New Delhi: The Indian government may allow Swedish furniture retailer Ikea to follow its global model and open stores with cafeterias that feature their signature meatballs. Commerce minister Anand Sharma said on Wednesday that the government has taken a favourable view of the matter.
The Foreign Investment Promotion Board (FIPB) had, in a 20 November decision, rejected Ikea’s proposal to run cafeterias in its stores, going by the strict definition of single-brand retail, and referred the matter to the cabinet committee on economic affairs.
The company made a presentation to the government seeking approval of its original proposal without changing the global business model. The FIPB is now scheduled to reconsider the proposal at its 31 December meeting at the industry department’s request.
“Ikea has a global model. Frankly speaking, we see no reason why their global model has to be changed in any manner,” Sharma told reporters in New Delhi. “The government has taken a view, sensitively so, on the presentation that Ikea has made in this regard and a favourable view has been taken. So we accept their global model. The process of FIPB approval is currently under way.”
Arpita Mukherjee, a professor at the Indian Council for Research on International Economic Relations (ICRIER), said the issue arose due to the flawed policy of distinguishing between single and multi-brand retail.
“If Ikea is committing that kind of investment (€1.5 billion), it needs to provide a whole range of products which it offers globally,” she added.
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.
In June, the Swedish company announced plans to invest close to €1.5 billion (Rs.10,875 crore today) to open 25 retail stores in India through subsidiary Ingka Holding Overseas BV. Ikea plans to initially invest €600 million to open 10 stores. The remaining €900 million will be spent to open 15 more stores in the next phase of its operations.
“We expect to have Ikea restaurant and cafe inside the Ikea stores in India as every other store worldwide,” an Ikea spokesperson said in an email response to queries from Mint. “The Ikea cafe/restaurant is a mandatory and an integral part of the Ikea concept and offer to our customers. The Ikea group is confident that the Indian government will support Ikea’s application as per the Ikea concept and Ikea respects the Indian government’s efforts in this process.” 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.
In January, the government allowed 100% foreign direct investment in single-brand retail. However, the response from global retail players was slow as the government had made 30% domestic sourcing from the small scale sector mandatory.
However, the government made this optional in September, while opening the multi-brand retail sector to foreign investment. It also amended the clause that mandated a foreign investor should be the owner of the brand. While this will help Ikea, it may also revive a proposal by Spanish clothes retailer Zara that was rejected by FIPB for not abiding by the earlier condition.