The IKEA Group said on Wednesday it had sold key subsidiaries for 5.2 billion euros ($5.58 billion) as part of an overhaul to help the furniture retailer react to new competition and shifts in consumer preferences away from its vast out-of-town stores.
The IKEA Group, which operates most IKEA stores, sold subsidiaries that manage the group’s supply chain and design, purchase and manufacture all IKEA furniture to Inter IKEA Holding BV, a company based in Delft in the Netherlands, which owns the IKEA brand.
The transaction, initiated by Inter IKEA, helped to boost pre-tax profits by 23% to 5.4 billion euros at IKEA Group, which has its headquarters in Leiden in the Netherlands.
Since September 1, Inter IKEA has controlled the development of the IKEA range and supply chain. This relegates IKEA Group to being a pure retailer, operating under a franchise agreement with Inter IKEA.
Inter IKEA CEO Torbjorn Loof said Inter IKEA felt it was necessary to take full control of developing the IKEA business to respond to increased demands from customers to shop in city center stores, buy online and to use collection points.
“The concept and the existing franchise system was made up in the beginning of the 1980s. It was another era,” he told Reuters. “The main aim is to make sure that we can grow and expand and be relevant to our customers,” he said.
Inter IKEA announced its decision to exercise its rights to take back control of the design and other activities from IKEA Group last year but the price of this transaction was revealed for the first time on Wednesday when the two groups presented their earnings to August 31.
The IKEA Group is owned by a Dutch Foundation while Inter IKEA is owned by a Liechtenstein foundation. The split of responsibilities aims to create a tension that spurs growth, Inter IKEA executives say.
The overall structure, which is also tax efficient, was created by founder Ingvar Kamprad, a Swede, almost 40 years ago to allow IKEA preserve its independence in perpetuity. Profits of both groups are retained in the companies or foundations to fund the expansion of the IKEA concept.
Sales from IKEA stores worldwide hit 36.4 billion euros last year, Inter IKEA said in its annual summary. IKEA Group accounted for 34.2 billion euros of this total.
IKEA Group Chief Executive Peter Agnefjall said the transfer of key functions and 26,000 staff, would weigh on his company’s future profits, but would be offset by improvements in IKEA Group’s contracts with Inter IKEA.
“(We) obtained important strategic benefits, that will strengthen our position going forward. So all in all, we’re happy with the transaction,” he told Reuters in a telephone interview.
Analysts said that lack of detail around the deal—which is one of the largest retail transactions in the world this year—meant that it was hard to assess whether the price paid was high or low but that the new split of functions should be good for the overall franchise.
“It’s going to be a good move for them, because one of the big problems is that they have been quite slow to adapt to customers,” Matt Walton, Analyst at Verdict Retail
Inter IKEA CEO Loof said as part of the restructuring IKEA Group received rights to open new channels for selling IKEA products, including in new city-center stores and via urban collection and order points. Also, the time scale of IKEA Group’s franchise contracts were amended to allow for the long-term investments needed to overhaul IKEA’s operating model.
He said certain areas of the product line, such as living room furniture, needed to be improved.
Inter IKEA said it had pre-tax profits of 329 million euros in the eight months to the end of August. The company receives a franchise fee of 3% of turnover at all IKEA stores. It had just 1,300 employees two years ago.
It said profits would increase in the coming financial year due to the acquisition of the subsidiaries which operate design studios, logistics hubs and 43 factories around the world. The acquisition was funded by borrowing and funds from its parent.
The deal boosted IKEA Group’s cash pile to 23.2 billion from 16.7 billion at the end of August 2015. Agnefjall said the sale proceeds would be used for investments, boosting the company’s cash buffer and to resume paying a dividend, which would be 840 million euros for 2016, compared to 600 million euros for 2014.
Agnefjall said he hoped that Inter IKEA would continue to select IKEA Group, technically a company called Ingka Holding, to open IKEA stores in new markets.
IKEA Group increased its sales by more than 7% last year, helped by new store openings and increased online sales. Combined, the other 12 franchisees boosted sales at their stores by 22%, Inter IKEA’s results show.