New Delhi: Swedish furniture retailer Ikea on Tuesday received the go-ahead from the Foreign Investment Promotion Board (FIPB) to set up shop in India. Ikea is the second foreign investor to receive FIPB clearance to start fully owned single-brand retail operations in the country, after European footwear chain Pavers England.
In June, the Swedish chain announced plans to invest close to Rs.10,500 crore to open 25 retail stores in Asia’s third largest economy. The investment will be made through a subsidiary called Ingka Holding Overseas BV.
Ikea plans to initially invest €600 million (Rs.4,200 crore) to open 10 stores. The remaining €900 million (Rs.6,300 crore) would be spent to open 15 more stores in the next phase of its operations.
The proposal still needs the approval of the Cabinet Committee on Economic Affairs.
In a text message, Ikea said it would release a formal statement on the FIPB decision “as soon as we have more clarity on the content of the decision. As of now, we have not received official details of the confirmation”.
The move is a positive signal for single-brand foreign investors waiting to enter the Indian market. In September, the government relaxed norms related to sourcing and brand ownership for foreign retailers.
According to industry estimates, India’s furniture market is pegged at an annual Rs.1 trillion; organized retailers only have about 6% share of the market, but their business is growing rapidly at an yearly pace of 20%-25%.
“Ikea’s entry will definitely help consolidate the market,” said Anil Mathur, chief operating officer at Godrej Interio, the furniture arm of Godrej and Boyce Manufacturing Co. Ltd that runs 50 exclusive furniture stores in 18 cities, has 800 dealers and Rs.1,600 crore in annual revenue.
However, Indian consumers aren’t used to the simplistic designs and do-it-yourself furniture that Ikea specializes in, said Mathur. Infrastructure and accessibility would be key to the success of destination stores such as Ikea’s, he added.
Ikea, with a global revenue of $31.4 billion, has been sourcing products such as carpets, textiles, plastics and lights for almost 25 years from India for its global operations. Ikea Trading (Hong Kong) Ltd-India, based in Gurgaon, had 140 employees and was working with 70 suppliers and 1,450 sub-suppliers as of June.
“With the increasing income levels, exposure to western standards of living and urbanization, acceptance for organized players like us is shooting up,” said Mahesh Shah, president of Home Centre, the furniture and furnishings business of retail chain Lifestyle International (P). Ltd.
Home Centre’s business is growing at a compound annual growth rate of around 25%. The unit has 15 stores across 10 cities and is looking at a revenue of Rs.500 crores in the next two years.
Harminder Sahni, founder and managing director at consultancy Wazir Advisors Pvt. Ltd, said Ikea’s entry would help shake up the furniture and furnishings market. “Other companies will have to follow suit to match up to the range, design and pricing of what Ikea has to offer,” Sahni said.
According to a February 2012 report by The Boston Consulting Group, the Indian consumer market is poised to grow 3.6 times between 2010 and 2020, faster than most other emerging markets. Total consumption is expected to grow to nearly $3.6 trillion in 2020. Amitabh Mall, partner and director at Boston Consulting Group, said companies that are able to “understand the Indian consumer and provide efficiencies in the current shopping landscape will find success and money”.
Ikea’s investment comes at a time when retailers are struggling with sluggish sales owing to weak consumer confidence and rising input costs in the face of slowing economic growth. The BluFin Consumer Confidence Index (CCI) for September dipped by 2.9 points, the highest month-on-month decline to date.
Mall says the India consumption story is very much alive. “None of these companies are coming with the next three quarters in mind, they clearly have a 10-year agenda,” Mall said. “Economic growth, demographic changes and socio-economic changes might slow down or accelerate growth, but the larger consumption story is still strong.”
PTI contributed to this story.