beautiful so that it is a higher value to you as a customer.

Yeah, there's so much good stuff in this document just to illustrate Ingvar's personality. The fact that he wrote this is, well, here it is. Bear in mind that time is your most important resource. You can do so much in 10 minutes. 10 minutes once gone are gone for good. You can never get them back. 10 minutes are not just a sixth of your hourly pay. 10 minutes are a piece of yourself. Divide your life into 10 minute units and sacrifice as few of them as possible in meaningless activity.

It's so, I'm so glad that you brought this up. I wasn't going to put this in the episode. But I totally highlighted that reading it. I was like, wow, I need to think about that in my life. Totally. And there are so many times when we're like 10 minutes away from a call that you and I are jumping on or 10 minutes away from recording an episode. And I'm like, I'm amazed in the amount I could get done in those 10 minutes when I really was forced to. And it's such a good point.

Like if you actually force yourself, hey, just go focus and get 10 minutes of work done. You can be astonishingly productive in 10 minutes. Totally. I hadn't thought about this, but maybe I can. Maybe I can app all our more spiritually aligned than I even realized. I can and Apple are very similar in a way that I will get to later. Oh, okay, I love it. Okay. And then another similarity analogy.

The last testament, number nine, is just so early Jeff Bezos shareholder letter like that we can't not read it. The title of the testament is, most things still remain to be done. A glorious future, exclamation mark. So he's e-reads, the feeling of having finished something is an effective sleeping pill. A person who retires feeling that he has done his bit will quickly wither away. A company which feels that it has reached its goal will quickly stagnate and lose its vitality.

Happiness is not reaching your goal. Happiness is being on the way. It is our wonderful fate to be just at the beginning in all areas. We will move ahead only by constantly asking ourselves how what we are doing today can be done better tomorrow. The positive joy of discovery must be our inspiration in the future too. Oh, I share this affliction. A hundred percent me too.

I feel for Ingvar that this is his like view on life because anytime anything awesome happens, I'm like immediately onto the next thing and unwilling to ignore. Like it doesn't give me happiness that something great happened. What gives me happiness is working toward the next great thing. If we ever just decided, all right, we made all the good episodes. We're done. I'd be miserable. I was going to laugh. I'd be like, this is the story of acquired. Yeah. It's so funny.

But more on the personal life advice from this too. Ingvar I think is living proof of this. I mean, the man lives to be 91. He clearly didn't think he was going to live to be anywhere near that age. And the stories we heard of him visiting stores, being super engaged in board meetings, making decisions, making product decisions up until the last weeks of his life at 91 years old. I think he is totally right.

He writes a person who retires feeling that he has done his bit will quickly wither away. That is like no more perfect example of that exist than Ingvar himself. Yeah. Happiness for him was making things a little bit better. If he has nothing to make better, what's his reason for being? Yep. Totally. So this is the mindset that Ingvar and the company are going into the 80s with. And the 80s is just continuing this compounding.

So 1981, the open stores in France and Spain, 1983, they go to Saudi Arabia, 1984, they go to Belgium, 1987, they go to the UK, 1989, they go to Italy, and along the way, in 1985, as we talked about, they opened the first US store outside Philadelphia in plimuth meeting, right back in the pressure, frequently did it often as a child, outfitted my bedroom, in my family room, and everywhere else.

The interesting thing about the US though, which I was so surprised reading, because again, Ikea has just been part of my life forever. It actually doesn't work that well for a really long time. Yeah. It opens with a bang. In 1985, they do this like incredible marketing campaign or in the Philadelphia area. Part of it actually was figuring out how it should be pronounced, because in Europe, it was Ikea, the way you would pronounce it as a Swedish person is Ikea.

And the ad campaign, they decided Americans are just going to pronounce it Ikea, so let's lean into it. So it was an I and a picture of a key, dash UH. And so coming soon, Ikea. And people sort of knew about it, because it had been in Canada for nine years. I think it had started in Nova Scotia.

And actually, I happen to know, the founders of Costco made a special trip up to one of the Canadian Ikea's, even before the founding of Costco, because they had so much respect for Ikea as a brand they admired. They like wanted to go and see it and experience it. Oh, that's amazing. Yeah, isn't that crazy? So like people in the US, especially merchants, and people knew of Ikea from its Canada press.

And so it's opening the pent up demand in Philadelphia from the Coffinia factors leading to the excitement around it was insane. There was over a one mile long line to get into the store. They ran out of merchandise on opening day, and they actually had to run radio ads apologizing and announcing that they were restocking the store as fast as they can. Whoa, that's wild. That said, a failure of Ikea corporate as they were expanding around the US was assuming that the US was homogenous.

And so I think they expanded to 10 or 12 stores, and it wasn't going great relative to their other markets. And I think it's because they sort of misunderstood that the US has really different needs in really different parts of the country. Yeah, that would make sense. And in Europe, not to say all European countries are homogenous, but any given European country is a lot more homogenous than all of the United States of America. And there was also some just basic US market specific stuff.

I love this softer sofas. Americans like to sit in the sofa, whereas Europeans sit on the sofa. Oh, really? Is that part of it? Yeah, yeah. So the sofas are softer in America. You think of them? Whereas in Europe, yeah. Funny. Yeah, around this time, I think when they were observing the US stores were not in great shape. They were open to the idea of individuals franchising Ikea stores. Now they had this structure in place.

They thought maybe this is an interesting thing for former long-time Ikea employees to do to sort of open up a store. So they did an experiment starting in Seattle and the sort of idea from Ingvar was, if you have your own wallet on the floor, how do you do compared to the corporately owned stores?

And it was essentially like a bakeoff and a test to see if the bureaucracy was hurting them or if they had too many layers of management or if they had more innovative marketing ideas which the independently owned stores, specifically the Seattle one absolutely did, created their own marketing campaigns. And like it became pretty divergent. The Seattle store was actually a least old Boeing warehouse that ended up being laid out pretty differently than other Ikea stores.

And so you kind of get what you ask for. If you want different ideas, the concept is going to end up being pretty different. So they only opened one or two more, despite the fact that the local-owned stores, well, the Seattle store actually did way better. I think it was the highest performing US store and beat all the corporate owned ones.

Despite doing another deal in San Diego and another one in Houston, eventually they kind of wanted to bring the learnings back to the mothership to kind of have them all be homogenous. And so all the US stores are now operated by Inca. But for anyone in Seattle that during the 12 years of independent ownership visited that store, it actually was a pretty different thing with very different marketing materials than anyone else in the US was getting.

Was it in the same location that the garment is down and reddened? I think that where the original Ikea was is now the parking lot. And they've shifted and built this new shiny building next to it. Man, I spent so much time in that store when I first moved to Seattle to work for Moderna. I mean, I was moving across country as a young person on my fourth and fifth apartment since graduating from school three years earlier.

Wow. Man, I was so squarely in the sweet spot for Ikea at that moment in my life. It was almost a weekly pilgrimage that I did to that Ikea store. Wow. And I used to love going to the Aziz section like I would always start there at the end and be like, okay, what can I get a deal on here? Because Aziz is like returns and... Yeah, broken stuff or showroom floor stuff that they're getting rid of. Yeah, yeah.

It's like when I enter a Lou Lemme and I always go right to the back and look at the clearance rack. Yep. Even the Lou Lemme's clearance is horrible. They're like 15% off for something. Oh, man. Sometimes in the Ikea Aziz section, you can get some screaming deals. I'm going to argue everything is a screaming deal. But to this point of like the reason they were doing this Seattle specific thing, the individual franchising, this like Ingvar was obsessed with reducing bureaucracy.

I get the sense this is still an ongoing battle today and now that they're a bigger company in figuring out how to be as lean and scrappy as they were. You know, when you have more committees and more lawyers and more traditional corporate leaders from other companies and all that coming in, this sort of thing is a helpful antibody against that. Totally. There's one other thing that happens in 1985 in Ikea land. Meatballs, baby. It's like the final piece of the puzzle.

