IKEA to extend sales of second-hand furniture – ecological virtue signalling, or a hard-nosed business solution to developing a circular economy?

Henley Business School's Professor Adrian Palmer says the principles of a “circular economy” seem undeniable, with an emerging consensus that repairing, reusing and recycling products, is better than sending single-use products to landfill. Many efforts by community-based groups have tried to put into practice the principles of circularity, but to have real impact, there needs to be serious take-up by business.

IKEA has recently started trialling its “IKEA preowned” platform to buy and sell used IKEA furniture. This follows the rollout in many IKEA UK stores of a scheme to buy back and resell second-hand IKEA furniture. Is this more green “window dressing” or a credible attempt to embed the transition from linear to circular supply chains into business models?

What's in it for IKEA?

At first sight, IKEA makes its profits from selling more new furniture. It is now embarrassed to admit that until quite recently, its advertising encouraged people to get rid of their “kitsch” and refurnish their homes with new contemporary styles. To sceptics of marketing, this approach epitomised all that is wrong with traditional business models of evoking consumer demand by encouraging a throwaway approach to consumer durables. So, for IKEA, what sense can it make to encourage consumers to buy less of the furniture that it makes, and to reuse more?

The business environment contains many carrots and sticks to guide a circular business strategy. The stick is increasingly coming from legislation designed to lengthen the life-cycle of products. The UK has followed the EU in implementing the Ecodesign for Energy-Related Products and Energy Information Regulations 2021 (“Right to Repair” regulations) which currently applies to electrical goods and imposes obligations for repairability and availability of spare parts for up to 10 years. This reflects evidence from the European Environmental Bureau (EEB) that 10 million tonnes of furniture are discarded annually in EU Member States, about 80% of which ends up in landfill or being incinerated.

It will no longer be good enough for companies to simply make their products recyclable - reuse and repair will need to be built into product design. Companies who act early gain experience ahead of the market.

How can circularity incentivize consumers?

The circular economy will not grow fast if it just relies on individuals’ ecological conscience. Extensive research has shown a gap between what people think and say, and what they actually do. A segment of “deep green” consumers will always make ecologically benign choices out of personal conviction, but there is a long tail of “pale green” consumers who need incentives which move them beyond having ecologically benign thoughts through to actually taking action based on those thoughts.

In addition to the social appeal of being seen as ecologically responsible, how else can IKEA get consumers to think in terms of circularity?

One long established technique is to flatter a potential buyer by placing a perceived high value on an item that they are considering replacing. This may overcome a barrier of guilt about throwing away a perfectly usable product - its value is now perceived as justifying trading up to a newer product. In the past, manufacturers of vacuum cleaners have included a margin for a trade-in allowance in their pricing, even if the vacuum goes directly for scrapping. A variation of this is taking old goods to give to charity - again it reduces a perceived barrier to throwing away usable products. Either way, consumers perceive a reward for their behaviour

Barriers for IKEA

Linear models of production, distribution and consumption have become very efficient when measured by conventional economic criteria. Products are manufactured in bulk and shipped in progressively smaller consignments through distribution channels until they reach the end-consumer. But online retailers have learnt that reverse logistics are much less efficient - gathering diverse products, sorting, grading and preparing them for resale can be time consuming and labour intensive. An important reason why we now benefit from cheap furniture has been the huge increases in distribution efficiency - handling circular distribution will be a big challenge.

Another logistical challenge is that fairly new and still serviceable furniture is more likely to be traded-in in areas of affluence, but as second-hand purchases, more sought after in less affluent areas. The logistical challenge is to move goods around the country (or even internationally) to match local supply and demand. This makes sense for high value products such as cars, which are routinely moved around the country to balance supply and demand. Will this still be economically feasible for lower value items?

Being able to offer second-hand furniture requires a ready supply of the types of furniture that consumers currently want to buy. A further market matching problem is that fashion cycles often lead consumers to reject “last year’s” colour, style and texture until many years later when they come back into fashion as “retro”. If consumers remain motivated to seek out the latest fashions, this gap will continue to be a barrier to circularity, until classic, timeless design becomes pervasive and appeals to large segments of consumers.

At the centre of a value creation network

So why should a company such as IKEA want to go to all the efforts of handling consumers’ second-hand furniture, when it is not charging any transaction fees for its online “preowned” platform, and runs the risk of cannibalising sales of its new furniture? The market space for second-hand furniture is quite crowded, with platforms such as Gumtree, eBay and Craigslist competing with traditional channels such as charity shops, car boot sales and family hand-me-downs. The arguments of circularity will not go away. Being a dominant player in the market from an early stage increases the chances of being the “go to” place for buyers and seller - getting into that market space late is a lot harder. Controlling an online marketplace gives many opportunities to earn money from a platform. Not just from selling more new furniture, but services which are increasingly associated with buying and selling it - finance, transport, and “Libraries of things” which appeal to millennials seeking to rent rather than buy home furnishings.

IKEA may be following the path of “service dominant logic” - physical products such as furniture cease to be the focus for value creation. Instead, they become a vehicle for providing a stream of services to finance, transport and insure them. A logical extension is to include the service of repairing and taking them back for further use elsewhere. Also, as a platform operator, consumer behaviour data is collected which may be monetised.

IKEA is following a similar path to car manufacturers - the car becomes a supporting element of a service package which provides core benefits of travel, dependability and the complex benefits which come from easily being able to upgrade to a new car. Increasing sophistication of Internet platforms, regulations on design for reuse, change in consumes’ attitudes and reducing stigma about buying second-hand may push the domain of circular economy to lower value products.

IKEA’s move may turn out not to be ecological virtue signalling, but a hard-nosed business view on how capitalism can benefit from circularity.