A Peek into IKEA’s Aggressive Game Plan for India

The Swedish home furnishings giant is aggressively pushing into the Indian market, but leading domestic brands are not ready to give up market share without a fight

By: Arnab Dutta

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It was a typical June morning in Bengaluru. The garden city showed off its best weather—temperature at a cool 23-25 degrees, marginally overcast sky, slight drizzle at times, the sun peeking through now and then to spread warmth and cheer.

Traffic, though, was quite the opposite. Crowded. Exasperating. Especially on NH75 near Nagasandra. Traffic had come to a standstill. But the reason was not only rush hour. If you looked closely, you could see cars queued up to enter a new, elegant, blue building bearing the legend “IKEA”. Once your car got in and got parked, you had to endure another serpentine queue of smiling, curious folks. The store opened at 10 am, but chances are you spent three hours in various queues before you finally got inside the building.

Not that this dampened the enthusiasm of Bengaluru residents, who thronged the maze of aisles and rows of the 460,000-sq. ft store in the thousands to take a peek at IKEA’s signature furniture, Japanese kitchen knives and other snazzy products. A grinning Ram Babu and his family were caught up in the frenzy. Babu, a bureaucrat and father of three teenagers, was checking out the vast range of affordable cutlery on his wife’s invitation, but had great difficulty managing an uncompromising crowd that conveniently ignored his elbow jabs, even as his daughter Sheetal lost herself in search of decorative plants. The 1,000-seater restaurant on the second floor of the Blue Box—the nickname of a standalone IKEA large-format store—could be accessed after enduring a wait of an hour as Swedish meatballs and mango pastries flew off the shelves. But the thousands of visitors, the Babus included, were in no mood to check out anytime soon.

As the crowds surged around her, the tiny, frail-looking Susanne Pulverer was caught in a heavy stream of downward-moving visitors on a broad staircase. Decked up in IKEA’s signature yellow top and blue skirt, the Swedish national looked delighted, gauging the mood of her customers. (Sweden, incidentally, regularly ranks among the 10 happiest countries in the world.) Despite the crowds and the visible enthusiasm of consumers towards the brand, the 62-year-old Pulverer, CEO and Chief Sustainability Officer of IKEA India, has a big task ahead.

[India is] a big, big country and we have just started to enter. There is so much to do.

Susanne Pulverer
CEO and Chief Sustainability Officer
IKEA India

Nobody needs to tell her that. Pulverer knows India well, having spent two stints here, the first as a sourcing manager for the country starting 2007. The soft-spoken IKEA veteran also gathered market experience from her stint as Local Community Leader and was present during IKEA’s first store launch in Hyderabad in mid-2018. No surprise, then, that in January 2022, the global executives in the Netherlands put their bet on Pulverer for their India gambit to succeed. “It’s a big, big country and we have just started to enter. There is so much to do,” says Pulverer. She adds that India is a “very important growth market for IKEA”, and while it has five stores here, “this is just the beginning”.

For the $42-billion Swedish-founded, Dutch-headquartered home furnishings giant, cracking the India market is important. IKEA clinched the title of the largest furniture retailer in the world in 2008. Yet, despite its presence in 64 countries across five continents, including the oil economies of the UAE, Kuwait and Saudi Arabia, and emerging economies like China, Russia and India, IKEA continues to depend heavily on the stagnating economies of Western Europe and North America. Nearly 73 per cent of its stores are located in these two regions, with Europe alone housing 277 Blue Boxes, of a total 472 worldwide. In comparison, the market in India is growing faster and with per capita consumption of furniture remaining low, opportunity beckons.

However, India is not an easy market to crack, as several multinational companies have found to their dismay. The character of the Indian consumer is hard to understand and serve. There’s competition lurking everywhere. In the case of IKEA, competition would range from large organised players like Godrej Interio to new-age upstarts like Pepperfry to the thousands of unorganised players in the ‘furniture markets’ dotting India’s cities. The company has also been making losses ever since it entered India. Add to that the fact that India has the lowest per capita income of all markets IKEA is present in, and you begin to get the scale of the challenge the company faces.

Ikea’s first India store came up in Hyderabad in August 2018, but its India plan began to unfold seven months later. On March 4, 2019, IKEA India’s board of directors gathered for an extraordinary general meeting at its registered office in DLF Tower-A at South East Delhi’s Jasola District Centre. As the government prepared to relax local sourcing norms for overseas single-brand retailers, the board decided to raise four-fold the company’s authorised share capital, the maximum amount allowed to be raised legally through a share issue—from `2,655 crore to `10,000 crore. The move was crucial. Since its incorporation in August, 2013, IKEA India had sucked in funds from its Netherlands-based parent for expansion through every possible avenue it had. However, for further capital through equity infusion, raising the authorised share capital was imperative.