They add meatballs to the menu. Now, this is what's funny. You would think this would be like the capping of his career, the end of the story. You know, it's 1985. They add meatballs. The concept is perfected. In 1986, Ingvar is 60 years old. He steps down as president of the Ikea store operation of Inka. It's the reverse morris Cheg. Isn't that the year he started TSMC? He was 59, so I like that. That's right. Yes, he steps down as president in 1986.

I don't think anything changed whatsoever in his daily activities. I think he was doing exactly the same things that he was always doing and his successor, a guy named Anders Moberg, does stay there, I think, for 12, 13 years maybe. He would leave at the end of the 90s to go become president of Home Depot's planned European expansion, which then ends up not happening until he would leave Home Depot. But yeah, I think he was constantly clashing with Ingvar. I'm like, hey, I'm the president here.

There's only one president at Ikea, even if not in name in that, was Ingvar. Do you know what Anders Moberg is doing now? Ooh, I do not. Anders is on the board of directors for the Ikea foundation. Oh, interesting. Well, there couldn't have been that many hard feelings then. Right. Yeah, which is the foundation on the Inka side of the tree, the franchisee side. Amazing. With two of the sons to Comprod Brothers. Yep. And I think the third son is on the interboard. Yes. Yep, exactly.

So that takes us into the 90s. Basically, the compounding story continues unabated. In 1994, they entered Taiwan. In the spring of 1998, they entered China. They expect that China will become a obviously huge, huge market for them, which it does. By the end of the 90s, Ikea is a $10 billion annual revenue business. They'll rock it and roll it. Seriously. There is another thing that happens in the 90s that we have to talk about on this episode. And happened way earlier in Ingvar's life.

But this is the moment where it really intersects the Ikea story. The news comes out that in his youth, Ingvar was a part of a Nazi and fascist movement in Sweden, which in some ways is not surprising. I mean, his grandparents had immigrated from Germany, had very strong feelings, had lived this horrible life. And Ingvar very much looked up to his grandma and sort of looked to her for political moral social guidance. And so unfortunately, Ingvar was a part of this Swedish fascist movement.

It was like sort of provable that he was attending meetings, helping to organize, raised funds, recruited members. He stayed close to this Swedish leader even after the war. As late as 1950, wrote a letter that he was proud of his involvement. The net of all this is in 1994 when this came out, he immediately came out and said that his fascist activities were a part of my life, which I bitterly regret in the most stupid mistake of my life. He was direct about it.

In fact, the first employee of Ikea was a Jewish refugee who had fled Austria in 1943. So there's a lot of complex stuff going around here. But the thing that is definitely admitted to proven is that he was a recruiter organizer for the Swedish fascist movement during the Nazi regime. The extent of his involvement in the Swedish fascist movement after the war actually didn't come out then in the 90s, came out later in the 2000s and Ingvar.

I think rightly took a lot of flack for not fully disclosing how long that went on. Yeah, he had a friendship with the Swedish fascist party leader who would go on to be this pretty horrible vocal Holocaust denier. Ingvar maintained that friendship and even at the end of his life went on the record and said this person was a great man. On the one hand, you want to say, look, he apologized and it was 50 years earlier.

He was 17 at the time, can't a person make a mistake when they were younger and admit a mistake and move on? On the other hand, you could imagine wanting to give him more forgiveness if he hadn't continued to stand by the Holocaust denier guy, maintain that friendship. Or just came clean about that whole thing initially. Totally. Or with his vast, vast resources made a big contribution to a Holocaust museum or the families or something.

Yeah. This is one of these things that covering these old European companies. You can't avoid this. Totally. My heart dropped and was also not surprising when we first started doing the research and had no idea and came across. It's not hard to find this. You come across it for the first time and you're like, ah crap. Yep. So coming out of the 90s. Coming out of the 90s, in 2000, IKEA starts their next big geographical growth initiative, which is Russia.

So they reach a deal with the Russian government that IKEA is going to enter Russia and they're going to use the market, which they expect to be really big for IKEA, to also pile it the, quote unquote, mega MEGA, all capital shopping center concept, which I think was actually like the brand name of the shopping center that they then later roll out to other places around the world. And the idea is IKEA writ large has so much capital and so much resources at this point.

We've always owned our own real estate and we think that's a key part of securing that future. We have so much more cash resources now. What if we also invest in like large retail centers around the IKEA store, which they hadn't really done before?

And the idea, this is kind of genius and not novel now because so many other folks do it, we surround the IKEA with lots of partial competitors, because IKEA sells so much stuff in its range that yes, there could be a home depot there or yes, there could be a bed bath and beyond there. I'm using American terms here. Obviously, these are not Russian stores and we compete with them partially. I didn't realize Russia is where they started the strategy. Yeah, Russia is where they started.

But because it's now this retail center, if even only say 10% of the people that are coming go there for call it bed bath and beyond, might also visit IKEA, well then that's a found extra 10% customers for us. So they pilot this in Russia, which is interesting. And I think it works pretty well. Unfortunately for IKEA and everything that would happen in Russia over the next 20 years, they end up completely exiting the market in March of 2022 after Russia invades Ukraine.

So they had 17 stores total in Russia, 14 of which were these mega complexes. They close all the IKEA stores, they sell off the 14 mega complexes to the Russian. I think Supermarket chain, Gazprom Bank. So they end up fully exiting the market after 20 years. But it does become pretty large for them and sort of pilots this mega retail center idea. Yeah, I mean, as much as 20 years later, they had to sell it all off. Or in some cases, I imagine they didn't get a return.

They just had to close up shop. It does lead them to this insight, which is we've been building these Disney lands out in the potato fields. And I've heard a few people refer to the potato fields and I read it in a few places. And then everything springs up around. We should probably benefit from the fact that everyone is springing up around it to try to take advantage of the fact that people are driving out for their day at IKEA.

And so they want to be everyone's landlords who are drafting off the success of IKEA, creating a whole bunch of traffic to this area. I think it's a pretty major strategy of theirs now, whenever they open a new store to own as much real estate as possible around it and help develop it. Yep. I mean, gosh, I think about here in the Bay Area, the Emoryville store across the Bay and the East Bay. I don't know how much of the Emoryville complex they own, but there's so much retail all around that.

Yes, it would be genius for IKEA to participate in it. Yep. So another thing that happens around this era, it's sort of the mid to late 90s, is they really codify these principles with what they call democratic design. They had always believed in optimizing form and function, like they wanted things to have beauty, but also incredible purpose. But they added three more pillars. So they now have these five pillars. So you've got form function, quality, sustainability, and low price.

And we've talked about the quality, we've talked about, quality is not maximum quality, it's appropriate amount of quality for the object. Low price, we've talked a lot about sustainability. They weren't extremely early. This is before anybody is mentioning ESG or anybody, like most people are mentioning climate. They are making heavy investments, even in the late 90s, when it was kind of viewed as heretical.

They probably wouldn't have been able to do it if they were a public company, but starting to invest in renewable energy and other things. And now this is like a huge, if you go to IKEA.com, it gets a lot of real estate and everything they do is their sustainability efforts. But their goal is to optimize across these five vectors and weigh the trade-off in between them.

And so their idea of democratic design is that everyone, regardless of their income, can access well-designed products to improve everyday life. And every time they iterate on a product, every year, they should be further optimizing some set of the products in the range to get a little cheaper or find a little better way to manufacture it or develop some way to... Serve more customers with the same product to get a little bit better scale economies or to do something in a slightly greener way.

You could imagine a five-point diagram where they have sort of a score on each of these five. They want the total area to be as high as possible for everything they do across those five vectors. You sound like a... I'm a kind of kidsy consultant now. I am confident that diagram has a name and I'm proud that I don't know it. Yes. B2, I've seen them before and I don't know what it's called and I don't want to... But yeah, that is democratic design.

