End of the UK-Ikea love affair?

WITH its affordable Scandinavian chic, Ikea transformed millions of British homes with easy-to-assemble flat-pack furniture. It became a furnishing phenomenon over 20 years. And along the way, its reclusive founder, Ingvar Kamprad, became one of the richest men in the world. But the British love affair with Ikea may be starting to fade.

Flat sales, falling profits, stiffer competition and an ageing customer base mean that the future may not be so bright for Sweden's most successful export.

The retailer's latest accounts for its UK division, filed at Companies House last week, do not make comfortable reading. In the year to August 2003, turnover stood at £882m, barely up on the previous year. But pre-tax profits slumped from £154m to £133m. The dividend was also cut.

In the accounts, the directors say that 'limited growth' was 'mainly due to poor trading conditions'. They add that 'poor sales performance was observed during the first half of the year due to the geopolitical climate'.

However, trading did improve significantly in the second half of the year, but clearly not fast enough to prevent the profits setback.

For a nation bred on the idea that flat-pack furniture was synonymous with retailers whose chipboard bits and pieces never quite resembled the table pictured on the outside of the box, the opening of Ikea's first store in Warrington, Cheshire, in 1987 came as a shock.

Ikea quickly swept past Habitat as the favourite of amateur interior decorators before it bought the Conran-founded business in 1992. Ikea is now the fourth-biggest furniture retailer, even though it has only 12 stores.

Though Ikea is still gaining market share, the rate of growth is stalling. According to retail research group Verdict, Ikea's growth in market share has slowed dramatically in recent years. Between 1997 and 1998, market share jumped from 2.6% to 3.3%. That had increased to an impressive 4.5% by 2000. But last year, Ikea's share of the market edged up by only 0.1 of a percentage point to 4.8%.

'Ikea faces much stiffer competition,' according to Verdict's Steve Gotham. 'There was a time when Ikea products stood out, but now that's not really the case. And you could find it difficult to choose between products from Ikea, Matalan or John Lewis, for example.'

The company is also embroiled in a court case in Nottingham, where three former employees face charges brought by the Serious Fraud Office of conspiracy to defraud, corruption and witness intimidation. A spokesman told Financial Mail on Sunday: 'We are a private company and do not comment on financial information.'

Homeowners increasingly see their property as a long-term investment and Gotham says: 'People want to retreat from a stressful life and will spend more on their homes being like a sanctuary.'

However, Ikea's policy of operating from mega-stores could be limiting its chances of cashing in on the nesting boom. In 2000, Ikea announced that it intended to open 20 stores, but last week the group admitted that so far it had not opened any due to 'difficult' planning guidelines. However, next year it will open its 13th store, in Edmonton, north London, and is now considering smaller sites and 'multi-floor' stores.

Ikea also suffered bad publicity a few years ago because of crowded stores and queues at its car parks. 'It was,' says Gotham, 'a victim of its own success.'

And its customer base is not getting any younger. The original Ikea fans are now middle-aged and looking to move upmarket to dearer home furnishings. If Ikea is not careful, its existing customers will move on unless it caters to a more mature market - or wins younger customers.

Worryingly, Ikea has resolutely refused to embrace the e-commerce revolution in the UK. While it offers online shopping in Sweden and Germany, for example, UK customers must drive to their nearest store and pay extra for home delivery. Ikea says it has 'no plans' to launch an e-tailing site in the UK.

While rivals such as Argos, which has a strong High Street presence, are offering quick and easy home delivery on internet orders, this could be Ikea's biggest blunder. Gotham says: 'They should really be looking at internet sales.

'Argos has improved its customer service, it has more contemporary products and has a multi-channel offering. Basically, it is on a roll.'