Such retail realty investments point towards a long gestation period... Typically, a store like IKEA’s in Navi Mumbai requires a cost of `12,000 per sq. ft just for land and construction.

Anuj Puri
Chairman
Anarock Group

That move was a vote of confidence in the Indian market’s growth opportunity. As per IHS Markit, in 2019, per capita consumption of furniture in India stood at $5 (Rs 400) while in IKEA’s two largest markets—the US and Germany—the figures were $733 and $661, respectively. Industry veteran Swapneel Nagarkar, Senior Vice President & Business Head at Godrej Interio, estimates the overall furniture market in India at $16 billion (Rs 1.3 lakh crore), and poised to double by 2027. The organised part of that market, by value, stood at Rs 50,000 crore in 2019, as per estimates by PwC, which further projects the organised market to grow to Rs 1,95,200 crore by 2035. The big opportunity: in spite of newer players entering the market, branded companies sell only a tenth of all furniture sold in India.

IKEA’s plan is to capture the millions of young Indian consumers who are on the verge of starting their family—either alone in a new city or with their partners. According to Bedraj Tripathy, a branded furniture industry veteran and currently Co-founder & CEO of UnboxSpaces, IKEA is eyeing a fraction of the vast home furnishings market for now. “Typically, it is the younger consumers that are exposed to the IKEA brand. This group comprises about 200-250 million consumers,” he says. Young millennials, consumers who may have started earning but are yet to turn rich, are the ones who currently fit its target profile.

The millennial is just one piece of the long-term puzzle. If India’s home furnishings market is set for a bull run, IKEA is preparing to ride the animal. The company’s market researchers noted in a recent report: “The current level of growth in output (supply) is not sufficient to meet this demand. Based on the business-as-usual scenario, the sector’s output will expand to about 1.5 times by 2035, from $6.96 billion in 2019 to approximately $10.4 billion by 2035, which is quite below the expected domestic future demand by 2035. Thus, it reflects that systemic inefficiencies will ensure that the furniture industry in India will continue to depend on imports for meeting demands of finished and intermediate goods.” In this scenario, IKEA hopes its global network of suppliers will place it at an advantage over local players.

At the same time, Pulverer says the company has set a target of locally sourcing half of what it sells in India, up from 27 per cent. Over the years, IKEA has secured sourcing partners for textiles, carpets and smaller home furnishing accessories at constant quality. Now it is looking to begin sourcing mattresses locally. “Then sofas, metal furniture and then wooden furniture. That’s a very big step, where we need partners to invest to build [supply] capability,” she says. The criticality is apparent because wooden furniture still makes up the bulk of IKEA’s sales and forms its primary identity amongst consumers. Increasing local sourcing is crucial for its success in India. As the cost of a single Blue Box beats the annual budget of most of its rivals, Pulverer and team would require to keep cost of products affordable in order to drive volume sales growth.

Given the kind of money it is pumping in, IKEA is clearly in India for the long haul. Over the past few years, it pumped in thousands of crores to put the local unit on a strong footing. In the run-up to its first Blue Box in Hyderabad, as per documents available with the Registrar of Companies (RoC), the global management from its Leiden (Netherlands) office infused at least `1,650 crore into the local unit between mid-2015 and end-2016. Plus, IKEA India raised `300 crore in masala bonds from IKEA Asia Treasury Centre Ltd, a group entity based in Hong Kong.

Players like IKEA coming in will accelerate the shift from the unorganised to organised sector, because consumers would be inclined to explore what all is available before making their decision.

Swapneel Nagarkar
Senior Vice President & Business Head
Godrej Interio

As it geared up to open its Hyderabad store in 2018, with stores in Mumbai and Bengaluru in the pipeline, IKEA’s India investments gained pace. In January 2018, the India unit reached out to Hong Kong again. By February, IKEA India raised `2,070 crore in two tranches against non-convertible debentures (NCDs), of which `1,370 crore, raised in January, was meant for purchasing land parcels in Hyderabad, Mumbai and Bengaluru, IKEA India said in RoC filings. Following another `750-crore equity infusion in April and raising its authorised share capital the next year, till June 6, 2022, the company has secured at least Rs 4,400 crore against fresh equities, masala bonds and NCDs from group entities spread across Ireland, China and the Netherlands. RoC documents show, between its inception in 2013 and June 6, 2022, IKEA India has raised at least `9,325 crore.