Jumping forward to 2007, they hit 20 billion in revenue in 2007 up from, you know, call it 10 in 1999-2000. So growth is really still going here. And then they hit a rough patch. Part of that obviously is the financial crisis in 2008, non-wards. But it's also e-commerce. So IKEA makes the like considered and deliberate decision here in the mid-2000s as e-commerce is taking off not to participate or at least to participate only as minimally as is required.

Which you can understand it is against every other element of their DNA. Totally. And I'm sure it's still to this day very much less profitable for IKEA than in-store visits. I bet e-commerce is not a profitable business for them. I suspect that is right. If you just think about all the ways in which they whittle price down, every single place they could make a deal with a customer and say, hey, how about you do a little bit of work and we don't?

We'll give you a better price and the customer says, okay, you know, it's picking it out yourself in the warehouse. It's assembling it yourself at home. It's driving it to your house. It's, oh, I don't need the back to look good. You know, it's every single way in which the customer makes the deal with IKEA to, yeah, lower the price a little bit. E-commerce blows it all up.

The overhead, the cost structure required for e-commerce, I mean, shipping things to your house, having the delivery network, figuring out a whole new supply chain. Like, should it come from the store every time? Should it not come from the store every time? Should we box them differently? Should we use third party logistics? Should we use our own, et cetera, et cetera? It goes in the opposite direction as everything they've been trying to optimize for the last 50 years. Totally.

And even more than that, we alluded to this much earlier in the episode. It also breaks the beautiful sort of closed loop ecosystem of controlling both the demand and the supply chains. In an internet, e-commerce post catalog world, IKEA no longer controls the demand chain in the way that they did before. Right. So for the next four years between 2007 and 2010, revenue is basically flat. Growth falls off a cliff, like zero growth for four years.

In 2011, they do start growing again. Revenue hits 25 billion euros. They enter Latin America. So they're starting to open up new markets again. Yeah. But 2014, they decide to shift strategy, but not to start doing e-commerce. The strategy shift is to start opening small stores in cities, starting in Hamburg, Germany. They have now embraced this and launched in dozens of cities. Including San Francisco.

It's the smaller set of products. So it's pretty interesting observing this trend toward urbanization and trend toward buying online. As of 2014, they still don't really have e-commerce. On the one hand, maybe that's the right strategy. Maybe they never should have done e-commerce. I don't really know because they're not a public company and because they don't break out segments, we don't really get to know if e-commerce is a profitable business for them.

What we do know is that over time their revenue keeps growing. At least if you look at Inka, the operator of these stores, their operating profit does not. In fact, over the last several years, it's been declining. So as a percentage of their revenue, the operating profit of these stores is going down. And David, I think where you're sort of going with this is they really start going down once IKEA does meaningfully start investing in e-commerce.

Starting in 2018 is when they really put their foot on the gas. And today, 2024, e-commerce is 26% of revenue. Right. So it is what their customers want. So you can't bury your head and say, look forever, we're not going to do e-commerce because it doesn't really fit with our model. If it's what your customers want and the fact that 26% of people are doing it today, clearly you do have to go do that. But I'm not sure yet that they have a profitable way to do that with their model.

I mean, simply just inferring from the financial statements they don't because revenue is growing, e-commerce shares growing and operating income is flat to declining. Yeah. My only skepticism on it is like before truly issuing judgment there is maybe there's something we're missing since we don't have full financials and we're just looking at Inka, which is the franchisee that operates the stores.

Maybe there's, I don't know, but yeah, I mean you and I ran the numbers. I'll pull up the spreadsheet real quick. Starting in 2017, revenue continues to grow on the order of five-ish percent per year, but their operating margin drops from 8%, 6%, 5% and kind of hovers in this 3% to 5% range the last few years. Yeah. So something is happening that is making them less profitable. Yep. And seems like a fair assumption. It's e-commerce. Yep.

2018, two big things happen. One, they enter India, two, Ingvar passes away in January 2018 at age 91. And like we said, he's working right up to the end. One sort of poignant story we heard in the research is after one of the last board meetings that he was part of, he sort of took the rest of the board members and management aside and so jealous of you. You know, he knows he's coming to the end of his life that you get to keep working in IKEA and running this business and I don't.

That's like, this was his life. Yep. Absolutely. So 2021, they finally discontinue the catalog. It's a sad, sad time. At peak 220 million copies were printed across 69 different versions, 32 languages and 50 markets. I mean, they really used to have their own proprietary relationship with customers. And in this new era on the internet, any time that I have a thought, oh, I need to go buy something. I Google it. I look at a bunch of retailers.

I am not specifically IKEA's customer in the way that in 1970, you would have been an IKEA catalog subscriber. And they don't really have a way to engage people as strongly as they once did. I mean, email marketing is just not the same as what the IKEA catalog was. No, not the same kind of catalog.

Now, on the one hand, they're competing on equal footing. On the other hand, I have spent thousands of dollars at IKEA over the last few years since moving to a new house having a baby yesterday morning. I bought $700 worth of IKEA merchandise in part to prepare for this episode, but in part, I needed stuff. Right. I mean, hell, I've got the IKEA high chair that have used across two kids now.

Yep. Oh, yeah, my son's crib is IKEA. Oh, and by the way, that $700 was spent on e-commerce. Oh, you didn't spend that on your trip to the store. No, I had two big IKEA transactions in the last week. I mean, I wouldn't have gone to the store if I wasn't preparing for this episode, but the stuff that I bought online, that was stuff I needed. And I probably wasn't going to go to the store to buy it.

Man, so you willfully and intentionally cost IKEA margins literally took money out of their foundations profits. I could have taken more time and gone to the store, but this episode would have been worse. I wouldn't have had a bunch of time research. There we go. This is like the version of, you know, when you Google for products you want, you know, click on the organic results. Don't click on the ad result, even though it's the top of the page to save your, you know, favorite companies money.

Don't buy IKEA online. Go to the store if you love IKEA. At some point, the bigger it's talked to somebody at the company about this, I'm sure they don't like lose them, but they don't make as much money. Maybe they do lose money on online orders. I don't know. I don't know. Ingvar isn't alive anymore. I don't know.

I don't know. It's true. I will say a thing that illustrates every point we've been making on this episode really, really well is so they bought taskrabbit for a small amount 50 to 75 million somewhere in there a few years ago. Yep. 2017. And I checked the little box like provide me an estimate of what it would cost for a taskrabbit to come to my house and assemble all this stuff. 350 bucks on a $700 order. So half of your purchase.

Yeah. That is the perfect encapsulation of how much money customers save by the IKEA flat pack pick up yourself at the warehouse model. In fact, it's more than that because I think it was like 30 bucks or 50 bucks in a delivery fee. So call it $400 that you're saving by buying something the IKEA way versus a fully assembled delivered at your house thing. I'm saving over a third of the total purchase price by doing it the IKEA way versus the traditional way.

Which I'm laughing brings up what for me was the ultimate IKEA hack for many years of my life. I think I talked before on the meta episode about how much I love Facebook marketplace and Craigslist before that. Yep. I decided probably I don't know 10 15 years ago. Hey, IKEA furniture despite the fact that you have to assemble it yourself and whatnot like it actually is pretty durable on the one hand it gets the rep of like disposable.

But if you take care of it, it'll last a long time even through a disassembly in a move. Oh, I can attest to that not just through the move really because my whole thing with it is to me it feels like once you assemble it is good. But then when you disassemble it and put it together somewhere else, it always feels like it's a little wiggly. Well, my hack for quite a number of apartments and houses was just by secondhand IKEA on Craigslist and Facebook marketplace and be cool with it.

