Sydney-Melbourne rivalry isn't dead, it's just become rather pathetic.
SYDNEY-MELBOURNE rivalry isn't dead, it's just become rather pathetic. The big philosophical considerations - beer, football codes, the Yarra's muddiness - are gone. We're just left with who has the biggest IKEA store.
Two days after the Melbourne Cup, Sydney will attempt to swing national attention north with the official opening of a flat pack furniture shop.
But it's not just any flat pack furniture shop. As IKEA's spinners are spinning it, at 40,000 square metres it will be the biggest in the entire southern hemisphere. (Excuse me while I gasp - wow, Australia will have a bigger IKEA store than any in Africa or South America, not to mention New Zealand. Or Fiji. We've come a long way, baby.)
Most importantly, the new store on the site of the old Tempe tip will be larger than the IKEA shop opened last month in Springvale. Greater Melbourne could only hold the title for having the southern hemisphere's biggest IKEA store for six weeks. Losers. Melbourne's only hope is that IKEA is building a store at Campbellfield rumoured to be 41,000 sq m. Self-respect could be restored.
The mystery, though, is why IKEA bothers. The Dutch (yes, Dutch) retail giant appears barely profitable in Australia. According to the most recent accounts filed with the Australian Securities and Investments Commission, IKEA's bottom-line profit margin was barely 1 per cent of the $556.6 million it took from shoppers in its 2010 year. And, as IKEA doesn't make much profit here, it doesn't pay much tax - just $2.5 million last year.
A greater mystery for me was the way the company's cost of sales blew when other Australian retailers' gross profit margins were doing very nicely out of our appreciating currency. IKEA's revenue rose by $23 million but what it paid for stuff jumped by $38.6 million. Despite all those lost-looking souls queuing at checkouts, the company's gross profit margin fell from 44.7 per cent in 2008 to 40.5 per cent in 2009 and 35.6 per cent last year.
It's an odd business - just like IKEA's ownership. The once-Swedish corporation is now housed in the Netherlands, where it is owned by a ''charitable foundation'' that receives very little of the many billions of IKEA's global profit and disperses even less for good works.
IKEA continues to introduce whopping great stores in competition with other retailers such as, just for an example of one that also operates at the less-expensive end of the market, Fantastic Furniture. Fantastic is also expanding, yet in the tougher 2011 year it reported a net profit of $19 million and paid tax of $7.7 million on sales of $437 million.
But life, accounting and taxation are full of mysteries. The Australian Financial Review last week printed some interesting details of the amazingly profitable deal Clive Palmer did in buying the Yabulu nickel refinery from a panicking BHP in 2009. For about $10 million down, Clive made a profit of $1.1 billion in one year. And, in Palmer's words: ''[Yabulu] provides me with about $250 million of beer money a year. That's why I've got larger and fatter, thanks to BHP.''
And the AFR story concludes: ''By buying the operation through three separate companies each owned by himself, he realised tax losses. In the first year he received cash payments from the Tax Office of $138.6 million, perhaps the sweetest beer money of all.''
Frequently Asked Questions about this Article…
What’s special about the new IKEA store opening in Sydney and how big is it?
The new Sydney IKEA, built on the old Tempe tip site, is being promoted as a giant 40,000 square metre store — the biggest IKEA in the entire southern hemisphere according to the article. It eclipses the recently opened Springvale store in Melbourne and even sparks a local size rivalry with a rumoured 41,000 sq m store at Campbellfield.
If IKEA is building such a huge store in Australia, is IKEA Australia profitable?
According to the article, IKEA Australia appears barely profitable. The accounts filed with ASIC showed a bottom-line profit margin of about 1% on $556.6 million of sales in its 2010 year. The piece highlights that this low profitability raises questions about why IKEA continues to expand large stores here.
How much tax does IKEA Australia pay compared with its sales?
The article notes that IKEA Australia paid just $2.5 million in tax last year despite reporting $556.6 million in sales in its 2010 year. The article contrasts this with other retailers to underline how modest IKEA’s tax payments are relative to its revenue.
Have IKEA Australia’s gross profit margins changed recently and why does that matter to investors?
Yes — the article reports IKEA’s gross profit margin has fallen: 44.7% in 2008, 40.5% in 2009 and 35.6% in the most recent year reported. The decline matters because the article links it to a sharp rise in cost of sales (IKEA’s revenue rose by $23 million while what it paid for goods jumped by $38.6 million), which squeezes retail margins and can affect future returns for investors in retail-related businesses.
How does IKEA’s Australian performance compare to other low‑end furniture retailers like Fantastic Furniture?
The article compares IKEA to Fantastic Furniture, noting Fantastic reported a net profit of $19 million and paid $7.7 million in tax on $437 million of sales in 2011. By contrast, IKEA’s Australian financials showed much lower profit margins and far smaller tax payments relative to its larger revenue, illustrating different profitability and tax outcomes among budget furniture retailers.
What does the article say about IKEA’s ownership structure and why might that be relevant to investors?
The article explains that the once‑Swedish corporation is now housed in the Netherlands and is owned by a so‑called ‘charitable foundation’ that reportedly receives little of IKEA’s global profits and disperses even less. For investors this is relevant because ownership and corporate structure can influence how profits are reported, taxed and distributed across jurisdictions.
Why does the article call IKEA’s business in Australia ‘odd’ and what operational mystery does it point out?
The article calls IKEA’s Australian business odd because it is aggressively expanding store size while showing thin local profitability and declining gross margins. The operational mystery highlighted is why cost of sales rose so substantially (even as other Australian retailers benefited from an appreciating currency), pushing IKEA’s gross margin down despite higher revenues.
Does the article mention any other high‑profile Australian corporate tax or profit stories investors should be aware of?
Yes. The article references an Australian Financial Review story about Clive Palmer’s purchase of the Yabulu nickel refinery from BHP. It describes how Palmer reportedly turned an initial ~$10 million outlay into about $1.1 billion in profit in a year and structured the acquisition through separate companies to realise tax losses — reportedly receiving $138.6 million in cash payments from the Tax Office. The piece uses this example to underline that accounting and tax outcomes can be complex and surprising.
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