Ikea goes flat out with ideas in India


July 8, 2012

Pia Heikkila, The National

8 July 2012

The Swedish company Ikea’s furniture is well known across the world for being inexpensive and flat-packed, and featuring functional Scandinavian design.

People either love it or hate it – Ikea’s DIY furniture that looks oh-so-simple in the picture but often needs several hours of careful assembling.

Now the Nordic giant wants to bring its collapsible furniture to India and plans to conquer the country with a massive plan that includes a nearly US$1.8 billion investment drive.

"Ikea has a long-term vision for India. The investment plans as outlined in the application are estimations based on previous experience in other markets and our belief that India has a huge investment potential," says Malin Pettersson Beckeman, a spokeswoman for Ikea.

"India is a very interesting and important market for us and we are eager to set up our first store in the country."

Ikea is hoping Indians will fall for its Billy bookcase or Klippan sofa because on paper the Indian furniture market offers a massive opportunity. The market for household goods – including furniture and decor – is worth $18.5bn and is growing at a rate of 10 to 12 per cent annually, according to figures from the management consultancy Technopak.

Initially, Ikea’s fans would be young and urban.

"India has a young population which would likely be more open to buying DIY furniture than an older population," says Seema Desai, an analyst at Eurasia Group researchers.

Today Indians have more money to spend on furniture than ever before.

"The rapidly growing middle class in India, higher discretionary spending power, migration and urbanisation as well as changing family structures and consumer tastes including growing enthusiasm for western brands are all major growth drivers," she says.

India’s $450bn retail market is dominated by small family-owned stores, and only about 10 per cent of the total retail market revenue originates from chain stores. Indians are used to buying their tomatoes, electronics and of course their furniture from small, independent retailers, not from huge malls.

This could work to Ikea’s advantage.

"The home decor retail market in India is quite fragmented, and there are very few stores that offer everything under one roof," says Devangshu Dutta, the chief executive at the consultancy Third Eyesight. "An all-in-one retail concept such as Ikea offers consumers convenience through the width of products categories."

It all looks promising. But it’s not been plain sailing for the Swedes’ Indian odyssey so far. The company has been planning to come to India for several years.

The issue was that Ikea never wanted an Indian partner, which made it impossible for the company to operate in the country because Indian foreign direct investment (FDI) rules stipulated that a single-brand foreign retailer could enter only in partnership with a local entity.

Things changed in January this year, however, when the government allowed 100 per cent ownership of operations in India by foreign companies.

Ikea was first in line to say it was heading for India.

However, Ikea shifted its position yet again swiftly when it read the fine print – the government said that 30 per cent of supplies must come from India’s small businesses.

Eventually, Ikea came around to India’s way of thinking but still isn’t terribly happy.

"In the longer term, the mandatory sourcing of 30 per cent of the value of goods sold in India from domestic small industries remains a challenge … It is therefore important that the definition of small industries in the future is reviewed and provides flexibility," says Ms Pettersson Beckeman.

India last week rebuffed a request by Ikea to relax rules on local sourcing, Reuters reported, citing a government source. That raises the prospect of a delay in Ikea’s entering the market. The company said that a short delay would not affect its decision to open stores and that it hoped to start operations soon.

Ikea is already important to India, as last year the company sourced $450 million worth of goods from the country. Ikea has more than 70 suppliers and thousands of sub-suppliers in India from which it buys carpets, textiles and other materials.

It is not just sourcing that could be a headache for the Swedes.

"The challenges are many – including getting local approvals, labour issues and acquiring land in urban areas for stores," says Ms Desai.

The company’s concept was born in Sweden in the 1960s, but industry experts say the model has not been foolproof in developing economies.

"Ikea evolved its business model in high-cost, high-income economies in the West. This was about high sales volumes in large stores, proprietary products with offshore sourcing, and having customers taking assembly and delivery costs on themselves. When it entered China’s low-income economy with a similar strategy, it struggled," says Mr Dutta. In India, the most significant challenge for Ikea would be to create a business model that is right for a low-income economy

"Operating costs are higher here than in China," says Mr Dutta. "This includes getting affordable and high-traffic store locations of the size appropriate for Ikea’s business model, and pricing its products correctly."

Changing consumer demographics, potential sector growth and a massive increase in housing development means more international companies are looking to invest in India. Which means Ikea is not the only foreign furniture retailer eyeing the Indian market.

There are a few foreign furniture retailers already operating there.

Take Natuzzi – an Italian company that has been in India for less than two years but is already on an aggressive growth path, planning to add 20 stores this year.

"The overall furniture market currently is largely unorganised and very few players are operating in the premium segment," says Nitin Bahl, the Natuzzi Group country manager in India. "Our opportunity lies in these growing number of discerning Indian consumers with evolving lifestyles, those who are well travelled, aware of the global trends and make a statement with their personal living space."

Competition is getting tougher, the retailers admit.

"The market seems to be in a spending mode, and many brands are seeing top lines grow, because of which more players are entering India," says Mr Bahl. "With the easing of FDI norms in single-brand retail, we might see expansion in retail furniture space."

Increased competition also has benefits, industry experts say, as more entrants mean the market is likely to mature faster.

"With the entry of global brands in the sector, the market will get more educated on global designs, trends and innovation," says Mr Bahl. "With more players, the Indian furniture industry would gradually transform into a more organised and competitive sector."

(This article appeared in The National on 8 July 2012.)