So you could successfully move the IKEA and it wouldn't not so much to save money but more to save on the assembly. That was the reason I was doing it. And they hold their resale value pretty well. Well, first of all, they can't really go down and value so they're fully depreciated when you buy them for a $10 lack table. Right. I was not buying lack tables on Craigslist. But there are some things that are super durable and some things that aren't like a lot of the press board stuff.

Once you pull it apart, I wouldn't expect to be able to put it back together. But they do now sell like $1000 dining tables made out of solid oak. First of all, I didn't realize you could get just the materials to make that for $1000. That's like a $4 or $5,000 table at other retailers.

But something like that, I expect to survive moves very well. I think it's just it's unfair to say everything from this retailer is throw away or everything from this retailer is infinitely durable. Neither are true. Yeah. What I really used to do my hack with was the HEMNESS line HEMNESS bookcases. We have had so many HEMNESS bookcases in our homes over the years.

Jenny did a PhD. She has lots of books. Lord knows I have tons of books now as my vocation our vocation. And HEMNESS bookcases like the last if you take care of them and you can disassemble reassemble. Fascinating. All right. Should I take us through to the state of the business today and then we'll get new in the analysis. Let's do it. Awesome. But before we do that, we have one more of our favorite companies to tell you about the climate aligned AI infrastructure company, Crusoe.

Yes, Crusoe is the vertically integrated cloud platform built specifically for AI workloads and was recently named the gold standard of AI cloud providers by Dylan Patel over at semi analysis. Crusoe is just such a cool story. They build and operate enterprise grade GPU data centers that are specifically designed for AI workloads and each one is powered by low cost, stranded energy that otherwise goes to waste or worse gets emitted as greenhouse gases.

Yep. They've totally reimagined the traditional data center architecture to support the huge power cooling and compute density needs of AI and kind of like IKEA. They've done it all with a focus on getting the lowest cost of inputs possible in this case energy which enables them to offer better prices to customers, which leads to signing more long term contracts, which leads to Crusoe building more capacity faster, which just makes the whole flywheel spin over and over again.

And it's not just better on cost. It's also super fast and reliable thanks to innovations across virtualization networking and other areas of the stack. They can do things like boot up a VM in under 90 seconds. Totally. Power demand in GPUs is increasing dramatically, which means that one, the traditional data center design and engineering of the hyperscalers is no longer optimal.

And to energy not compute is actually becoming the limiting factor in scaling AI. So Crusoe's infrastructure, unlike the hyperscalers is built from the ground up for GPUs with elements like high density racks and direct liquid to chip cooling, which enables them to support the most demanding AI workloads that traditional data centers just cannot.

Yep. And because Crusoe can build with this unique access to stranded energy, they're able to bring massive amounts of compute online all at once. They currently have 15 gigawatts in their development pipeline and they're coming Abilene Texas facility alone has over 1.2 gigawatts planned, which will make it one of the largest clusters in the entire world.

Yeah, it's just an amazing company. The net of all this is Crusoe can provide nuclear levels of power for less cost than other cloud providers and with low or in some cases actually negative emissions. David and I are super proud to be working with them and also to both be investors to learn more about Crusoe go to Crusoe.ai slash acquired that CR us.

And I'm going to go to the chat.ai slash acquired or click the link in the show notes and just tell them that Ben and David sent you are thanks to Crusoe. Alright, so the IKEA business today will start with a quick refresher on structure. There's two branches of IKEA to think about. There's inter IKEA systems. This is the corporate entity that owns the brand and the IP. And as of 2016.

All the product development supply chain all that stuff so they own sort of all the inventory and the franchisees take possession of it almost on like a real time basis as they needed. So inter IKEA does three things franchise the range which is the products and supply which is supply chain and the way that I would sort of think about this is.

There are like two things in one one there a company that designs and makes products to sell to franchisees and to their license or that takes a 3% rate effectively on all sales which it's pretty fair totally. 3% of your revenue for the IKEA brand and concept that seems very fair.

But also like if you're selling razor thin margins it's actually a huge percentage of your profit pool it's kind of like payment processing you're like oh what's 3% and then you look at the profits on a retailer you're like whoa I'm shipping half my profits to yeah what did you say operating income margin is these days like six 7% fair member.

That's high it's like 4% 5% OK so you're taking basically half of your operating income yeah on the other hand like are these really different companies like there's not really deal between the two that's yeah. And there's actually a specific tax reason right why it's a royalty on sales from what I could tell I'm not a tax expert I think royalties are tax deductible.

So by shipping money around between two entities instead of having it just be one simple C corp that runs the whole company they are actually able to deduct those royalties off their taxes yeah it is helpful for tax purposes.

That parent company did 27 billion dollars in sales of goods and they made 1.4 billion dollars from franchise fees that number pencils pretty well IKEA as a whole did 47 billion dollars in revenue so when you think about it the parent company sells 27 billion dollars of goods to the franchises who then have their own top line of 47 billion you can kind of start to understand the margin structure a little bit.

And then they get that call it one and a half to billion is sort of effective cash flow back in the royalty of that 47 billion dollar total revenue it's exactly right OK so where does money go when it comes up to the inter IKEA foundation this is again the parent company the one who owns the IP the one who develops the product range all this stuff but they don't operate the stores that company is owned by the inter IKEA found date.

And then the other Ikea foundation in lichtenstein the main purpose as we talked about is to ensure the independence and the longevity of the Ikea concept and to own and govern the Ikea group. The inter IKEA foundation is a self owned entity that's a new thing that I didn't know existed is the no more Nordisk foundation also maybe this is sounding familiar to me.

There is no nor can there be any individual beneficiary funds held by the foundation can only be used in accordance with the foundations purpose which again the purpose is ensuring the future of Ikea. So David you were doing some napkin math on this what sort of cash do you think is held by the inter IKEA foundation in lichtenstein right so it was reported around 2011 that it had roughly 15 billion.

Euros in assets and that does not include the value of the company so that's just like cash and marketable securities call it sitting on the balance sheet of this foundation in the 13 years since then if you can sort of infer from the financial statements and I actually do disclose how much the operating holding company sends in cash up to the foundation every year.

The billion euros in cash every year they get sent to the inter IKEA foundation so just add 13 more billion euros in cash every year you're up to call it close to 30 billion euros in assets there that's assuming no investment return compounding but 2011 to today is among the best investment returns in history assuming they were just at market beta.

Totally it's like 50 billion is seems like a wildly conservative estimate for the amount of assets in this foundation you know arguably closer to 100 we don't know it's not a charitable foundation let's be super clear this is an enterprise foundation.

And their purpose is to ensure the continuity of Ikea what do you do with 50 plus billion dollars well you start investing in retail centers right this is not including the ownership of inter IKEA itself the company this is an addition to the value of your ownership of that enterprise. This is like a memory we were joking at the arena show that the Forbes net worth estimations of Taylor Swift are laughable because they're just looking at like what is her bank account you know they're not.

Enterprise valuing Taylor Swift this is like the bank account of the foundation not valuing inter IKEA the company had anything fascinating yes one of the largest entities in the world by assets and then if you include the value of Ikea I mean. My God what do you value Ikea as a company yeah.

It's funny I had done some napkin math on if I were to buy all of Ikea including inter and Inca what would I value it at maybe now is a good time to share that so the whole company does something like 45 billion a year it's growing at about 5% per year. But operating income at least for the moment is not growing right there's another company out there that grows at about 5% a year that has an income margin that pops around the 3% range that's also a retailer and that company is Walmart.

Oh Walmart is valued at about 1.1x sales so you could value all of Ikea again this would be inter plus Inca plus the other franchisees at about 50 60 billion dollars that feels low to me just given.

The durability and defensibility of Ikea but you could also make an argument that it's fair yeah but call it 50 to 100 I don't really care about slicing it into versus Inca I think this is all silly but it is interesting to think like there's a cash pile that the inter Ikea foundation has to ensure the continuity of Ikea that is approximately equal in value to all of Ikea itself.

