The Swedish furniture maker IKEA that consumes about 1% of all the wood supply (IKEA also consumes 1% of all cotton!) in the world, has announced that it plans to buyback furniture from customers in 27 countries. Unfortunately, the United States is not on the list, but Canada is, according to RetailWire. So, it is not the logistics of being in North America vs. Europe that is preventing the buyback efforts in the US market. I speculate that the US market is too big to “give up” and IKEA must believe that green policies play better in Europe.
Sustainability or Green-washing?
“Closed-Loop Supply Chains” have been an important area of research, and are also the benchmark for sustainable supply chains. An example of a closed-loop supply chain would be reusable products such as containers. Think of old-fashioned milk bottles delivered to customers, going back to the farm as empty bottles, to be washed, refilled, and then sold to customers. Such efforts at closing the loop are sustainable as they use the same raw materials (theoretically forever) in the supply chain. On the other hand, closed loops are expensive. Devising inventory collection and re-processing requires capital investment and operational planning at various points.
This is why contracted buybacks from businesses and stores are more common than buybacks from individual consumers. The granularity of demand and the diseconomies of scale are natural challenges to designing cost-effective buyback programs. This is why we see that recycling is relegated to be an issue of local governance. Supply chains are increasingly global, and it is far too costly for firms to shift to sustainable equilibrium (even if sustainable design from the drawing board itself can be profitable).
Hence the prevalence of “greenwashing”. Greenwashing (similar to whitewashing) is a dismissive term for firms engaging in visible promotional activities, to gain the halo effect of being perceived as responsible and green. However, the activities themselves are a minor part of their overall portfolio and add little value to the environment. Effective investment in sustainability has a lot to do with focusing on backend details that are not often visible to customers (e.g., placing LED bulbs in warehouses instead of incandescent bulbs). So, is IKEA being sustainable or just greenwashing? What’s the catch for customers? Let’s evaluate IKEA’s buyback plan, as advertised, to fight Climate change by preventing “excessive consumption”.
IKEA Buyback Process
If you are upgrading your bedroom and want to use this chance to get rid of that Ikea mattress or sofa, sorry, you can’t. It is only chairs, tables, desks, cabinets, shelves, and cupboards (See below).
Let’s look at the resale process:
1. Complete the form
You must complete this form giving your personal contact details, information about the furniture item you wish to sell (attaching four photographs) and indicating which store you would like to drop the item off at.
2. Receive an offer from IKEA
An expert from IKEA will value your item. Then you’ll receive an email indicating whether IKEA wants to buy it and the valuation based on the current price.
3. Drop off the piece of furniture at the store
If you accept the offer, you must bring the piece of furniture to the store. If the furniture is not assembled, you will be provided with the tools to enable you to assemble the furniture at the store.
4. Receive your payment
An IKEA expert will check that the item of furniture matches the photographs you provided. In exchange, you’ll receive an IKEA gift card to the value agreed in the offer.
5. Your furniture goes on sale
Your furniture will go on sale in our Bargain Section at the price we paid you for it.
Assembly for thee, and not for me.
The returned products must be assembled before acceptance, and IKEA will even give you a toolkit to assemble the product if necessary. It is an inconvenience for returning customers. It is funny to note this because IKEA famously sells unassembled goods. In fact, I hear that some fans love assembling KEA furniture.
The massive global scale of Ikea was made possible by its ability to sell components and delay the final assembly as late as possible. Ikea’s business model of shipping components and letting customers assemble has been a remarkable differentiator in an industry beset with high inventory costs.
- Low Inventory on Books. Components are cheaper to hold in inventory than finished goods, mainly because time and effort for assembling are expensive. Also, it costs less to fix an issue with missing components. Imagine an assembled chair getting damaged when all your inventory outside the supply warehouse is in the form of finished goods. Compare the scenario with one of the parts getting lost before the full assembly is completed. You can always pick another component to assemble the finished product.
- Packing Efficiency. Components are easier to ship. Stacked planks occupy less space and can be packed more efficiently in a container, compared to an assembled shelf that wastes space.
- Component Commonality. Finally, with common components, you can assemble very different products. For instance, IKEA uses the same screws and bolts for many different assembled products. Earlier on this blog, I argued how LEGO can exploit component commonality by moving the final assembly as late as possible.
If shipping assembled products that are returned back is expensive, why does Ikea want the products assembled? It is mainly because quality control (QC) is easier to achieve with finished assembled goods. It is easier to visually examine a bookshelf online see a bookshelf and notice that a bolt is missing vs. knowing that from disassembled products.
Pricing Problem
The most interesting aspect of the whole plan to me was step 5 “Your furniture will go on sale in our Bargain Section at the price we paid you for it.”
Ikea promises to sell the product at the same price they paid for you. This is a costly commitment, and the blowback can be bad if found not to be true. It is not easily verifiable, but by choosing the same price, IKEA does suffer a loss on processing and payments on these returns. Another issue with moving markdown or bargains goods is that they often may not always sell and they might need to discount it further. Discounting is not a profitable business. Remember the fond days of America’s oldest discount retailer, Filene’s Basement? Given the size of assembled goods, the costs of shipping them including labor costs and planning time, it is uneconomical for IKEA to transship these items to other stores.
Plan? Rejuvenate Brick and Mortar.
So, is it a loss-leading, money-losing signaling venture? I do not think so.
IKEA furniture is often considered as “starter furniture” that is not for long term use. Usually, customers get older and richer and upgrade with more expensive designs. However, given the household income pressure everywhere due to COVID-19, IKEA has an opportunity to act as a re-entry point on replacement furniture. Coupled with the drop in workplace furniture demand and the often floated “K”-type recovery, IKEA must see a fair bit of a benefit in paying the customers to visit and increase foot traffic in the stores. IKEA’s online presence is minimal and a successful return to brick and mortar is key to their healthy recovery. I think eventually, couponing the returned products assures IKEA of some future sales and increases the chances of those customers who returned the products spending their proceeds in IKEA.
This approach is somewhat distinct from Patagonia’s remarkably successful “Buy Less” campaign, but as Black Friday approaches, IKEA is exploring strategies that can boost the demand traffic in the stores. We will see how it pans out.