Ikea's entry will give the economy a much-needed boost
While the potential appears huge, the government's condition requiring foreign retailers to source 30 per cent of the value of their goods locally, from small enterprises, could prove a sticking point.
It's a U-turn that promises to bring some much-needed cheer to the Indian economy. Back in January, when the government announced that it was hiking the cap on foreign direct investment (FDI) in singlebrand retail from 51 per cent to 100 per cent, Swedish homeware company Ikea decided to shun India. It was not willing to be limited by the policy's local sourcing requirements.
However, on June 21, after a meeting between CEO Mikael Ohlsson and Commerce Minister Anand Sharma in St. Petersburg, Russia, Ikea said it would enter India. That U-turn, with all its ramifications, promises to bring in the largest-ever investment into single-brand retail in India.
The size of Ikea's investment alone is enough to raise eyebrows. The company plans to pour 1.5 billion (around Rs 10,500 crore) into India over the next few years. Here's another number to put that in perspective: the total FDI inflow in single-brand retail between April 2000 and April 2012 was Rs 204.07 crore - around 30 million.
Ikea was founded by Swedish billionaire Ingvar Kamprad in 1943 and has grown from a single outlet then to 325 stores in 40 countries today. In India, the company says it will open 25 stores, in two phases. The first ten will come up over the next decade and the remainder thereafter.
It will have to take on a handful of organised retailers, who account for less than 15 per cent of the country's home furnishing and furniture market. Pantaloon Retail's HomeTown, which has 39 stores in 17 cities, is the leader of this segment. Other prominent names include Lifestyle International's Home Centre and Shoppers Stop's Home Stop. Ikea will also have to contend with the vast informal sector, which includes local furniture and carpenter shops, and accounts for more than 85 per cent of the market.
Estimates on the highly fragmented market's size vary. According to retail consultancy Technopak Advisors, it is expected to grow from $10 billion in 2009 to $15 billion by 2014. Companies such as Lifestyle put the current worth of the furniture market alone at $17.5 billion. "The market is not big at the moment. If a global retailer like Ikea comes, it will only expand and redefine the market," says Future Group Chairman Kishore Biyani.
While the potential appears huge, the government's condition requiring foreign retailers to source 30 per cent of the value of their goods locally, from small enterprises, could prove a sticking point. That clause has made many global chains put off their investment plans in India. The only proposal that has come in since the government lifted the FDI cap on single-brand retail is from footwear maker Pavers England, which has announced an investment of Rs 70 crore.
Ikea still has reservations about parts of the local sourcing clause. In an official statement, it has called for a clearer definition of small industries, keeping the future in mind. Currently, small industries are defined as units whose total investment in plant and machinery does not exceed Rs 5 crore. In other words, Ikea would have to look for new suppliers each time one of its existing ones breaches the investment limit, something that is inevitable in time. The Commerce Ministry, while acknowledging Ikea's reservations on sourcing, noted that officials had provided suitable clarifications to the company, leading to the investment.
India has actually served Ikea as a low-cost sourcing destination for the past three decades. The company sources $600 million worth of goods from here every year, primarily textiles and carpets, and plans to increase this to $1 billion annually. It has 70 suppliers and 1,450 sub-suppliers here supporting its global operations.
Noida-based Hanung Toys and Textiles has been associated with Ikea for more than 20 years. The toymaker currently earns about 10 per cent of its total annual revenues of Rs 1,395 crore from Ikea and expects this to increase with its entry here. "Ikea focuses on the middle-class segment and has a huge potential market in India. Our business with them is growing at around 15-20 per cent every year," says Ashok Kumar Bansal, Hanung's Chairman and Managing Director.
Still, not everyone is enthused by the prospect of Ikea coming into India. The promoter of a Ludhianaheadquartered home furnishing unit told BT that while the company's entry was good for consumers, manufacturers had nothing to gain. His unit was an Ikea supplier but severed ties with the company around four years ago. "Ikea engages in predatory trade practices," he alleges, speaking on condition of anonymity. "In the first year, they offer excellent margins. In subsequent years, the margins reduce to a level that turns a unit into an unprofitable venture." Even Bansal concedes that margins from the Ikea business are lower.