Right yes that cash pile is almost certainly between 50 and 100 billion euros dollars whatever you want to say similarly the value of Ikea somewhere between 50 to 100 billion euros dollars. Yes totally fascinating so then flipping over to the Incaside of the House this is the largest franchisee with 90% of stores that is the 400 different Ikea stores out of the what do you say was 470 total.

76 I think that they operate they also have what they call Incasenters which is this shopping center concept we talked about they have 44 of those experience oriented shopping centers across Europe and China and more are on the way.

And they're also applying that concept to the small city stores here so like interestingly in San Francisco the Ikea here in downtown San Francisco Ikea bought the building that's not just like they leased some space in downtown San Francisco was actually an empty building was empty for long long time on market street.

Ha they bought the whole thing they put Ikea and and now they're putting other tenants into this complex so they're like Ikea is participating in San Francisco downtown urban renewal which is kind of wild but like I think it's all part of this hey we need to make some investments with all this cash.

Yep so they have this arm in investments that basically allows them to invest in other companies that they think will in some way be additive to their core business so it's like effectively super large scale corporate venture and then their owner this is again the franchisee that operates 90% of the stores.

Inca's owner is the stitching inca foundation based in the Netherlands the other one was licked and shine this one's the Netherlands and this one is an actual charitable foundation that has a specific focus on climate and poverty and with this one inca sends about 15% of their net income up to that charity and then they use the other 85% for reinvesting in the business so call it two to 300 million euros a year.

That inca actually ships up to their charitable foundation and from what we can tell it seems like the charitable foundation then does about 200 million euros of grant making every year so hard to know exactly what the endowment size is of the stitching inca foundations net of the asset itself like any estimates that float around kind of include the enterprise value of inca.

But there exists some cash pile there that probably grows modestly because they're doing so much donating out of the endowment all that reminds me there's another big cash pile that we forgot about the actual balance sheet the balance sheet of inca yeah inca has 25 billion dollars in cash on hand yeah.

Cash is not the constraint here no and that cash again is at inca totally separate from that call it 50 to 100 billion of cash and securities we can estimate that is over at enter yeah anyway one way to think about this company is basically as like the Berkshire half away of Europe yeah if you wanted to sum some things together and just pick some mid points let's say you got 75 billion dollars for the enterprise value the whole kit and caboodle then you've got another.

25 billion of the balance sheet so called 100 billion for the Ikea business then let's say another 75 billion for the inter Ikea foundations cash pile so that's 175 and then the question is what is the cash size of the endowment that the stitching inca foundation has i'm going to guess it's smaller 10ish billion but we're still approaching 200 billion dollars here in value all create.

All created with no equity investment no debt investment I mean this is just 81 years of selling things that provide value to customers and reinvesting the dollars to do that again on a grander scale i truly don't think there is anything like this in the entire world yeah I wonder if that's true this is the only business like that and if we define it as like 200 billion dollar scale.

Built from nothing with no investment exclusively investing the cash flows of the business for growth like there has been no inorganic growth right no material in organic growth i mean with Berkshire they traded a paper clip for a house many times with LVMH they did the same thing he had like three years were returned some small amount of money into 600 million dollars to get the whole thing started if i'm remembering our LVMH episode correctly yeah but LVMH certainly capital both from.

Bernhard and the family and other sources went into the business Berkshire maybe you can make more of an argument it was trading paper clips but either way it was all inorganic growth right air mes is a pretty good. I mean it's been around twice as long that's a good point doesn't have as much cash is worth the same or maybe arguably more right but doesn't have the ludicrous cash pile that I can.

Meta didn't use much of their cash otherwise you could say metas this example but they have a lot of other mark is not the only shareholder the way that Ingvar was and it took venture capital to build that business yeah and that capital as we talked about yeah that to me is like the most impressive thing about this whole.

Businesses that it was just one foot in front of another take your money keep plowed into the next thing yeah more stats on the business today they have 216,000 employees they call them co workers.

To slight decrease year over year from last year ikea is in 63 markets worldwide last year they welcomed 860 million people to the store sometimes they say store visits sometimes they say visitors so I don't know if it's 860 million unique people are 860 million times a person walked into the door but whatever either way.

It's crazy the demographic of their customer base is 20 to 36 so there is an age where you kind of like churn out of ikea and they know this this is measured in a bunch of external surveys. I'm surprised to hear you talking about how you're doing so much active buying right now perhaps because you have your first child. It's a nursery and yeah.

I've totally aged out as much as I love ikea it's been such a huge part of my life for a long time now that we're on the kid number two we're reusing a lot of stuff I don't actually buy from there that much anymore.

There's a great study that Ernest did that will link to in the show notes that shows ikea's peak customer age is 24 it's like they start churning after that it's interesting to see the distribution like Creighton barrels peak ages 31 West Almas 33 William Sonoma is 33 then you start to get into like restoration hardware is 44 pure one in 425 home depots 48. Loses 54. This is like the cycle of life.

I love it you go from sort of the ikea semi self construction or believe self construction to then I'm just buy and consumer furniture to then know I'm actually building this stuff myself. Yes exactly well you go from furnishing your apartment to furnishing your home to fixing your home yeah that sounds right yeah.

So geography Europe is still their core 71% of sales even still come from Europe even with the US as a huge and developed market and Germany is still bigger than the US I think 71% is products in stores 26% is ecommerce 3% is services to customers I assume that basically means task rabbit I assume so yeah.

The majority of the revenue is still products sold in stores growth is pretty slow 5% or so not so different than Walmart I decided I wanted to do a sales per foot analysis the same way that we did in our Costco episode it's a private company they don't break it out and they're limited in what they have to report to you but.

If you assume all their revenue is spread over there 473 stores and you estimate it's about 300,000 square foot per store that gives you 320 euros a foot which is like I don't know 350 bucks a foot or something like that yeah yeah restoration hardware is 900.

Williams Sonoma is 1,300 but if you're a million Sonoma store that makes sense it's overpriced and it's very small these are also small stores to me well restoration hardware is huge complexes but few of them and their weird palaces it's a crazy business have you been to the one in San Francisco no it's freaking wild you think it's like a tech company headquarters but no it's the restoration hardware building really yeah they've been on quite the transformation sort of going up market every the last couple decades

lazy boy is 157 dollars a foot none of this is on a spectrum of like bad to good because Ikea is intentionally not trying to maximize their dollar per foot here right there are trade off they're willing to make instead of

a lot of money to maximize that now let's compare it to the companies we mentioned on our Costco episode Costco is $1,800 a foot they are trying to maximize their dollar per foot Walmart is about 600 target is about 450 dollars and then these like crazy businesses just to compare to the all time greatest Tiffany is $3,000 a foot for jewelry and apple is $5,500

I should remember this from our our mess episode do they report sales per square foot I don't remember I don't think we talked about it I don't think we talked about it either it doesn't feel like a thing they would report but I gotta imagine though that it is as high of not higher than apple you think it's higher than Tiffany yeah you might be right

we spent a lot of time in her med stars recently yeah can attest to some of the behavior that we have observed in there you're raising their price for foot no I think I'm lowering the

it's it really I don't really know how to think about this 350 number like they have a huge amount of square footage they intentionally try to sell things as inexpensively as possible the ultimate maximization function is it's almost like it's not margin dollars I think it's like number of items sold profitably at all they want to sell more things to more people yeah I think it comes back to this concept of the many

which again maybe is a little hokey but like I actually think it is true they built our hundred billion dollar business on the idea of the many it's not a hokey at all yeah it is the many that is the optimization so I think you're totally right I don't think they're trying to optimize sales per square foot at all I think it's just like the square feet are all in function of the many right and they own all the real estate so like it's not like they're paying rent they choose the location strategically

they become a landlord to other people in these new mega shopping centers yeah they optimization function is they want to provide as much value to as many people in the world as possible here's another reason why this metric doesn't make any sense at all for a key up with the exception of Costco which is its own thing none of those other businesses

also have their warehouses in their stores right right so then the last thing in the sort of snapshot of the business today is the market today in 2024 with forty seven billion dollars in revenue Ikea holds only a five point seven percent market share this is an astonishingly fragmented market it was winning our start of the company and it is today still

right which is so wild and they are by far the largest player yeah I mean even if you look around where else do people get furniture that gets the job done looks good enough and is it good value to them target Amazon way fair but then you start to get quickly into like more expensive CB2 pottery barn I mean I get Walmart sells furniture but

oh yeah I've been chomping at the bit all episode to talk about this is like the craziest thing to me about this whole story Ikea has proved beyond a shadow of a doubt that furniture and home furnishings is an extremely large extremely global very attractive market one two Ikea and a whole set of other retail companies

