Ranjan Mishra, Vidhi Choudhary & Sapna Agarwal, MINT
Delhi, 22 June 2012
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 thats
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 didnt refer to the retail stores, nor did it give a timeline
for the investment.
Ikeas decision will come as a symbolic boost for a government
thats 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 firms 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
Fridays 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
According to the Sweden India Business Guide 2011-12, Ikeas
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.
Technopaks 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 cabinets 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.