IKEA

I also got a flat packed chocolate moose. I put it together this morning. It's very easy. It's three pieces. Oh, moose like an animal, not chocolate moose 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. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sitting down, saying 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 and 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, you're 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 use of 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 we'll 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 Poeng 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, taken to its absolute logical extreme. Totally.

Well listeners, after this episode, come discuss it with us on Slack and check out ACQ2, our second show where we just had Luis Fanon 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 Luis 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, ACQ2 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 Raybans or an ACQ dad hat. We might need to add a polling chair or something to that.

Actually, that'd be extremely economical for us to offer. Yes, it would be cheaper than the right bands. Maybe we'll even throw in some ad-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. It's true. 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's story is powered by payments and JPMorgan payments is a part of so many of their journeys from seed to IPO and beyond. 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 Elmhoot, Sweden.

which is in the province of Smalland, 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 Smalland, again, despite its sort of cutesy, friendly, Ikea-like-sounding name, is a 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 would foreshadowing 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. Tough place to grow up.

Totally. The farmers in small land, though, they really have to work hard to scrape out their existence. And there is actually a word in small land called lista, which means making do with an absolute minimum of resources appropriate to the province and appropriate to Ikea as we shall see.

And so, it is there, on a farm in smalland, in March of 1926, when our protagonist, Theodore Ingvar Kamprad, or just Ingvar, as he is known, is born. And he's born, where else, for the region, on a family farm named Elm Taurud,

in an area about 20 kilometers outside of Elmhoolt called Aguna-Reed, which apologies to all of our Swedish friends. 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. Elmhoot, the bustling local metropolis. I don't know what the population was in 1926, but in 2010, the population of Elmhoot, the big city, was 9,000 people.

And that is including IKEA's major, major presence there in that town today, including the first SOAR, the IKEA Museum, the IKEA Hotel, et cetera, et cetera. I'm imagining maybe 1,000 people live there at this time. Maybe. And Agudarud, 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 small end? Well, if you're perceptive and know you're sort of.

northern and central European family names. You might say, Comprad is not a Swedish name, it's German. 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 small land 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, Almatarud, sight 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. Hey-oh. So wait, why would you buy a sight 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 a agricultural farm into a timber farm into a timber forest. Ingvar's grandfather, H.M. 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, H.M. commits suicide. So that leaves his grandmother, Francisca, alone to raise three kids, one of which was just born and manage this farm. She says nothing 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. 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. His life was so miserable from being totally impoverished that he was clinically depressed. Yes. There's a little more to the story.

turns out the actual reason for the family's immigration from Germany was more about Francisca and H.M.'s marriage and Francisca's family. So H.M. 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 an illegitimate 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 plant a seed 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, Francisca has turned umterude 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 Phaedor, grows up and marries the daughter of the biggest merchant in Elnhult. So, bringing, you know, now some merchant blood into the family. When he's 25, Francisca asked him, and I don't think she asked to come help manage the farm. So, Franz Phaedor and his new wife, Berta, they have two young sons, the elder of whom is Phaedor Ingvar Kamprad, our protagonist here,

They arrive at the farm, and this is where Ingvar Kamprad, the founder, purveyor, janitor, soul embodiment of Ikea, grows up. I mean, really, we say this on a lot of episodes, but 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 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 3x 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 croner 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 sown of one of the greatest retailers of all time, right here at age five. Totally. I mean, Sam Walton, Jim Senegal, Saul Price, Jeff Bezos, Ingrid Comprade. Absolutely. Yep. So, young Ingbar, 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-land countryside. It's like Christmas cards, wall decorations, garden seeds. It's 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. I have product market fit. I should raise money. I should raise money. So he goes to the village at Delpool and he takes out a 500-coroner 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. Right. That's also part of this story here. He finicles. Like, I don't think his grandmother or his parents were helping him with this. Right. So he uses that to import 500 fountain pens from Paris. And then I think they sell quickly. He 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 they have 25 billion euros in the bank. This is it. This is the background. This is what he comes from, 500-chronor 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's family. The whole thing gets financed off of cash flow from pens. Yes. He literally trades matchboxes to Christmas cards, to pens, to furniture, to Ikea. Nuts. It's like the story of the guy who starts with a paperclip 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. Right. 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. Right. 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, so in 1943, when Ingvar is 17, he's about to go off to the equivalent of college at the School of Commerce in Gotemburg, which is a much bigger city in Sweden, like it's actually a city in Sweden.

