Ikea to invest €1.5 bn in India, set up stores


June 22, 2012

Asit Ranjan Mishra, Vidhi Choudhary & Sapna Agarwal, MINT

New Delhi, 22 June 2012

Swedish furniture retailer Ikea will invest as much as €1.5 billion (around Rs. 10,740 crore today) in India, chief executive Mikael Ohlsson told trade minister Anand Sharma, signalling an endorsement of the country by a high-profile investor, something that’s been rare of late.

Sharma said in a government press release on Friday that Ikea will initially invest €600 million and subsequently an additional estimated €900 million “for initial establishment of 25 retail stores in a wholly owned subsidiary”. Ohlsson and Sharma met in St Petersburg, Russia on Thursday.

While Ikea confirmed in a press statement that it will invest €1.5 billion in retail expansion “over the coming years”, it didn’t refer to the retail stores, nor did it give a timeline for the investment.

Ikea’s decision will come as a symbolic boost for a government that’s been criticized for being unable to push through policies and turning investors off the country at a time when it needs them badly as growth splutters amid global uncertainty.

The gross domestic product (GDP) growth slowed to a nine-year low of 5.3% in the March quarter.

“This quantum of investment at a time when India is facing challenges of credibility both within and outside the country sends a positive statement from a business outlook perspective,” said Arvind Singhal, chairman of Technopak Advisors Pvt. Ltd, a management consultancy firm.

Sharma also met Olaf Koch, CEO and chairman of German wholesaler Metro AG on Thursday in Russia. Koch expressed satisfaction over his firm’s investment in India and apprised the minister about expansion plans in the country. “He also informed that soon they will raise the number of their stores from 10 to 16 in the country,” the statement said. A Metro spokesperson in India declined to comment on the expansion plans.

Ikea said it has already applied to the department of industrial policy and promotion (DIPP) to be allowed to establish a fully owned subsidiary in India.

“We expect DIPP to expeditiously process our application and present the same before the Foreign Investment Promotion Board (FIPB) for consideration of the government of India,” the company said. “Once our application is approved by the government of India, we will be able to share more information about our intentions to establish retail operations in India.”

The government had hoped its decision to remove the 51% ceiling on foreign direct investment (FDI) in single-brand retail in November would persuade high-profile brands such as Ikea, Louis Vuitton, Cartier, Armani and Rolex to invest in fully owned stores in India.

But a condition requiring 30% local sourcing from small industries in India has been a stumbling block. Small industries are defined as those with a total investment in plant and machinery not exceeding $1 million.

Friday’s commerce ministry statement said Ikea had certain reservations about the sourcing norms and discussed those with DIPP officials. “Suitable answers…were provided leading to the decision to invest,” the release said, without elaborating.

Ikea said it will source at least 30% of the purchase value of products sold in India from its “direct and indirect supply chain comprising Indian small industries”. However, it said the mandatory sourcing norm remains a challenge “in the longer term” and asked the government to review the requirement and “provide flexibility”.

Ikea Trading (Hong Kong) Ltd-India, headquartered in Gurgaon, employs 140 people and sources many popular Ikea items from India such as textiles, rugs, plastics, lighting and metal products for its global supply chain. Currently, it is working closely with 70 suppliers and 1,450 sub-suppliers, including many small industries.

According to the Sweden India Business Guide 2011-12, Ikea’s annual turnover in India is $645 million, while its global turnover is $31.4 billion. Worldwide, it employs 127,000.

Ikea is known to adapt to local market requirements. For instance, in Turkey and China, emerging economies similar to India, Ikea offers home delivery and assembly as a service. The company also takes time to scale up operations and has just half a dozen stores in China in its 10 years of operations there.

“It will be interesting to see where the company sets up (shop) and how it adds value to the manufacturing and supply chain logistics in India,” said Mark Ladham, president, home division, at Future Group, which has 38 stores in 19 cities.

Devangshu Dutta, chief executive officer, Third Eyesight, a Delhi-based retail consultancy, said Ikea is known to have large stores that exceed 100,000 sq. ft and are designed as all-day destinations for shoppers with café and restaurant options.

“In India, one of the biggest challenges is realty and they may adopt a more pragmatic approach here and consider smaller stores (because of high property prices). What they do needs to be seen,” Dutta said. “Additionally, Ikea is favoured for its very cheap products. But the reason they are cheap is largely because the cost of assembly and delivery is borne by the customer. If the company offers these services, it will have to relook at its prices very carefully.”

Technopak’s Singhal also said Ikea, which is known for developing vendors globally, will maintain this tradition. “This step will encourage growth of manufacturing set-ups for SMEs (small and medium enterprises),” he said.

Dhvani Modi, research analyst at ICICI Direct, a Mumbai-based brokerage, said the opening up of FDI in single-brand retail was a positive move for the country.

Boosting sourcing from India will encourage job creation and better development of the sector as a whole.

The Indian cabinet’s bid to allow 51% FDI in multi-brand retail was scuppered by intense resistance from within and outside the ruling coalition.

In a bid to revive the initiative, trade minister Sharma wrote to the chief ministers of Uttar Pradesh, Punjab and Orissa on 19 June seeking their support on the issue.