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Is an IKEA store to our advantage?

Wink Sutton, New Zealand Tree Grower February 2019.

IKEA is possibly to begin trading in New Zealand. Should New Zealand forest owners be pleased? Already New Zealand has large retailers including The Warehouse, Harvey Norman, K Mart, Mitre10 and Bunnings. However, these are Australian or New Zealand based companies. Sweden’s IKEA is probably the first of the northern hemisphere ‘big box’ retailers such as Walmart, Home Depot or Lowes, to come to New Zealand.

 These ‘big box’ companies can be massive. Walmart, for example, had an annual revenue of US$480 billion in 2018 which is more than twice the GDP of this country which was US$206 billion in 2017. IKEA, although not as large as its North American ‘big box’ equivalents, is still large with a 2018 revenue of US$44 billion.

Their profit comes from not just scale but also from the pressure these retailers can put on suppliers. These ‘big box’ companies pay only minimal prices for their wood and only pay the lowest wood processing costs, therefore much processing is being done in China and other counties with low wage economies. But the cost of wood should be greater than the direct cost of felling, extraction and transport – there must be an extra payment for past and future management costs. Failure to do this means that there will be little or no future forest management and almost no plantation plantings. In the long-term, therefore, less wood would be available.

The importance of paying more for wood than the direct costs involved was highlighted in 1987 report of the World Commission on Environment and Development: Our Common Future, often referred to as the Brundtland report. A most relevant quote from chapter two −

The process of economic development must be more soundly based upon the realities of the stock of capital that sustains it. This is rarely done in either developed or developing countries. For example, income from forestry operations is conventionally measured in terms of the value of timber and other products extracted, minus the costs of extraction. The costs of regenerating the forest are not taken into account, unless money is actually spent on such work. Thus figuring profits from logging rarely takes full account of the losses in future revenue incurred through degradation of the forest.

Being a Swedish company IKEA must know, that for future wood supplies to be assured, it is important to reward forest or plantation owners for their management and investment. Because we should expect IKEA to be a responsible wood buyer. Setting up in New Zealand could be to the advantage of New Zealand forest owners.

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