And Ingvar decides that 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 Goldenberg at school. His sort of import-export business, shall we say. And 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 Smalland 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, Comprod, Elmterud, Agunyard, 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 El Tarud Guggenyard. He doesn't have a house number. So cool. So that's Ikea. That's Inkbar Comprad's trading firm.

This is it. He does put the first IKEA logo sign on 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. Yeah, for.

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 at 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. I mean, he's just an aggregator for a demand. He's an agent. And he never takes possession of the inventory. It's a fulfilled and real time as he gets the order the supplier puts it in the mail. It's great.

I think in 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 a traveling salesman. He's going back and forth to Gotenburg and to small land. And he's selling to customers that he meets mostly out in the countryside. It's hand-to-hand combat. It's ringing doors. It's calling on his network.

Then, though, he gets the idea. He's like, well, I'm getting all my supplier relationships through trade magazines and corresponding by mail. And then a lot of times when I'm the agent, they're fulfilling 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. Yep.

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. I mean, 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 of 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'd mailed out to everyone and that was your sort of client base.

I mean, it was the e-commerce industry before the e-commerce industry. Yep. 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 land. So after school, he returns to the farm to Elmterude and he recruits his family to also start helping him with the business and fulfilling these orders and running all the mail and all that stuff. And they're still just running it on the farm.

And then, in 1948, Engvar 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 Sam 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. And he would joke later. It was an accident that he found his life's calling in the furniture business. So he does with furniture, what he's doing with all Ikea products at this time, which is he goes around, he sources some suppliers, and he asks them if Ikea 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 armchairs and stuff it under your bed or put it in your 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. Yeah.

Well, fortunately, as we discussed, Smallland 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 Smallland furniture makers and asks if he can be their agent, like, hey, can I bring you more business?

They're all like, well, sure. He's like, there's one condition, which is you'll have to deliver the furniture yourselves. Is that okay? And they're like, well, that's what we do anyway. It's part of our business. Sure. Yeah. Now famously, and this is part of the lore about Ingvar and probably is somewhat exaggerated, he loved to tell people that he's dyslexic and it totally serves this lore 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 thought I was going to stump you, because it comes up later in a key moment of IKEA that he's dyslexic, and it's why some... I don't want to spoil it yet. But obviously, not only do you know he was dyslexic, you're proposing he may not have been that dyslexic? Well, I read some stuff from.

Some former employees that suggested that it was more part of the legend that he cultivated than reality, but I actually don't know what you're referring to. I'm excited to be surprised. 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. Okay. Yeah.

It's like part of the, hey, I need to have a word for each of these things. Yeah, yeah, this is exactly what I was about to say. I thought that was like, oh, is there another point later? No, 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 and catalog. So he decides that he's 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 until 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 at companies. Yes, so products are usually named after Scandinavian locations. I think Swedish locations are used for sofas 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 or season lakes, and outdoor furniture is islands, I think. Clever. They've got the whole schema here with names, so Ingvar, if he truly was dyslexic, would now be having a tough time with all of us.

So anyway, Ingbar decides that he's going to start all this off with his, you know, named pieces of furniture and 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 land in the catalog, two armchairs, one of which is a armless armchair. So it gets just a chair that is intended for baby nursing. Dude, an armless chair for baby nursing sounds awful. So it's like torture. Like that's the time when you need the arm 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 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. Is that too much? That's too much. Anyway, so now.

Why is it selling 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 it had to get made and bought at some point in time, was through dealers like Ingvar used to be, like traveling salesman 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 sparse and unreliable product offerings. Like you need a baby nursing chair, an armless 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 everybody here is just basically eking out a living. The traveling salesman agent types, they're trying to eke out a living too. They're 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, no, no. What's the maximum margin I can extract for this very one-off random special sale I'm making?

