IKEA’s Digital Transformation
Before becoming the largest furniture retailer in the world, Ingvar Kamprad started IKEA as a mail-order sales business in Sweden 1943. IKEA is now a global conglomerate or a multi-industry and multi-sector business organization. The success of this organization can be attributed to specific business strategies and tactics that revolve around offering well-designed and functional products at affordable prices.
Currently, IKEA is in the middle of a transformation of its business model that made it successful on a global scale. Specifically, for many decades IKEA’s business strategy was primarily based on having giant out-of-town warehouses, where shoppers pick their own furniture and then build it at home. But now it is looking increasingly at city-center stores, online shopping, home delivery and assembly, and more radical ideas such as leasing furniture.
Barbara Martin Coppola, CDO at IKEA Retail mentioned in Harvard Business Review:
“Digital transformation is not a goal in and of itself, and it is so much more than technology. We are transforming our business: We are exploring potential new offers to customers, new ways to bring our offers to customers, and new ways to operate our business. And in order to be successful, digital needs to be embedded in every aspect of IKEA. Digital is a way of working, making decisions, and managing the company.”
IKEA has been on the digital transformation journey and the supply chain has been part of it. Its online sales have boosted during lockdowns, and digital transformation has helped make the company sustainable. Artificial Intelligence-powered product recommendations and a more scientific approach to data have seen IKEA lift average order value (AOV) by 2% worldwide.
IKEA Utilizing Data + AI
1. Decision Making
The first step IKEA made was to radically improve its ability to get high-quality quantitative information to understand how its ‘recommendation’ solutions affected personalization. IKEA did this through high volume A/B testing on customer behavior and after initial experimentation, IKEA had a few key learnings: first, the mix of both UX and algorithms are really important for a cohesive customer experience; and second, the quality of personalization cannot be measured in silos. Statistical significance could be attained by testing several groups of recommendations at once.
2. Data for Personalization
Utilization of qualitative and psychographic data to understand its customers better and delve deeper to develop personalized experiences for its customers distinguish IKEA from its competitors. The qualitative data helps IKEA to understand that when a customer buys a piece of furniture, for example a sofa, the customer is bound to make other changes — the domino effect, to ensure the matching of the couch with the room, like lamps, curtains, and pillow covers. Like many modern businesses, IKEA’s digital strategy relies on customer data. However, the company understands the concerns around it and thus launched the Customer Data Promise to help customers understand, provide control, and the ability to make decisions about their data – for psychographic data.
3. Smarter Demand Forecasting
Optimizing stock across various in-store and online channels requires real-time analysis of customers’ buying behavior to minimize the demand and supply gap. To that end, IKEA created an innovative Demand Sensing, an AI-based tool that optimizes stock levels to ensure the consistency of shopping experiences for its customers. To create projections and predict future demand more intelligently and effectively, the tool leverages up to 200 data sources for each product. The system considers various influencing elements, like festival purchasing preferences, the impact of seasonal changes on purchase patterns, and weather forecasts, among others. It can even detect an increase in in-store visits during the month.
4. AR and VR for Visualization
IKEA Kreativ uses virtual and mixed-reality room design technology to let customers use the app to scan and design their space and bring products into their homes. Once the customer is happy with the design, they can add everything to their online cart and check out. Or, they can save everything to a shopping list and go to the store for pickup. IKEA Kreativ brings machine learning and 3D technology into something that is immediately applicable and helpful for customers. Both mobile and web applications connect to a scalable, containerized, cloud-based platform of microservices and AI pipelines, hosted by the Google Cloud Platform.
Results and Lessons
COVID influenced IKEA to commit to its digital transformation journey three years ago with a root and branch review of the company’s digital strategy, encompassing everything from back-office IT systems to how consumers experienced the buying process on their smart devices. IKEA visualizes key consumer data from around the world in real time, sharing insights across departments, markets, and nations. As a result, IKEA can be far more adaptable and proactive in its social efforts.
With more personalized and real-time recommendations with AI, IKEA was able to increase the number of relevant recommendations displayed on a page by +400%. Even though IKEA previously already had well-tuned recommendations of several types, with ‘Recommendations AI’ IKEA measured a +30% improvement in click-through rates as well. Average order value saw a +2% surge with numerous examples of how Recommendations AI could help customers find both attractive and directly complementary products, expanding the customer purchase from a single product to an entire home furnishing solution.
- Milne, R. (2019) “Inter Ikea’s Torbjorn Loof: making the vision clear” Financial Times, Available at: https://www.ft.com/content/6b250c0a-2486-11e9-b329-c7e6ceb5ffdf