IKEA is a home furnishing company dealing in multiple products including furniture, beds & mattresses, kitchen materials, and appliances, textiles and decorations along with the bathroom products. The company was started in Sweden but is now headquartered in the Netherlands. The company’s revenues in the FY2021 were 25,615 million euros which increased from 23,613 million euros in 2020. The company employs a high number of people, at present, the IKEA Group has 225,000 employees.
PESTLE analysis is one of the important tools to analyze the external environment that can impact the industry. This article would analyze the impact of the political, economic, social, technological, legal as well as environmental factors that can have an impact on the home furnishing industry. The PESTLE analysis would prove to be beneficial for the home furnishing companies to formulate strategies for efficient operations in Sweden as well as India.
Furthermore, an in-depth understanding of PESTLE Analysis will give you a detailed overview of the most important factors in the macro business environment that directly or indirectly impact the operations and growth prospects of a company in a specific industry. As for now, let us get started with the PESTLE Analysis of IKEA
Table of Contents
A fact-based and engaging PESTLE Analysis of IKEA
Political factors affecting IKEA
Sweden is one of the main consumers of home improvement products and the government has initiated various steps to promote the businesses. The newly introduced step includes abolishing the advertising tax (Deloitte, 2021). This would reduce the operational expenses of the companies. Further, the Swedish home improvement companies can benefit as Sweden is part of the European Union which is a common market, and the goods, labor, and capital can flow freely, therefore the companies would be able to access an expert workforce with ease and there would be streamlined transportation of goods. Moreover, 52% of Sweden’s exports are within the EU, this can benefit the companies as they would be able to generate high revenues.
Further, India is one of the emerging markets for home furnishing companies and the government of India has allowed foreign companies to set up single brand retail stores and own 100% stake without the need for any government approval (Financial Express, 2019).
Economic factors affecting IKEA
The GDP per capita in Sweden is more than $51,000 and it has almost doubled from $27,207 in 2001. The rise in per capita reflects a rise in the living standard of the people which means that they would spend more on maintaining homes and this would ultimately lead to an increase in the sales for the home improvement companies. Furthermore, the Swedish economy grew moderately by 4.9% in 2021 and it is forecasted to witness a growth of 3.1% in 2022. Also, the public finances of the country are in a strong position, the deficit as a percentage of GDP is way less compared to other OECD nations. This means that the companies would not have any problem in sourcing the credit for the expansion of the business.
Further, the interest rates have been increased in India, this would reduce the cost of borrowing for the customers and make products more expensive which would ultimately restrict people from buying the products from the companies. However, the huge jump in the economy where the growth rate in 2021 was very high at 8.3% and predicted to rise further to 8.7% can be an effective opportunity for the companies to enhance their presence as with the increase in the economic growth, the businesses and level of income of people would grow which would eventually lead to more consumer activity and the people would purchase more products, hence leading to increase in the sales for the home furnishing companies.
Social factors affecting IKEA
In Sweden, the trend of online shopping has increased over the years. The last year has witnessed a 10% rise in people purchasing for the first time through online means. Further, 38% of people are expected to shift to online shopping permanently (Sandberg & Anderson, 2021). This change in consumer sentiment signifies the need for the companies to shift to the e-commerce business.
Further, in India, the preference for sustainable products is rising among the people and 67% of people reveal that they would be looking at the sustainability factor while purchasing any product in the future. This means that the companies would have to be mindful while sourcing woods and other natural resources required to manufacture the products (Alves, 2020).
The spending on real estate has increased with 48% of people preferring to renovate their houses (Deol, 2020). This would lead to an increase in demand for home-related products such as more furniture, lighting, decoration, etc. and this would lead to an increase in the sales for the home furnishing companies. In addition, the Indian consumers are ranked third in terms of most brand-conscious in the world and the positive aspect for the companies is that over 35% of people prefer spending a high amount on luxury and valuable brands.
