Is IKEA's investment in India such a big deal?

Last Updated: Wed, Jul 18, 2012 19:11 hrs

When Mikael Ohlsson, CEO and president of IKEA, announced the euro 25 billion Swedish furniture giant’s investment plans for India at St Petersburg (Russia) on June 22, the initial reaction was that of euphoria. Now that policy makers in New Delhi are dissecting the company’s application and also trying to tweak some of the tough conditions in the guidelines for FDI in single-brand retail, it’s time to ask whether IKEA is such a big deal for India. Isn’t FDI in multi-brand retail, after all, the real game changer, where global majors like Walmart, Tesco and Carrefour can bring mega bucks to India, much more than IKEA ever will?

The retailer, which sells only under a single brand, wants to invest euro 1.5 billion (around Rs 10,500 crore) here over a period of 15 to 20 years. In a phased rollout, it plans to set up 25 furniture stores, restaurants and food marts under the IKEA brand. While initially it would invest euro 600 million (Rs 4,200 crore), another euro 900 million (Rs 6,300 crore) would come later. Its rollout plan, store numbers and the scale of investment may not be the leviathan that the promise of multi-brand will bring with it; experts suggest that one must go beyond the surface.

Multi-brand’s juggernaut
Arvind Singhal, founder and chairman, Technopak Advisors, a leading retail consultancy, says that the scale of investment in multi-brand retail will be much higher when companies like Walmart, Carrefour and Tesco are allowed to set up shop in the country. For instance, the $447-billion Walmart would invest at least five to six times of what IKEA does in the same timeframe, he says. “IKEA is just about furniture and furnishings and India spends small in that category,” he adds — a point that the Swedish company has itself made in its application.

The difference in employment generation between single- and multi-brand players, experts point out, is a per-square-foot phenomenon. While a cash-and-carry player in India may be generating around 300 jobs (direct or indirect) for every wholesale store it opens, IKEA claims to have generated 240,000 (including indirect employment) jobs in the 20 years that it has been sourcing from this country. “This is expected to double by 2020 with the establishment of IKEA retail stores in India.” On the other hand, once FDI in multi-brand retail is allowed, around three million jobs are expected to be generated in five years, according to industry projections.

Many of the international multi-brand retail chains are already present in India, as cash-and-carry operators, since there’s no FDI restriction in wholesale trade, which is about selling anything from grocery to white goods to businesses, retailers, offices and educational institutions. Many of the foreign majors have entered this category while waiting for multi-brand retail to open up.

Cash & carry makes a splash
The scale of investment by these wholesalers itself is already almost on a par with what IKEA proposes to bring to India. Consider these statistics: The world’s largest retailer, Walmart, in a 50-50 JV with Bharti Enterprises, operates 17 cash-and-carry outlets in India. Since 2009, when it opened its first outlet, the company is estimated to have invested around Rs 1,500 crore in India. With a target of launching eight to 10 stores a year, it aims to scale up its investments. Walmart India President and Bharti Walmart Managing Director Raj Jain recently told this newspaper: “If you look at some other emerging markets like China, the Philippines, Indonesia, Brazil, or Mexico, you will find these are ahead of India by anything between five and 20 years. India has a lot of catching up to do.” Bharti-Walmart’s India sales were estimated at around Rs 1,900 crore in 2011.

Germany-headquartered euro 31-billion Metro Cash & Carry, operates 11 stores in India, and is estimated to have invested around Rs 1,600 crore in the country since 2003, when it set up the first outlet. While its current revenue is learnt to be just one per cent of the global Metro Cash and Carry sales, or around Rs 2,200 crore, the company is eyeing five per cent of its international revenue from India sales by 2015. It plans to open 50 stores in India over the next four to five years with an estimated investment of Rs 3,500 crore.

Carrefour, the second-largest retailer in the world with revenues topping euro 112 billion, started its India operation towards the end of 2010 and has two stores in the country; it is planning two more by the end of this year, in Meerut and Agra. In 2011, its net sales from India were roughly around euro 26 million (Rs 182 crore).

These foreign cash-and-carry chains such as Walmart, Metro and Carrefour source around 85 to 90 per cent products sold in the country from India, the companies claim. Most of them maintain that once FDI is allowed in multi-brand retail, they would continue to keep sourcing from the country at similar levels. IKEA has claimed that it, too, would source significantly from India for what it will retail in the country. As of now, IKEA is sourcing $450 million worth of materials from India, and wants to raise it to $1 billion by 2016 and $2 billion by 2020.

Ikea has itself inadvertently tried to answer the question of its worth in a recent proposal, made to the Department of Policy and Promotion (DIPP). The idea, it has said, is not to make inroads into each and every city in India, but only in a select few. Pointing out that “it does not view itself as a large foreign retailer seeking to make a stronghold across India, or control the Indian market”, IKEA has said that households in India spend just 1.5 per cent of their income on home furnishings. “So, it will remain a small retailer.”

Size doesn’t matter
Industry experts say that IKEA’s application is not about a certain investment figure or a timeframe. It’s a major psychological boost in an environment starved of positive investment news, and this is something that isn’t quantifiable. After all, IKEA’s is the first major single-brand retail FDI application that the government has received six months after opening up the category to 100 per cent foreign investment. UK’s Pavers was the first application under the 100 per cent FDI cover, but the investment figure involved there was significantly lower at $20 million (Rs 110 crore).

A government official saw the IKEA application as a “symbol” that foreign investors are still upbeat about coming to India, despite the talk of policy paralysis. “It is therefore important to clear this proposal without losing any time,” he said. Once this one gets going, many more foreign single brands are expected to queue up, the official added. Foreign single brand retailers have been around in India under the franchisee or joint venture route as only 51 per cent FDI was allowed in single brand till recently. With 100 per cent FDI permitted in single brand now, the global chains that want to enter India on their own include GAP, Abercrombie, Prada, Hennes & Mauritz and Arcadia. Among international single brand retailers that are already present in India, either through franchisee or local JVs, are Louis Vuitton, Christian Dior, Jimmy Choo, Zara, Marks & Spencer and Canali. French luxury brand Christian Louboutin recently got the government approval too to operate in India.

Technopak’s Singhal said that the IKEA proposal “is not about the quantum of investment, but an endorsement of the country’s potential.” Singhal said that the global perception of the brand is similar to McDonald’s or Coca-Cola. He added that IKEA is one brand which has rarely left a country where it has invested in. Also, IKEA’s entry into India is expected to start a new category of manufacturing, much like how Suzuki had revolutionised auto parts manufacturing in the country, he said.

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