In comparison, IKEA India’s net sales stood at `608 crore in 2020-21—7.4 per cent higher than the Rs 566 crore it had posted a year ago. Its operating expenses, however, jumped to Rs 1,092 crore from Rs 1,067 crore in 2019-20. As a result, IKEA’s net loss expanded to Rs 808 crore in 2020-21, from Rs 721 crore in 2019-20. According to industry experts like Tripathy, IKEA’s vast scale of physical retail outlets is a key factor in its high initial costs. Its long-haul stance for the market allows it to invest such large sums of money without having to break even within the short- to medium term.

Take its flagship Navi Mumbai store, for instance. Spread across 500,000 sq. ft, the store may have cost IKEA in excess of `600 crore. Anuj Puri, Chairman of real estate consultant Anarock Group, says that an estimated Rs 12,000 per sq. ft could be the cost of land and construction alone. Then there is running cost. According to Parineeta Cecil Lakra, Country People & Culture Manager at IKEA India, it takes nearly 1,000 people to run its large-format stores. Comparatively, leading industry players like Godrej Interio or Pepperfry have so far launched their largest stores measuring about 10,000 sq. ft in markets like Bengaluru and Delhi.

But it is not just the stores that guzzle IKEA’s funds. Being in the furniture business means setting up and maintaining large warehouses and fulfilment centres closer to key markets in top metros. Apart from keeping logistics costs in check, these centres also allow swift delivery. As the company now plans to venture into Delhi-NCR, Pulverer says setting up a fulfilment centre in the region would be imperative before IKEA opens its doors to consumers. After setting up its flagship large-format stores in Hyderabad, Mumbai and Bengaluru, IKEA’s next big move is expected to come in Noida and Gurugram. But unlike other cities, here the company is planning to open shops inside high-street malls that will be built by its parent Ingka Group.

Godrej interio’s Nagarkar is, however, unfazed by IKEA’s massive plans. “Players like IKEA coming in will further accelerate the shift from the unorganised to organised sector, because consumers would be inclined to explore what all is available before making their decision. And IKEA definitely carries its brand name and global reputation,” he says. Godrej Interio, the largest player in the branded furniture market with `2,500 crore in annual sales, has chalked out its own expansion plan. The company, which has some 1,200 outlets including 500 branded stores, now aims to add 100 outlets every year. According to Nagarkar, the company expects its sales to grow at 20-25 per cent a year, up from its current rate of 15-20 per cent. “The next goal is to be at Rs 3,000 crore yearly sales. And eventually, in the next three to five years, take it in the direction of about Rs 5,000 crore,” he says. To back its plan, Godrej has invested close to Rs 300 crore in the past three years to ramp up its manufacturing capacity and R&D, and another `60 crore to strengthen its online infrastructure. Currently, the company manufactures 75 per cent of its products in-house.

Then there is Pepperfry, which claims to be the largest home furnishings marketplace in the country in terms of product range and retail reach. It has its footprint across 500 towns, including 175 physical stores in 91 cities, and a strong online presence. According to Ashish Shah, Co-Founder & COO of Pepperfry, unlike many of its competitors, the company has set up studios in comparatively remote areas like the North-East—apart from larger cities—that enables it to cater to customers who were otherwise unattended. To improve its margins, it has introduced seven private labels that now contribute 40 per cent towards its top line.

Ashish Shah
Co-Founder & Chief Operating Officer
Pepperfry

According to Shah, the dynamics of the market have changed significantly in the past 10 years since Pepperfry began its journey. “Earlier, when consumers used to buy furniture or cars, they expected to use them for over a decade. However, now there are consumers who are ready to change their furniture in five years. Coupled with this, promotional spend by brands like IKEA and Pepperfry is boosting consumers’ interest for branded home furnishings. Now people are talking about furniture. Earlier, nobody used to talk about this category,” he says. Shah, who himself adores IKEA’s accessories, has done enough research to keep himself appraised on the potential threat.

Like Nagarkar, Shah refuses to panic from IKEA’s heavy spending. In spite of the buzz around the brand, he feels Pepperfry would remain immune to IKEA due to the latter’s weakness in the variety of materials offered in furniture. “Our motto is: don’t play God to the consumer. Show them as much variety as possible in terms of design, material and price range, and let them choose,” he says. Pepperfry offers furniture made of every popular material—from solid wood to particle boards. IKEA, however, he says, is heavily dependent on its engineered materials to keep costs in check.

Udaipur-based Wooden Street is on an expansion mode, too. The company, till recently, offered only solid wood furniture. Post-Covid-19, it offers particle boards due to rapid demand arising from the work-from-home culture. According to Lokendra Ranawat, Co-founder and CEO of Wooden Street, the Rs 300-crore company has set a target of launching 300 outlets in three years. Currently, it has some 60 stores across 35 cities. “IKEA is clearly not our competitor. The design and style of their furniture, I feel, is not aligned with Indian consumers’ preferences,” says Ranawat, who had been an IKEA consumer himself during his corporate stint in London.