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Another enormous store, but why does IKEA bother?

Sydney-Melbourne rivalry isn't dead, it's just become rather pathetic.

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.''


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