But Harminder Sahni, Managing Director of Wazir Advisors, believes the company has sound reasons for its operating practices. "Ikea has been able to pass on cost benefits to consumers because it focuses on building cost efficiencies," he says. "This helps it offer its customers better designed products at prices that are very affordable. And given its sheer size, Ikea could be a game changer in India."
However, on June 21, after a meeting between CEO Mikael Ohlsson and Commerce Minister Anand Sharma in St. Petersburg, Russia, Ikea said it would enter India. That U-turn, with all its ramifications, promises to bring in the largest-ever investment into single-brand retail in India.
Ikea was founded by Swedish billionaire Ingvar Kamprad in 1943 and has grown from a single outlet then to 325 stores in 40 countries today. In India, the company says it will open 25 stores, in two phases. The first ten will come up over the next decade and the remainder thereafter.
It will have to take on a handful of organised retailers, who account for less than 15 per cent of the country's home furnishing and furniture market. Pantaloon Retail's HomeTown, which has 39 stores in 17 cities, is the leader of this segment. Other prominent names include Lifestyle International's Home Centre and Shoppers Stop's Home Stop. Ikea will also have to contend with the vast informal sector, which includes local furniture and carpenter shops, and accounts for more than 85 per cent of the market.
Ikea plans to invest pound 1.5 billion in India. The total FDI inflow into single-brand retail in the last 12 years is around pound 30 million."
While the potential appears huge, the government's condition requiring foreign retailers to source 30 per cent of the value of their goods locally, from small enterprises, could prove a sticking point. That clause has made many global chains put off their investment plans in India. The only proposal that has come in since the government lifted the FDI cap on single-brand retail is from footwear maker Pavers England, which has announced an investment of Rs 70 crore.
Ikea still has reservations about parts of the local sourcing clause. In an official statement, it has called for a clearer definition of small industries, keeping the future in mind. Currently, small industries are defined as units whose total investment in plant and machinery does not exceed Rs 5 crore. In other words, Ikea would have to look for new suppliers each time one of its existing ones breaches the investment limit, something that is inevitable in time. The Commerce Ministry, while acknowledging Ikea's reservations on sourcing, noted that officials had provided suitable clarifications to the company, leading to the investment.
India has actually served Ikea as a low-cost sourcing destination for the past three decades. The company sources $600 million worth of goods from here every year, primarily textiles and carpets, and plans to increase this to $1 billion annually. It has 70 suppliers and 1,450 sub-suppliers here supporting its global operations.
Noida-based Hanung Toys and Textiles has been associated with Ikea for more than 20 years. The toymaker currently earns about 10 per cent of its total annual revenues of Rs 1,395 crore from Ikea and expects this to increase with its entry here. "Ikea focuses on the middle-class segment and has a huge potential market in India. Our business with them is growing at around 15-20 per cent every year," says Ashok Kumar Bansal, Hanung's Chairman and Managing Director.
Still, not everyone is enthused by the prospect of Ikea coming into India. The promoter of a Ludhianaheadquartered home furnishing unit told BT that while the company's entry was good for consumers, manufacturers had nothing to gain. His unit was an Ikea supplier but severed ties with the company around four years ago. "Ikea engages in predatory trade practices," he alleges, speaking on condition of anonymity. "In the first year, they offer excellent margins. In subsequent years, the margins reduce to a level that turns a unit into an unprofitable venture." Even Bansal concedes that margins from the Ikea business are lower.
But Harminder Sahni, Managing Director of Wazir Advisors, believes the company has sound reasons for its operating practices. "Ikea has been able to pass on cost benefits to consumers because it focuses on building cost efficiencies," he says. "This helps it offer its customers better designed products at prices that are very affordable. And given its sheer size, Ikea could be a game changer in India."