Costco probably being foremost among them have also shown that becoming a scale global player in a consumer market is a good position to be in Ikea has no competitors in the vent diagram of those two things they are the only globally scaled furniture and home furnishings company that's crazy yeah

so I'm foreshadowing power as we move into analysis here powers can be our next thing we examine but just to name it this company is scale economies and so now that they have reached escape velocity like they're through the takeoff phase in Hamilton's parlance you can't compete directly with them because there's no chance that you could beat them on price are on quality for price so it's almost like if there was going to be an Ikea competitor they would have needed to start

50 to 80 years ago a direct Ikea competitor so the most credible way to compete with them is doing something different I mean probably the best competitive strategy is wafer something that's born on the Internet that does something with a completely different cost structure

structure than their capable of wafer is not a hair margin business but they have built the whole business around the idea that they sell online whereas Ikea needs to figure out how to do that which as we've talked about ecommerce is a challenge for Ikea if you make it your strength yes

but you really got a squint today to see wafer becoming a global business on the scale of Ikea wafer is a five billion dollar market cap company yeah yeah long way to go now it's interesting as I was saying that part of me something like that's so crazy

but you're right like let's think through how would you actually compete with Ikea if you wanted to build a globally scaled furniture brand well an obvious one that pops out to me is okay give the low and low media mens to Ikea and then competed the top end like restoration hardware is doing

the issue with that though about going global is the tastes at the high end or way more heterogeneous and fragmented especially cross geography yeah then they are at the middle and low ends yeah that's a great point you can't have a narrow product range yeah so you have a more expensive overhead and producing a wide variety of skews yeah probably the most credible competitor from my perspective with me as a customer is target yep

I probably would look at target dot com and see if there are because they partner with all these designers they have like a reasonable sense of taste it's not like high in furniture and never will be and it's not the best designs but it's like okay this is going to get the job done for a commodity thing in my house

they don't just sell furniture but you know targets a seventy billion dollar company I don't think it's global in the way that Ikea is again it's like to your point competing on just furniture and competing at global scale that's tough tough not to crack yeah I totally agree with you that within the U.S. or in North America target feels like the closest competitor to Ikea however exactly that target is a North American company it is not a global company

so we're pretty squarely in power here normally when we try to assess power we say what is it that enables the business to achieve persistent differential returns or put another way be more profitable than their closest competitor and do so sustainably we're asking a slightly different question here which is what enables this business to own this market to almost uniquely exist yeah yeah when no one else is really competing with them directly

or at least competing with them across everything they do yeah I'm trying to think if we've encountered a business like this before you would have to counter position them because no one else can outscale economies them maybe Amazon would be the most credible because they have the scale if they were to make a real run at it I assume there's an Amazon basics line of furniture yeah Amazon definitely has furniture there's not switching costs from a customer perspective

it's funny I'm thinking through that now like yes Amazon definitely has furniture Amazon is more or less global more so every day but there's a supply side scale economies vote here for IKEA which is how on earth if your Amazon even if you're just a retailer you're not designing or sourcing any of this furniture yourself how on earth are you going to do the logistics around the world in the way that Ikea does right not to mention at this point Ikea

I think 10% of their furniture is actually made in house at Ikea they own their own manufacturer yes and specifically they own their own manufacturing for their highest volume and most strategic products for the hot dog products yeah normally when we do a power analysis we're like looking at the competitors yeah there's nobody to look at here right I guess we should assess it versus target in North America

and I think it really is just local competitors in any given market right they're not in the same segment as William Sonoma or restoration hardware any of these other furniture companies who by the way also are not global yeah ultimately it scale economies everything about this is the same scale economies as Costco they take every dollar that they're not shipping up to the foundation one of the two foundations and they're not using to try to figure out e-commerce

and they try to deploy it in how do we further increase our fixed cost space to reduce variable costs like what are the ways in which we can design it better or manufacture it better or invest in another factory or something to reduce the price for customers over time and I think that really is the only one that matters I was tempted to say like all brands important here to and like yeah the Ikea brand great but compared to scale economies

well and the definition of branding is that you're willing to pay more for it because it's from that brand right the definition of the Ikea brand is cheaper paying less yeah right so right it's scale economies it should be cheaper every time because of scale economies

yep that's it and the interesting thing is cash really isn't the constraint this is a lot like the big tech company Scott like we're talking about with meta they have way more cash than they could ever strategically deploy and so the way for them to obtain more power is just grow even more but they're already using their cash

so they can't just make a huge amount of cash to the extent that they can grow without ruining some part of the business and so time is kind of their constraint because time needs to march on in order for them to grow at whatever the rate they feel they can optimally which also kind of comes back to their wack do crazy structure that Ingvar set up right to make it as durable as possible you know there's a method to his madness here

time is arguably the thing that the company is most optimized for yep so one question I have for you right before we move to playbook is what is Ikea is it primarily a store like a retailer or merchant or is it a furniture brand that happens to have vertically integrated stores

and I was thought about it as like oh it's kind of Costco ask because they're in locations kind of like Costco and in some ways their business model and their obsession with thin margins and serving many people and high volume is Costco ask but they're not a merchant really I think they're a merchant at heart and anger was a merchant at heart in the same way that Sam Walton and Jim Senegal and saw price and Jeff Bezos were in our

it's the whole PT Barnum aspect that we were talking about with the early days it's the show room right shop the competition incorporate their best ideas yep that was the thing I think also that's where this focus on value for the many I this is a very merchant retail type idea you're right

but the way that it actually manifests is this vertically integrated furniture and home wears brand that happens to have a really great experience for you to go and buy their products yes which is funny most merchants that are vertically integrated our focus on higher margins they are not

that's an interesting point like apple this is the way in which I key as a lot like apple an apple store sells apple products and a few other things and I key a store sells I key products and a few other things but I key is focused on minimizing margins and Apple is focused on

maximizing margins yes super interesting okay playbook we've talked about some of this already but just underscore this crazy corporate structure basically only helps them when I was first digging into it I was like oh this is going to have lots of tradeoffs and pros and cons I mean in the way that it helps them it minimizes taxes protects them from takeovers ensures their durability they have the benefits of being a nonprofit corporation there's no shareholders to

a piece which enables longer term thinking they're protected from transitions of government power you know the tax savings the European Parliament green party estimated that they saved a billion dollars in taxes between 2009 and 2014 alone there's all these benefits that's not to mention it neutralized what probably was realistically the biggest risk to the business which was now our future family squabbles in generations to come that's just off the table

absolutely the only way in which it hurts them is access to capital but they don't need money right I mean can you come up with another way that the corporate structure is a con I mean it's a con for society I guess it deprives people from the tax dollars that they would have to pay otherwise or the participation as a index fund holder equity holder in like the building of this business right oh that's true but yes I mean that's kind of where my mind was going of like well maybe

