This article was originally published on Barron’s.
Ikea is getting into the FaaS (Furniture as a Service) game. Their customers will soon be able to try out new furniture for a fixed period of time, and then return it — perhaps for something different. No more having to stare at the same couch for decades! “When that leasing period is over, you hand it back and you might lease something else,” Inter Ikea CEO Torbjorn Loof told the Financial Times. “And instead of throwing those away, we refurbish them a little and we could sell them, prolonging the life-cycle of the products.”
Ikea embracing this model is a significant wake-up call for the rest of the furniture industry. Ikea has 313 stores in 38 countries and makes $4 billion annually, but it only has roughly two percent of the $282 billion American furniture market. And Ikea isn’t alone when it comes to applying the subscription model to home furnishing. Companies like Kamarq and Feather are all vying to become the “Netflix of Furniture.”
It makes sense — according to the U.S. Census Bureau, the average American moves their residence more than 11 times over the course of their life. This is also helping companies like Wayfair, currently the largest online-only retailer for home furniture in the United States. Wayfair currently works on the standard e-commerce model of discrete purchases shipped to your doorstep, but what’s missing from this approach is the flexibility and novelty of subscriptions — it’s really hard to get rid of sectionals and recliners once you’re tired of them. As Feather founder and CEO Jay Reno told PYMNTS that “ownership of things ties you to a specific place…and removes the ability to have flexibility” in daily life.
Simply put, we are witnessing a broad societal and commercial shift in favor of access over ownership, experiences over products. According to a 2017 Euromonitor survey of U.S. millennials, 37.5 percent used some form of subscription-based retail service, and 20 percent did so for the furniture category. “Consumers have grown to adopt the subscription model, and they’ve become very familiar with things like recurring meal kits, razors and fashion products like Rent the Runway — it’s mainstream consumer behavior,” said Michelle Grant, head of retail at Euromonitor, to Digiday. “Consumers also want the newness; call it the HGTV effect, where everyone is constantly upgrading.”
A growing number of traditional retailers are adopting subscriptions, including Loblaws, one of Canada’s largest supermarket chains, which is rolling out a new annual membership program. CVS, Gap, DSW, Lululemon, Best Buy, and Target all have programs in the works. No doubt the success of a certain Seattle-based e-commerce vendor is partially responsible for this shift. “For the longest time, retail business was very product-focused, as in how many shoes did you sell,” Corey Pierson, co-founder of predictive marketing analytics platform Custora, told Digiday, “But given Amazon’s growth and how easy it is for customers to do price comparisons, retailers are realizing that if customers don’t become repeat buyers, the economics of the business won’t work.”
But the broader picture here is that the dominant economic model of the last 150 years is could be coming to an end. Ever since the rise of industrial production, we’ve operated under a straightforward asset transfer model. Companies built and sold physical products. The fundamental goal was to create a hit. Once that was achieved, then a company could spread its fixed costs over as many units as possible, so it could compete on the all-powerful margin.
Of course, this entire system was predicated on planned obsolescence. The revenue model depended on us re-purchasing products that were specifically engineered to expire after a fixed period of time. Back in the days of Thomas Edison, light bulb companies actually competed on how many hours their light bulbs could last (no doubt some MBAs soon corrected them). We were expected to fill up our lives (and our landfills) with disposable stuff on a regular basis. Is it any wonder that people are starting to get tired of this approach?
Offering subscriptions is also an important part of Ikea’s mission to become not just carbon-neutral, but actually climate positive by 2030. The company has dedicated itself to “offering services that make it easier for people to bring home, care for and pass on products.” Some of their other environmental goals include only using renewable and recycled materials in their products, achieving zero emission home deliveries, removing all single-use plastic products and expanding their affordable home solar solutions. Who knows — subscriptions might someday help save the planet.
In the shorter term, however, IKEA’s move could indicate a significant change for consumerism. As we start to enjoy the benefits of upgrades and additional services without the hassles of maintenance, thousands of brands (young and old) stand to benefit. There’s been a lot of talk about the retail apocalypse. But the truth of the matter is that retail is adapting to new consumer demands, and lots of old companies just can’t catch up. As Reid Greenberg, lead researcher at Kantar Retail says: “It isn’t that retail is dead. Roughly 85-90 percent of retail takes place in brick-and-mortar locations. But bad brick-and-mortar is. These mall-type department stores are faced with many challenges because they aren’t connecting with shoppers in the way they want to be connected with.”
IKEA appears to be connecting — they realize that they need to actually understand the people who are buying their products, as well as offer them creativity and flexibility. We are still in the early days of this retail shift, but big changes could be coming soon.
For more on how the subscription model is changing every industry, read Zuora CEO Tien Tzuo’s book “SUBSCRIBED: Why the Subscription Model Will be Your Company’s Future – and What to Do About It.”