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IKEA Tests the Small-Store Format in Select Markets

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IKEA’s new store format

Earlier this year, privately-held big box furnishing chain IKEA announced that it’s looking to open several small-format stores in Canada. These will be designed as a place for customers to pick up online orders. They will also help IKEA’s omnichannel retailing. However, the company does remain committed to its brick-and-mortar store format as its main sales driver.

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Big-box retailers embrace small

Due to potentially lower store occupancy costs and growth in the online channel, home improvement (XHB) (ITB) and furnishing chains are increasingly looking to minimize their retail footprint and rationalize stores. They’re looking to leverage their stores to double as fulfillment centers. About 40% of The Home Depot’s (HD) online sales are fulfilled at its stores.

New stores in Canada

Last month, in an interview with the Financial Post, Stefan Sjostrand, president of IKEA Canada, announced IKEA is opening two smaller stores in Quebec City and London, Ontario. These will be 40,000 and 20,000 square feet, respectively. A full-sized IKEA store in Canada is more than 320,000 square feet. The new limited merchandise stores will stock 99 of IKEA’s most popular products.

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Omnichannel benefits

The smaller Canada stores will also serve as pickup points for IKEA’s online sales. The initiative may potentially save the customer delivery costs. The stores will be equipped with tablets, enabling customers to make in-store purchases on the Internet. Several home furnishing and improvement chains, including Home Depot (HD), Lowe’s (LOW), and Michaels (MIK) offer in-store pickup.

MIK is part of the portfolio holdings of the SPDR S&P Retail ETF (XRT). XRT has ~17% of its holdings invested in specialty retailers.

Testing the waters

IKEA’s small store rollout is part of the company’s plan to test smaller formats in select markets globally. The idea is to serve smaller, secondary markets where the retailer doesn’t have a presence yet. Customers in these markets face a long drive to an IKEA store in a larger city or have to pay for home delivery. IKEA has already rolled out smaller pickup stores in Greece and Spain and plans to do so in Thailand as well.

Organic search

Another key advantage that makes the case for IKEA to go multichannel is its higher visibility in online searches. According to L2, IKEA appears on the first page in 26% of search results pertaining to home- and gift-related online searches. That’s the second highest in its peer group after Crate & Barrel, which appears in 35% of search results. The Pottery Barn, owned by Williams-Sonoma (WSM), is third at 24% of search results. Restoration Hardware (RH) and Pier 1 Imports (PIR) are in the top ten.   

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