there's some like reputational hit to the company by having this crazy structure and for a long time people believed it is you know tax dodge which it may also be but at the end of the day with I key as customer be like it doesn't matter nobody knows your cares about that it's kind of true if imagine there 10 times more successful and they are worth a trillion dollars

what's a real shame that the public is deprived from being an owner of all that value creation right yeah fascinating the other big playbook theme here is all of this is basically only possible because of our built a business by reinvesting solely the businesses own cash flows all this other stuff kind of does rely on that if there had been external capital and thus de facto external stakeholders

even if it was debt capital along the way it's hard to imagine history playing out like this right Costco managed to make it work even though they raised a bunch of money but they're not structured like this right but they can make a lot of the same sort of long term thinking decisions and in fact Costco even runs on thinner margins I

key as gross margins are like mid 30% and Costco's are 13% yeah there is definitely this thing that we've talked about a few times frugality as an edge they originally built in the potato field and it was a way to save money but it ended up kind of creating and inspiring their business model that they need to create this destination experience

yeah the culture of frugality is interesting trying to buy materials at a discount minimal sales staff no finishes on unseen services flat packing no one has assistance I think actually the CEO is the only person at the company with an assistant no one flies first class they print on both sides of the paper

oh yeah and the assistant thing the CEO may have a administrative assistant these days but for years in our head an assistant but it wasn't an assistant like an administrative assistant it was like his sort of chief of staff like COO didn't he become CEO after yeah exactly

but it kind of does actually beg this so frugality as an edge but could they run leaner why is it that Costco can have 13% gross margins but Ikea marks their goods up more is Ikea bloated is the fixed costs of running the business as it just gotten high to the point where you need high gross margins

margins are to pay for all that overhead I think there's an explanation here which is the Costco let's put Kirkland aside Costco is selling other companies products so therefore at least with the non Kirkland products Costco can take a lower margin because they're reselling those products they don't have to develop them where is Ikea is designing developing producing

so they should have a lot higher overhead they should have a lot higher fixed cost base yeah exactly still feels like a big gap where it's like in Costco there's actually again Kirkland aside third party products in Costco there are two margins happening there's Costco's gross margin but then there's also the suppliers gross margin yeah that's the right way to think about it

we're looking at the sum of two margins when we're comparing Ikea and Costco yeah you're right yeah fair this kind of funny one they lean into Sweden super hard most companies that go international try to embrace the local market and let their origin fade into the background but that's just the opposite of the strategy that Ikea runs I mean in the meatballs there's this little Swedish flag that sticks out of the top of them every time you buy them you walk into the store and it says hey H.E.J.

which is so funny Ikea has become the greatest Swedish ambassador so true so David you're going to love this because it's like it's from the complete other side of the spectrum here's what Ikea does they sell a sense of place

oh wow or mes and Ikea separated a birth there we go there we go for listeners that haven't listened to LVMH and Hermes episodes this borrows from the luxury playbook and luxury companies sell a sense of place and mark their goods up 10 to 13 X on the cost of materials for that sense of place and Ikea does the complete opposite

Ben you got a mic drop there we just end the season right there it's not going to get any better than that no it is not Ikea sells a sense of place amazing amazing I do have one more which is not nearly as poetic but I'll just finish my section off they have a very contrary in view on working capital

and this didn't really come up in the story so can't really find the right place for it but most companies common wisdom is you should keep your inventory low and you should minimize the amount of your capital that's locked up in working capital and Ikea has a very different optimization function

there's is about cost for the end consumer and ensuring availability of products at all times to keep customer confidence high so they're willing to do things like build up excess inventory is during certain periods if it means getting a favorable rate from a manufacturer who might have extra capacity as long as it means eventually their customers will save money when they do buy it

and I think a huge part of this is the foundation ownership and the other part of it is the scale and the timelessness of their product lines they sell these things forever so they know they'll eventually sell through that inventory so if there's a good price on it yeah give me a thousand sure the billy bookcase is never going out of style right honestly if I describe a billy bookcase to you there's not a simpler way I could describe it it is straight lines with no facade the simplest bookcase they're going to be a lot of time to do that

simplest bookcase that you could draw on a piece of paper that's the billy bookcase that's the lack shelf that's a lack table so in their reporting you kind of dig into it you see pretty high levels of working capital tied up but they just don't care capital is not a problem they can't deploy the capital that they have and so they may as well use it strategically

and the other benefit that dovetails out of this is they get to be really really supplier friendly they can do things like net 30 terms when the rest of the industry is on net 60 or net 90 because they're just not cash constrained so they sort of invest in the relationship with their manufacturers and that's why they have what is it now 1600 suppliers 55 countries and the average supplier relationship is 11 years long

to pick up on the point I was just thinking about what is my biggest complaint about IKEA and as a customer over several decades in my life when have I been most frustrated with the company it's when I go to the store and they don't have what I want in stock and I'm sure they know this too that is my number one biggest complaint biggest negative experience I would ever have as an IKEA customer

so like yeah tying up more working capital and inventory for the sake of the value to the customer very worthwhile investment yep okay one more I want to add on this same vein that similarly didn't have the right place to put it in the story is their supply chain and just how really really smart and strategic

oh yeah didn't you read a whole book yep there was like three or four books that we read but you read a whole book on their supply chain yes so there's a book called strategic outsourcing and category management lessons learned at IKEA by Magnus Carlson and Magnus was a senior executive in IKEA supply chain for 25 years this book is awesome this is like the luxury strategy for supply chain I haven't read that many supply chain sort of business school

textbooks but you hadn't read them any luxury books before I hadn't read them any luxury books either I can vouch this thing is amazing if you are at all interested either for like your own edification or if it's relevant to your business in supply chain like buy and read this book it is so good and it talks a lot about how they like became more and more strategic in their supply chain

specifically they're sourcing over time at IKEA and it's the kind of stuff you talked about of like hey you would think ordinarily we want to squeeze our suppliers on terms but actually what we really care about is continuity of supply depth of a relationship with these manufacturers let's do the opposite and embrace them

that was sort of like one level and then the next big transformation is when they stopped thinking about sourcing and supply chain in terms of individual products and moved instead to like product packages sweets of products and then whole categories they could say like oh rather than sourcing the Poing armchair that's a bad example because I'm sure they make that in house now but like whatever product let's take like a whole set of arm chairs that are

similar and let's bid that out globally rather than an individual markets and then that'll let us you know a sure get the best price and then pass that on in value to consumers but be build the deepest and most strategic relationship with the suppliers who are going to make that for us and then we can also transfer technology to them to so stuff like the board on frame construction they've done dozens and dozens of these

technology advancements in fabrication factory layouts all sorts of stuff over the years and they transfer that to their supplier partners so it's super cool then stuff like their distribution center strategy so you think total logically almost like Costco the stores are the warehouses well over time they found that oh actually it doesn't totally make sense that we keep a hundred percent of our products stocked it

all of our stores instead let's focus to my what I was talking about my complaint let's make sure that the 50% of our products that account for 90% of our sales are like really in stock at all of our stores and then for the second half of our product catalog that accounts for the tail end of the power law you know 10% of sales let's do that across pan geographical distribution centers and keep actually a minimum of that in the stores with constant restocking so

that we can maximize this space for the products that we know people are going to want a lot of really really really great stuff fascinating stuff you can only do with 81 years of history and a lot of scale and a lot of money a lot of cash yeah right

David the quintessence who the quintessence I've been thinking about this one this is our new yeah for anyone who didn't listen to the meta episode Dave and I renamed this section because we've been struggling with how do we land the play what's the end of an episode look like and David you came up with this term the quintessence yeah we boil it down after all this work we've done on the company this long recording like what is the essence what is the quintessential factor of this company

