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The Weird Economics Of Ikea

Ikea is a behemoth. The home furnishing company uses 1 percent of the planet’s lumber, it says, and the 530 million cubic feet of wood used to make Ikea furniture each year pulls with its own kind of twisted gravity. For many, a sojourn to the enormous blue-and-yellow store winds up defining the space in which they sit, cook, eat and sleep.

All that wood is turned into furniture that tries to bring a spare, modern aesthetic to the masses. “We’re talking about democratizing design,” Marty Marston, a product public relations manager at Ikea, told me.

The furniture is also sold according to some unique economics. In many cases, Ikea’s famously affordable pieces get dramatically cheaper year after year. In others, prices creep up. In some cases, products disappear entirely. The result is an ever-evolving, survival-of-the-fittest catalog that wields an enormous amount of influence over residential interiors.

As we tour Ikea’s unique economics, you may want to have a seat in the company’s Poäng chair, 1.5 million of which are sold each year. Ikea’s been hawking them around the world for the past four decades, taking over living room square footage and modern design sensibilities with just a hex wrench and some wordless instructions.

Poang-chair

Ikea.com

The Poäng’s midcentury-modern forebear was the Finnish designer Alvar Aalto’s 1939 creation called simply armchair 406, which had its own bent-birch frame, swooping arms and thin tan upholstery. The Poäng’s design was first sold decades later, in 1978, after a collaboration between Lars Engman and Noboru Nakamura. Nakamura, in a company brochure celebrating his chair’s 40th anniversary, said that even though trends and fashion influence what he designs, “all products should have a timeless value.”

But it’s less the fashion trends than the resulting furniture economics that make this particular history interesting. Versions of the Aalto sell online for over $4,000. The Poäng debuted at a fraction of the price of the Aalto, and now, after a steep price decline, the Poäng sells at a fraction of its original price. Furniture has generally gotten cheaper relative to other goods over the years — likely due to effects of globalization — but this chair’s trend stands out. In the early 1990s, the chair couldn’t be had for less than $300, adjusted for inflation. Today, it’s $79. (The average piece of $300 dollar furniture in 1990 would cost about $151 today, per the consumer price index for furniture and bedding.)

roeder-ikea-1

I was inspired to browse old Ikea catalogs and prices after seeing the iconic Poäng — bent birch, swooping arms, thin tan upholstery — in an ’80s movie.1 Or so I thought. After a few rewinds, however, I realized I’d made an embarrassing mistake. I had been looking at the Aalto 406 all along. It wasn’t only lumber purchases that Ikea had come to dominate, but also my internal aesthetic compass. What isn’t Ikea becomes Ikea, and what is Ikea becomes everything.

Other Ikea mainstays have followed Poäng’s path, plummeting in price as the years pass. The warhorse Lack table, for example, sold for $25 in 1985 ($56 in current dollars) but goes for just $10 today. Iterations of the Billy bookcases have seen big drops, as well.

But it’s not as simple as saying that everything in the 1988 Ikea catalog has gotten radically cheaper over time. The full story is, as full stories always are, subtler. Anthony Landry, a research adviser at the Bank of Canada, and Marianne Baxter, an economist at Boston University, have studied swaths of data culled from old Ikea catalogs and how they reflect economic concepts — exchange-rate pass-through and the law of one price, for example. Baxter, who loves midcentury-modern designs such as Aalto’s, shared some slices of that data with me, and we discussed the phenomena she and Landry spotted within it. In addition to the steadily decreasing prices of much of the product line, the researchers also identified Ikea’s tendency to constantly modify its menu of products and varieties.

“I think this is a pattern for products that survive for a long time,” Baxter said of the steep price drops. “Basically, they won’t survive unless they’re cost effective. I think the economies of scale really kicked in for that chair.”

Even Ikea employees told me they marvel at the declines. “We pulled out a 1985 catalog, and we started looking at products,” Marston said. “It was really fun for us to say, ‘Oh my God, look at the price of that. Look how expensive it was when we first came here to this country.’”

Although Baxter can’t yet prove its particulars — more data cleaning and analysis is necessary for her ultimate Ikea project — there is a sort of evolutionary dynamic at play in the annual Ikea catalog: survival of the fittest furniture. She noticed that the company tends to discontinue products that remain expensive. “If they can’t figure out how to make them more cheaply, or retool them or slightly redesign them, it seems like the things disappear,” she said.

Indeed, the products have evolved. In 1992, part of the Poäng was changed from steel to wood, allowing the chair to ship more densely and efficiently in the company’s flat packs. (“Shipping air is very expensive,” Marston said.) And the Lack table was changed from solid wood to a honeycomb “board on frame” construction, decreasing production costs and increasing shipping efficiency. Baxter theorizes, though, that if a product is finicky — requiring design in Sweden, manufacture in China and intricate pieces from Switzerland, say — it may eventually be abandoned.

Marston thought the Darwinian idea was interesting, but that the deletions from the catalog were less about persistently high prices and more about popularity. “If a product doesn’t perform well — we have certain sales expectations — then it will cease to exist. The public didn’t like it for some reason, so why continue to sell it?” she said.

Not all Ikea chairs have seen Poäng’s stark downward trend in price. The Antilop highchair (Swedish for “antelope”), for example, saw price decreases in a few international markets during the 1990s, but prices remained flat or increased, including in the U.S., in many cases after that. Baxter illustrated this example in the chart below:

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But, indeed, the highchair is still being sold — it’s not yet extinct.

More generally, there is another common pattern in Ikea pricing. “If they’re going to increase the price, they do it by little bits all the time,” Baxter told me. “But if they’re going to decrease the price, those decreases tend to be big and noticeable, and they get advertised.”

Marston echoed this empirical finding. “On average, the prices would go down, from year to year, 1 percent overall,” she said. “Some prices could go down with a huge jump. Other prices may increase slightly. But overall, year on year on year on year, we’re trying to reduce prices.”

Some mysteries persist. One is the company’s international pricing discrepancies. “They’ll sometimes reduce prices in the United States and make them go up in Canada, which makes even Canadians mad,” Baxter said. (The horror.) Marston said each country has “its own unique competition profile” that influences how the company prices its goods.

Some of these oddities may be explained by one principle: Ikea is sui generis — in a class by itself. The company navigates largely uncharted waters for traditional economic strictures. “Ikea continues to be nearly unique,” Baxter said. “I would’ve told you that they would have competitors all over the place by now, 15 years ago. I would’ve been horribly wrong. There’s only them.”

Footnotes

  1. Full disclosure: Mike Nichols’s “Working Girl.”

Oliver Roeder is a senior writer for FiveThirtyEight.

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