Technological factors affecting IKEA
The government of Sweden spends extensively on Research and Development wherein in 2021 it spent around 42.7 billion Swedish Krona whereas the Indian government does not spend much on Research and Development and the Indian government spent Rs. 851 crore in 2021 and the budget has been decreased to Rs. 812 crore for 2022 There are various technologies that are changing the way stores conduct their operations. For example, the use of blockchain for analyzing real-time inventory data helps reduce the inefficiencies in the supply chain and maintain an adequate level of products is on the rise. Further, blockchain is also useful for tracking the sell-by-dates and the retailer can get to know what products should be discounted more. This helps in the reduction of wastage. In addition, the use of in-house robots for storing products or providing customer service is also gaining momentum along with a Scan & go technology wherein the stores are totally cashier-less and every step is tech-oriented ranging from scanning the customers while they enter through facial recognition, tracking their purchasing behavior through cameras and installation of sensors on shopping carts eases the customer experience.
Legal factors affecting IKEA
In Sweden, the home furnishing retail industry is governed by Consumer Protection Act wherein the customer can claim refunds related to defects in the products for a period of up to 6 months which the government is planning to extend to one year. This would increase the liabilities of the companies and thus they need to produce more durable products. There is positive news as well for the companies under the new proposed law. The customer cannot reject the purchase in case of minor damage to a product if the seller informs beforehand unlike now when the customer can anytime reject the order because of small defects (Ronqvist, 2022). Further, the government of Sweden has passed a law wherein online shoppers would not be able to purchase the products on credit. This would reduce the purchasing power of the customers and would ultimately impact the sales of the companies as the industry involves high-priced transactions.
Further, the Indian market is an important emerging market for home furnishing companies and the government has recently formulated The Consumer Protection Act that fixes the accountability of the companies. Consumers have now been given the right to file cases against the manufacturers, service providers, or even the product sellers if the product is defective and they can claim the damages. This means that the companies would need to be more aware from now on of the efficiency of the products. Further, a consumer protection authority has been formed that is authorized to recall the defective products, and supervise the content of advertisements of the companies and the authority can levy fines on the companies if they do not adhere to the rules and regulations.
Moreover, the Indian government is planning to formulate a national retail trade policy wherein the government would streamline the norms for the ease of doing business and the companies would be able to avail of credit for expansion more easily. The policy would also focus on digitization and establishing adequate infrastructure for the companies. This would be beneficial for the companies as they would be able to conduct their operations in a more efficient manner (First post, 2021).
Environmental factors affecting IKEA
The home furnishing industry produces carbon emissions in excess amounts while manufacturing the products. The companies also use huge amounts of single-use plastic for packaging the products. In Sweden, the government has established a target in accordance with the Climate Act to have zero net emissions by 2045, and to achieve this target the government would highlight the data in yearly budgets. This would put pressure on the companies to shift their operations to more sustainable means and as a result would have to incur additional expenditure. As far as the consumption of single-use plastic is concerned, the government of India is planning to ban it for all purposes by 2023. Hence, the companies would need to shift towards paper or cardboard and by doing this they would need to totally alter their supply chain which would increase the operational expenditure and as well lead to temporary disruptions in the business process.
To recapitulate, both the Swedish and Indian markets have a promising future for the home furnishing industry as Sweden has eliminated many types of taxation, and also India has allowed the foreign companies to hold full ownership in the operations. The economy of India is at present the topmost growing economy which reflects that companies should look here for growth but they need to be aware of the sustainability factor that is arising among the modern consumers. Also, to learn about the internal strengths and weaknesses of the company, you can go through our diligent SWOT analysis of IKEA.
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DEOL, T. (2020). Signs of green shoots with 48% Indians willing to spend on renovation, travel, survey finds. theprint.in. Retrieved 7 April 2022, from https://theprint.in/india/signs-of-green-shoots-with-48-indians-willing-to-spend-on-renovation-travel-survey-finds/566900/.
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Rönqvist, H. (2021). Proposal for a new Consumer Protection Act in Sweden. www.magnussonlaw.com. Retrieved 7 April 2022, from https://www.magnussonlaw.com/news/proposal-for-a-new-consumer-protection-act-in-sweden/.
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