Totally. Ingmar, 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 matchboxes. That's how he's approaching the problem. He's also young. He doesn't have a family. He can just operate 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 I could sell cheaper, these are still large ticket purchases for people. The absolute number of dollars are, you know, crohners 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 pour 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. I mean, 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 drop shipping industry. 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 he's like, OK, 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 Terud. And then in 1949, Ingvar decides to go really big.

He starts buying regularly every week a 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. I've talked about supplements, advertising, realizing that a bet 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 Buy Circular in the Sunday paper or the Target Circular or the Sears 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 one thing far's got your address and knows who you are. You're in a 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. 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 middlemen.

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 crona 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. We'll make it up in volume. This is thinnest margins possible for the many people with an obsession in cutting out middlemen. Yeah. 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, 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? It's convenience, price, and selection. And what he's basically saying is price, price, price.

Yes. 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. Yep.

A little later, we're going to talk about this amazing document that Engvar writes in 1976 called The Testament of a Furniture Dealer. He's so folksy. But the very beginning of it, 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 as many people as possible will be able to afford them.

I mean, that's it. It's all right there in that sense. Now, the interesting question though here and for the rest of the episode is, like we said, Ingvar is not the only mail 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. Oh, 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 rely on connecting multiple third party hardware and software vendors together.

or to sacrifice stability and security in order to grow their top line. This is why JPMorgan invests over $17 billion a year in technology as the end-to-end seamless payment solution to handle everything from payment acceptance and processing to security to reconciliation 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, JPMorgan Payments enables this as part of their omni-channel solution.

That's likely been running under the hood in many of the in-person checkout experiences that you've had. 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. listeners, 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 going to 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, retail or otherwise benefits from having a frictionless payment experience listeners can go to JPmorein.com slash acquired and learn more about tap to pay and check out other payment solutions driving growth for businesses are thanks to JP Morgan 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 a 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. 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, oh, 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.

I actually don't know what their return policies are. I hope they're good, but it's like the Timu of 1950s to Sweden here. 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. 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. I can just deliver low prices if I compromise on quality.

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 Goethe, 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 Elmholt is about to close. He is going to buy the building for $13,000, 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 corona 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, a store in a mall that you can go see the cars or see the pants, but you can't take it home. Let's illustrate why this is a completely nutty idea. A, there's the obvious you can't take it home. B, the whole 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 is a pretty big geographical country. What Inkbar is doing here, they're opening a showroom in one singular remote part of this country, you know, in a town with like a thousand people who live there, and they're

business model is to sell to the other towns of a thousand 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 Elmhill was that important to Ikea itself. People come from all over the country to go to the showroom. This is 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 Elmhold.

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 Elmerl to see the furniture. They're not even buying anything. It's crazy. Ingvar and the team, like, they're so 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 going to 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 going to offer free coffee and morning buns to anybody coming to shop. Yes. The very first time there's 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, there's no warehouse, there's no flat-pack furniture. Everybody's just there to see the stuff. And you could also fill out an order form while you're there to then buy 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 Elmahut and convince yourself, we wrote on the back of the first catalog, two very important words there, convince. 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 Barnum than poor retailers. Totally. Oh my god. So this is, I think, and 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. So you might think, oh, Sears in the US, obviously that's a mail order business and they have Sears stores. No, no, they're different. Like 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 and it's like, we tempt you to come see this exhibition and 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 them, and they visit the showroom. This tiny little village, hundreds of thousands of people are now coming there.

quite made this shift yet, but especially in the 60s after Britta Lang took over from Ingvar, because Ingvar is like everything right now. He's like art directing the photography. I think he 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 a thing in the 60s with modernity and when the target customer becomes the urban and suburban customer. But even with the rural 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 Elmhoot.

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 Elmo that night. This is a hokey stuff, but to your point, PT Barnum, that's what this is.

So within a year, they pass one million croner in sales at this showroom, which has got to be by multiples, the largest business ever built in Elmo in like human history.

