By Michael Pascoe
The advance guard of the crowd heading for Sunday's rugby league grand final might have wondered what the traffic jam was about on Homebush Drive heading away from Olympic Park - the queue was to get into the car park for IKEA's massive headquarters store.
This wasn't an opening special, there was no spring sale, not even a sausage sizzle - just a wet Sunday morning at the retail flatpack phenomenon. Inside the maze that funnels customers through multiple departments on two levels before permitting them to escape through the checkouts, hundreds of mostly young homemakers clutched their yellow plastic IKEA totes holding Narhet glasses and Alvine Vacker quilt covers while comfort-testing the Ektorp sofas or pondering the battle of hope over experience in assembling Pax Malm wardrobes.
More amazing than the lines waiting patiently at the checkouts with large and heavy boxes is the knowledge that, despite all the indications of thriving commerce, the place apparently is barely profitable. The last accounts filed by IKEA Pty Ltd with the Australian Securities and Investments Commission show customers handed over $531.3 million at the tills in the 2009 year, but the Australian subsidiary made just $4.9 million net profit – a margin of less than 1 per cent.
That was nonetheless a huge improvement on the 2008 year when net profit was just $434,000 on the $479.2 million in cash sales – a margin somewhat less than 0.1 per cent.
Reflecting such low profitability, IKEA's Australian arm doesn't pay much tax – something it has in common with its parent, the world's largest furniture retailer with $32.8 billion in annual sales.
Behind the wholesome Swedish image is one of the world's most curiously structured multinationals that's actually owned in the Netherlands – James Hardie's tax haven of choice for a while. It enjoys a tax rate that would make Macquarie Bank and Rupert Murdoch jealous and belongs to a charitable trust, but a trust that doesn't seem to dispense all that much charity, considering its wealth.
The weekend's international news about IKEA's big step forward in actually publishing a profit figure largely seemed to miss the main story – the glimpse of what IKEA actually is: an organisation that, in my opinion, seems to exist primarily just to grow, not to pay dividends or reward its shareholder. And it could be argued that IKEA's ability to make the most of its vertical integration and international structure, never mind the charity's tax status, means it could have a considerable financial advantage over its competition.
IKEA Group's first stab at some sort of annual report falls well short of what Australian companies need to provide. Being privately owned by a Dutch charitable foundation, the Stichting INGKA Foundation, IKEA isn't required to tell as much as it has. In the report's words:
“The Stichting INGKA Foundation was established in 1982 by the founder of IKEA, Ingvar Kamprad, to create an ownership structure and organisation that stand for independence and taking a long-term approach.”
Kamprad still consults to the company and reportedly is one of the world's richest people, perhaps depending on the view you might take of who owns what. He certainly knew how to establish a very patient charity.
With a profit margin of 11.6 per cent of revenue, IKEA Group declared a net profit of 2.5 billion euros ($3.5 billion) in its 2009 financial year, but just like the two previous years, it paid the foundation no dividend. The annual report says the foundation expects to make donations totalling 45 million euros ($64 million) this year – less than 2 per cent of the 2009 profit.
That 2.5 billion euro profit was after paying tax of just 384 million euros – a tax rate of 13 per cent. In the annual report, CFO Soren Hansen acknowledges the tax rate was “unusually low”.
“This was primarily due to a relatively lower result in countries with high income tax rates. Currency movements, a negative result in our industrial groups, a strong result in our asset management and an improved cost of sourcing in our supply chain, all contributed to this development.”
The intriguing point to speculate upon is how controllable the source of profits might be for a group with such a totally integrated supply chain, right down to making a considerable amount of its own furniture. IKEA is upfront about the tax rate, spelling this out in its “main principles”:
“Naturally we pay taxes and fees in accordance with laws and regulations, wherever we are present as retailer, manufacturer or in any other role. The effective tax rate varies from year to year, depending on where we grow – in high or low tax countries.”
Australian reporting requirements extract more information from IKEA Pty Ltd than IKEA Group provides. For the 2009 year, there was the big franchise fee of $16 million paid to its parent and fat financing costs of $52.5 million, both helping keep the bottom line low in high-tax rate Australia.
A British blogger, Richard Murphy, had a look at the IKEA report and was puzzled by the low tax rate. Using the scant information in the annual report, he found IKEA makes 79 per cent of its sales and 62 per cent of its purchases in Europe, clearly making it a European-dominated business. On Murphy's figuring with KPMG data, average European corporate tax rates are around 27 per cent.
“And yet IKEA has a tax rate of 13.1% in 2009 and 19.3% in 2008,” writes Murphy. “We have no idea whether these are current rates either: if the provision includes deferred tax the current rate may be lower, but we can't tell.
“All we can wonder is why the published rate IKEA records is so low compared to the rates available in most countries in which IKEA must actually make its profit. Without country-by-country reporting we can't answer that.
“Only when a company reports its sales, costs, profit and tax on a country-by-country reporting basis can we know that it is really paying its way where it should. I'm not saying IKEA isn't. But I am saying the published data looks hard to reconcile with the rates data noted above, and country-by-country reporting data would let me resolve the conundrum.”
What does IKEA do with its rich global profit stream? Soren Hansen:
“Our profit is either reinvested in our business, for example in new stores or factories, or paid out as dividends to our owner.”
Given that the owner hasn't received a dividend for three years, you're right in thinking the company is reinvesting – 2.1 billion of the 2.5 billion euro profit went on buying new stories and facilities in 2009. Fixed assets total 16.8 billion euros.
And IKEA Group, unlike the indebted Australian arm, likes cash:
“Combined cash and securities amounted to 14.3 billion euro. These financial assets continue to be conservatively invested. There were no financial counterparty losses during the year and we will continue to monitor this exposure closely. This 14.3 billion euro will primarily be invested in new stores and markets.”
IKEA, the world's biggest furniture retailer, is getting bigger. Assemble yourself a larger empire – and an impressively low tax rate.
Disclosure: I tried to contact IKEA Pty Ltd yesterday for comment on this article, but was told the telephone number for a spokesman could not be divulged and I could not be connected. Contact had to be an email address. As of early this morning, there had been no reply.
Michael Pascoe is a BusinessDay contributing editor. Further disclosure: he has assembled an IKEA wardrobe.