IKEA, Coca-Cola make inroads into India


July 6, 2012

Anjali Mathai, Channel News Asia

New Delhi, 6 July 2012

India’s recent policy change to allow foreign companies to wholly own their businesses has relieved some pressure off the government, which is seen as being unable to boost growth.

Two major international brands, IKEA and Coca-Cola, have announced plans to invest billions of dollars in the country.

Swedish furniture and home décor giant IKEA is setting up shop in India. It will invest about US$1.9 billion, opening 25 stores in the country over the next 15 to 20 years.

Devangshu Dutta, Chief Executive of Third Eyesight, said: "If you look at the markets globally, there are very few large markets that are growing in any significant way. India happens to be one of those markets.

"One of the interesting things about India is that despite the development in the last 20 years, there’s probably another 25 to 50 years of further development in the market.

So any brand that enters the market at this point of time has possibly a generation or two for its life cycle to be lived out. I think that’s a very powerful driver for any brand, any retailer, looking at markets around the world."

In January, the Indian government removed barriers to foreign direct investment in single-brand retail, allowing foreign firms to own 100 per cent of their businesses in the country.

But, the policy came with the caveat that foreign companies must source 30 per cent of their inventory from India’s small and medium-sized enterprises.

IKEA already sources US$450 million worth of textiles, carpets and hard goods from Indian SMEs. However, it said continuing to do so in the long-run will be challenging.

Mr Dutta said: "That may be doable, let’s say in the initial period, when maybe the business volumes are slow, the number of stores are small. But as the business grows, and if you look at the whole range of merchandise, it’s going to become difficult to source from only small businesses.

"The very fact that the small suppliers would grow with the business would take them beyond the league of SMEs at some point in time."

Still, the policy change has attracted big international names.

Days after IKEA announced its investment, the Coca-Cola Company declared that it would invest US$3 billion in India over the next eight years. This is in addition to a US$2 billion five-year plan that the soft drink firm announced in November 2011.

Foreign direct investment is still not permitted in some key sectors of the Indian economy. But the IKEA and Coca Cola developments, which came after one small step was taken, have shown that there is still some international faith in the long-term India story, spurring hopes that further changes are on the way.

(This story appeared on Channel News Asia on 6 July 2012.}