In 1954, so the next year after this has been open, they passed 3 million croner in sales. I think the exchange rate was about 5 to 1 at this point in time of 5 croner to $1. In 1955, they double again to 6 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 scale 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 were 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 amazing winning combination that they just realize, oh my god, we need to scale this.

Yeah, totally. This is, I would say, generation three of the IKEA business. 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 furniture catalog plus showroom, and that's what's really explosive.

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.

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. When the 1960s come around, Sweden, 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. It's wild, but this is happening all over Europe.

The customer base for IKEA and all their competitors starts to majorly, majorly shift. It's no longer families setting up. Their farms are taking over the farm from the elder generations. It's now like a whole new lifestyle of 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. I 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 wanted. 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, then 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, then I know you're itching 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 full-sized, fully assembled armchairs in order to get them to your house. Well, remember, Ikea's not shipping it. The suppliers are shipping it. But 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. Like, 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 a huge portion of all the furniture maker's 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 pin in it. I have a thesis on why. Oh, OK.

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 is 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 Engvar, the company, they're like, all right, well, how are we gonna 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 line, 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 Engvar sets to work on this is a former advertising draftsman named Gillis Lundgren.

And Ingvar had hired him originally to help Ingvar do the set layout in the photo shoots for the catalog as is like assisting. Lundgren 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,

Lundgren and Ingvar are taking down the set from a photoshoot. And Lundgren says, well, 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 tabletop, 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, you know, the last commandment from God, 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 going to 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 flat-packed furniture before this, including the company we've talked about multiple times on this episode, Sears Roebuck, was flat packing in their catalog distribution in America. But certainly the company that gets credit for popularizing and growing the volume of flat-packed furniture being shipped 100x, 1,000x around the world is Ikea.

And it's a nice little story. But I think what IKEA does is they go all in on this. So the first flat pack product that they design is the max table in the mid 1950s. But by the end of the 1950s, flat pack and then self-assembly by the customer is expanded across the entire range, like all of IKEA's furniture. Obviously some stuff you can't flat pack, but like 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 flat packing. 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.

Male order was the only way to make this happen. You're not going to drive away or get on a bus with a table. Absolutely. There's a further cost reduction since it decreases the broken merchandise in transit. There's this third amazing benefit to flat packing.

Ultimately, they pass all this along to the customers, meaning now their products are definitely the least expensive on the market for their quality. Psychologically, it gives this feeling of accomplishment. It 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. We almost broke up, but we didn't. 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 flat pack 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 I recall, oh, no, this is like what people used to call the flat pact is KD furniture.

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 adoration there. Oh, man, we're going to talk about hot dogs. You think I'm joking? I'm not. All right, let's go. OK, before we get there, though,

So, K.D., you know, this innovation, knockdown, flat back. 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 flat pack, 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 opportunity is 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. 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 it 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 crème de 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'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 this is sort of trying to emulate.

Yeah, so Ingvar 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 were making. With the 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 6 million croner. By 61, they did 40 million croner. So that's almost a 7X 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, OK, doesn't this kind of stuff happen all the time? What's the big deal? Well, Poland at the time was a communist country behind the iron curtain. So this was odd.

And Ingvar is like, well, if we could find a way to work with the communists, we could probably lock up a lot of production capacity that nobody else is going to go through the trouble of getting.

And I bet they can also produce things pretty cheaply over there and in pretty high volumes. 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 Bookcase, the Agla Cafe chair. It's the wooden curved back 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 a Polish chair design.

Oh, interesting. It becomes 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 supplier relationships here and basically make sure that those factories are going to be successful for the long run so they can bet their business on it.

totally. They get really, really intertwined to the point where eventually, 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.

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. 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 breathtaking price, quote unquote.

And every product that IKEA sells in 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 breathtaking price products. And these products should also be high quality, but they should be priced at least 50% below any competitive or substitute of products out there and ideally like well less than 50%. I mean, a $10 table today that's breathtaking. That's astonishing.