I had been planning to say this idea of the many and I think that there's a reason in far had it as testament number one in testament of furniture dealer but man the more we talk about this I really think it's something a little more meta quote unquote which is like this is an end of one company there is no other company in the world like this it is so

esoteric in so many ways there is nothing else like this out there yeah or put differently I think mine is the combination of never taking a single outside shareholder plus in far as personality and the desire to serve the many equals this company yeah all of those are necessary conditions and there's many more to but those are really necessary in order to create what I

think it's not a lot of time to do it and the structure that it ends up with I guess maybe to put an even finer point that this is an end of one company the end of one term is a little overused you know post zero to one and you know yeah

we make the argument all the time like every company we cover on acquired is unique meta is an end of one company amazon is an end of one company you know et cetera et cetera but that's the point that's all true I think this is like even another level all the big tech companies yes they are all unique yes they are all individual but they're all big tech companies

there just is no other idea there's nothing like it that's interesting no other vertically integrated retailer brand of this scale in any category yep huh it's apple but if they serve the many instead of the few yep well I guess arguably they do serve the many but they have very high margins right well but they specifically could serve five times more people then they do serve if they were

selling to forgo margins and maybe eventually they will they might be on a path to that that's a good point this company is apple if they decided to also be Android essentially like we're going to own the whole market it seems like your definition is a brand that is vertically integrated that is at fifty billion dollar a year scale and serves philosophically the many yep

in some ways that's what Tesla is aiming to be I mean these are not high margin cars they're sold at the price where they can be the best selling car in America it's hard to compete globally on evs since the u s and China are becoming pretty fragmented ecosystems

yeah but everything about Tesla is rate manufacturing drive prices as low as you can vertically integrated on cell through an else there's no channel there's no middleman yeah but like a brand of consumer good that is vertically integrated and sold at low margin to the many globally I'm just having a really tough time thinking about it like I could think of retailers for sure yeah super fascinating all right we have reached it the quintessence of IKEA

yes I think so I'm so glad we did this company is in many ways sort of off the wall it's like this private weird structure nobody can invest in it totally and I will tell you like for some reason I'm just like not as fired up about it as compared to a Costco or an air meds but like you study it it's really interesting and it totally is end of one yep I think the future to me is like not quite as clear as some of these other companies

I think there's like certainly a lot of question marks around what do they look like in an e-commerce world in a world that's shifting to urbanization and a world where they're now a big company yep what are they going to do with all this cash etc etc right that's the reason watching them is going to be fun over the next decade or two yep all right car vets all right I've got to one is a show on Netflix called Detroiters I think a previous carve out of mine was the show I think you should leave

with Tim Robinson this is his first show with his body who's sort of the I think he's like a co producer he appears in I think you should leave also it's a little bit more story driven and less get driven then I think you should leave but it's like totally the same Tim Robinson sense of humor

it has me like dying laughing so I highly recommend Detroiters the second one I have a device I just recently bought the new super thin eleven inch iPad pro oh how is it it is awesome I've been I it's so sexy there's something like really amazing about the promotion scrolling on a big screen

where when I'm just sitting there and it feels impossibly thin I mean I know that's a marketing slogan but like you feel it in your hands and you're like how how is there an all day battery life in this and the screen is much more enjoyable to sit and read things on it on there

than looking my computer in fact in particular for each of these episodes now I read the worldly partners research on the company we're covering from front of the show arvand and I was able to read the whole thing take it in and a much more like enjoyable way

when reading it on the iPad versus sitting on my computer scrolling like it's just it feels really good and by the way we'll take to that research in the show notes for anyone who wants to go read 50 to 100 pages analyzing in a very structured way the business of

IKEA listen to four hours and then read another 50 to 100 pages but I love it this iPad is like so great I'm so tempted because you know I mean we both have the iPad minis that we got for when we do things live with guests yeah this is too big to use on stage oh oh no I was going to say the iPad mini suck and the thing that's worst about them is the screen it's awful apple doesn't love it at all yeah yeah like they really suck it's a terrible product we need it for that specific use case

and it was fine when it came out but it just feels like the leftover parts been now I almost bought the new one and I'm like it's the same screen it's like last year's dead end processor from the iPhones it's just a weird franken device the size is very compelling I wish it had the iPad pro screen I wish it was thin it doesn't have to be thin but like try I wish should have a new processor I did I just it's a bummer they don't care

and it's clear yeah they don't care I don't even know why they make it but I mean I'm glad they do because we can use it for use case but like right yeah anyway I also have two carveouts my first one is a

re carve out admittedly but I've been enjoying so much this season the cubie school I thought that was what you're going man it is so awesome to have the cubie school specifically but stuff like this on YouTube where you know for folks who don't know says a YouTube channel called the cubie school DT O Sullivan who was a journeyman NFL quarterback for a decade he breaks down film of quarterback performances every week like breaks down the actual film from the whole you know as they would do it in

the whole quarterbacks room like the all 22 quote unquote camera angle where you see all 22 players on the field as opposed to what you see when you're watching highlights are watching a game when I first started watching and I had it as my carve out the first time I was like oh it's just cool to see this like I don't understand 90% of what he's talking about I now understand a lot more and it's so

awesome that consumers like I'm never going to play football again and certainly never going to play in the NFL but being able to appreciate and understand what quarterbacks are doing and what teams are doing and

players are doing at this professional level just increases my enjoyment so much more and especially this season when there's so many quarterback narratives going on I don't even listen to the talking heads anymore talk about X Y you know Anthony Richards and our brace young or whatever because like

even if those talking heads were NFL players and they know what's happening they need to dumb it down for the mass audience I'd rather just watch the film with JT I feel like that with Tom Brady he just like sits there in silence because whatever is going on

in his head is not at the right level for what needs to be said and it's like I want to know what's going on in your head yeah anyway really enjoying it's been great this season and then my second carve out of the sports media related one was did you watch ice cubes performance during the World

series at the Dodgers game I did not oh man it was so good I mean I'm a giant fan so it sort of pains me to say this but so ice cube I think it was game two of the World Series at Dodger Stadium performed at the start of the game and he just walks out from the center field fence and then performs two songs wraps two songs while walking to home plate it's just him and a camera man and like I mean you and I now have like performed in an arena and we know what that is like and one person ice cube

with no backing vocals live on a mic walking the length of a baseball field up to home plate and just holding the stadium in the palm of his hands it's like one of the most incredible performances I've ever seen and I got to watch it in broad daylight yeah it's awesome ice cube ice cube

well listeners thank you so much for going on this journey with us a huge thank you to our partners JP Morgan payments stat sig and crucio please check out the link in the show notes to learn more about any of those companies and their fantastic products that we talked about earlier in the episode

we want to give three special thank yous to Jim Senegal the co founder and former CEO of Costco for his chat about IKEA as we were doing the research to Bjorn Bailey the former president of IKEA US and to Lars Johan yarnheimer who is the chairman of the board of Inca Group is that right David

or I guess it's the IKEA Group within Inca yes I think that's right is of IKEA Group which I think is the sort of operating entity within Inca holdings yeah thank a side of the company and you read all of leading by design right that's sort of the most canonical

sort of autobiographical book yes this is the confusing one the updated version of the book is called the IKEA story the first edition of the book is titled leading by design but it's the same book yeah it probably has the best detailed account of the blow by blow that we went through anyway

if you like this episode go check out our episodes on Costco on Walmart or on Amazon or or mes or or mes it's true that wasn't on my piece of paper here because I did not expect it to come up that way after this episode come discuss it on Slack check out ACQ to with Louise von on from Duolingo

be super fun find ACQ to in any podcast player and seriously I'm sending it to anyone I know running a consumer startup he's I mean there's just so many practical lessons if you haven't taken the survey yet please do we'd really appreciate it takes three or five minutes

acquired.fm slash survey and you might win Meta Ray Bands or an ACQ dad hat or David might mail you a poem perhaps with some assembly so thank you David for volunteering that on air I'll truck it across country awesome with that listeners we'll see you next time we'll see you next time