And so, Bingvar says like, it's our job to figure out, you know, start with that and goal in mind. And then design backwards from that of like, how are we going to 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 going to sell? The product does 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 going to wholesale reinvent the manufacturing technology process for this. We're not going to make a solid wood coffee table. We're going to 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 going to 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 lactables every year and has been for decades. They've sold hundreds of millions of these things, so you can optimize the freaking crap out of your whole supply chain to do this.

That is wild. I think they have multiple skis at that scale. So later, once he, like Charlie Munger, got turned on to the virtues of Costco,

Engvar 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. 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 going to 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 going to 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 150. 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 to copy the hot dog.

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, a great example of this is the Poeng Chair. Yes. Another hot dog product. Absolutely. I think they've sold 30 million of these since 1976. They've just been maniacal about optimizing. So the initial Poeng 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 $2,000 to $3,000. Right. You're not going to buy a Boeing 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 only 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 the hot 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 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 Bingvi probably viewed that as a short-term optimization, and that is antithetical to how he wants to run the business. Now, what's also interesting, though, is this element that I was just saying of they control the whole demand and supply chain is no longer true.

in the internet world. In the catalog world, absolutely was true. In the internet world, no. Whoa, whoa, 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.

Okay, lay it on me here. All right, and bear with me listeners. You probably know the rough story of stat-sig 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.

Stats SIGs 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 idea of product tools. Yes. So 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 fifties where we have a few more pieces of the puzzle of modern Ikea that kind of 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 Elmo. 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. It is unbelievably frugal.

Oh, man, we got to 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 managers like, OK, you know, come on in. I'm going to 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 going to use this flashlight and they spend hours going through the storm 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, asks 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 want to add a Disneyland effect and add perceived value to your trip here. Yep.

Today restaurants just a flash all the way forward it is technically the world's 6th 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 duplicated like if i eat multiple times per year.

That might be counting me. Otherwise, it's unfathomable. Does 10% of the world really eat in IKEA's? Even more wild, there are only 476 IKEA's in the world today. 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 and Ikea and I was kind of thinking like actually until the last few years I haven't.

Really, like I've never eaten an IKEA just eat lunch and I kind of realized 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 had ever experienced IKEA and the Seattle IKEA is so great. Yeah, I

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. Like 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.

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 the same concept as the Alamo showroom, not really a store. By the mid-60s, though, all of this 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. I think even this one is no longer circular. That does not last in the IKEA playbook. It costs $17 million to build, or roughly $3 million, compared with the original Almouth location that Ingvar bought for $13,000.

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 croner 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, Flat Pack 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. 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. Then in that first year, that store alone does 70 million croner in sales. It doubles the company's revenue.

They also at this store for the first time now have the set up 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 coworkers there, are not battling morning rush hour to get there when, you know, 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 do 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, 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, desired 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, but 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 Engvar's mindset is like every challenge is an opportunity. When they reopen 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 coworkers 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. Two, they 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, you know, how on earth are you going to 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 going to 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 land and they only allowed five kids at a time. It was sort of this odd, like, I was all built up for all small lands. Gonna be this amazing thing. I suspect this is something that, you know, hey, a different era when we were growing up, like things where it worked a little better and you can't get away with these days. Totally. Like one person watching 40 kids or something. Yeah, a choppy 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 Alm Hoot at the showroom a couple years ahead of time. But this was the real cafeteria.

the real cafeteria like we know and love it today with the traditional small and style menu. Yes. 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 is too big. They just didn't understand the needs of that market. Well, self-assembly was kind of an 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 the 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.

I don't laugh at 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 are just doing tons and tons and tons of volume to enable them to do their future growth with their current profit dollars. It's hard to get consistent revenue data on the company because 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.

Yes, it's interesting. It's a company that is rapidly scaling at the same time that in their DNA, they're unbelievably thrifty. You wouldn't expect both of these things to be true of the same company. Totally.

This is the same guy, like just to quote the testament of a furniture dealer. This is like one of my favorite paragraphs. Ingva 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 croner. But only the most skilled can design a good functional desk that will cost 100 croner. 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 costs 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. It's totally what enables it to happen because it's almost like Warren Buffett in the Berkshire Hathaway 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 like compounded value of future investment here. That's interesting way to think about it.

So in the 70s, during this decade of blitz scaling, if you will, for Ikea, Engvar 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 compraden estate in IKEA as an asset would definitely be one was over 60%.

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. Really? 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 call it a couple hundred million croner revenue business to a multi-billion dollar revenue business. His net worth would eventually rise to something around 60 billion dollars.

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 Engvar and the comprods, 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 settle 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 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 any one country's political fate, the political history of Europe that

of our live through and that we're going to talk about later is 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. I key up to. 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 huge 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 wedding your pants. It's warm and comfortable for a few minutes. But then after that,

Oh, my God. What a folksy dude. Wow. 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 Nordisk 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. 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 Inca 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 Inca Foundation, which is a charitable foundation. This is an 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, Inca, 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 franchise or franchisee relationship. The franchisor, who owns the brand, the IP, all that, is inter-IKEA systems. They work with a company called Inca, 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 upkeeps the brand and all the corporate stuff. Designs the catalog, et cetera, et cetera.

sells that furniture to Inca or any of the other franchisees. And the reason there's other franchisees is because you want specialized franchisees in different markets where you don't understand the local culture. So that's kind of why there's Inca for a lot of the like Western Europe and English speaking world. And then there's specific franchisees that are not Inca for other parts, but just simplify it for now because Inca is like 90% of the stores.

And then Inca buys that furniture from Interikea 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 Ingvar dies, the Comprad 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, influence or control the decisions of either company.

And that was super important to a bar. Yeah, it's pretty interesting. And I believe the Inca company and foundation still rolls up to a Dutch parent and the interholding 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 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 Ingbar is doing here. That's a good analogy. Yes, you are correct.

Inca, 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 noncharitable, is 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. Yeah. And you said to just sort of an enterprise foundation, I think 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 Inca foundation is a charitable foundation, and they do disperse, I think, now, like, to 300 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 some things 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 Engvar and the family no longer directly 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. That's 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, so 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 are identity. We shall offer a wide range of well-designed functional home furnishing products at prices 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.

It 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 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 shall 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's 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 that 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 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.

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. And I was like, wow, I need to think about that in my life.

Totally. And there's 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 and Apple are more spiritually aligned than I even realized.

I can't at Apple are very similar in a way that I will get to later. 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 writes, 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 on to the next thing and unwilling to acknowledge. 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 a choir. Yeah, it's so funny. But more on the personal life advice from this, too, like 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 or

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 Ingbar 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, they 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 Plymouth meeting, right by King of Prussia, frequented it often as a child, outfitted my bedroom and 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 incredible marketing campaign 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 eye 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 presence. So it's opening the pent up demand in Philadelphia from the cacophony of 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. I think they expanded to 10 or 12 stores, and it wasn't going great relative to their other markets. I think it's because they misunderstood that the US has really different needs in really different parts of the country.

Yeah, that would make sense. I mean, 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 U.S. 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?

Yep, yep, so the sofas are softer in America, you sink into them whereas in Europe, you know, 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 open up a store. They did an experiment starting in Seattle, and the idea for Mingvar was, if you have your own wallet on the floor, how do you do compared to the corporately owned stores? It was essentially a bake-off 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. 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. You 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 locally 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 wanted to bring the learnings back to the mothership to have them all be homogenous. 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 current one is down in Rhetton? 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 Madrona. I mean, I was moving across country as a young person on my fourth and fifth

apartments 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. I used to love going to the Aziz section. 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 lululemon, I always go right to the back and look at the clearance rack. Yeah. Even the lululemon's clearance is horrible. They're like 15% off for something. Oh, man. Sometimes in the Ikea as is section, you can get some screaming deals. 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 Inca. It's the reverse Morris Chang. 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 say that 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 felt like, hey, I'm the president here. There's only one president at Ikea, even if not in name, and 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. Yep. Well, there couldn't have been that many hard feelings then. Right. Yeah. Which is the foundation on the Inca side of the tree, the franchisee side. Amazing. With two of the sons, two 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 enter Taiwan. In the spring of 1998, they enter 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 in. 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.