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The long wait for Ikea’s promised disruption

Customers outside an Ikea store in Hyderabad. India’s furniture market is a tough one to crack–it is fragmented, price sensitive and dominated by unorganized, smaller retailers (Photo: PTI)Premium
Customers outside an Ikea store in Hyderabad. India’s furniture market is a tough one to crack–it is fragmented, price sensitive and dominated by unorganized, smaller retailers (Photo: PTI)

  • The Swedish retailer has made a slow, steady start, but its next big leap in India is some distance away
  • In 2013, Ikea got approval to open stores in India, under the single-brand FDI policy, drumming up hopes of a market shake-up. It promised to open 25 stores by 2025.

BENGALURU : The wisecracks on Twitter likened it to a queue outside the Tirupati temple. For once, they weren’t exaggerating.

On the first weekend after Ikea opened its giant new store on the northern outskirts of Bengaluru last month, thousands of shoppers lined up outside for two hours or more to get in. Like 34-year-old Sandeep Reddy and his wife Poornima. “It’s like Hyderabad all over again," said Reddy. The young couple were living in the Telangana capital in August 2018, when Ikea opened its first store in India. Then, too, they were among thousands of middle-class residents to brave bumper-to-bumper traffic for a sample of the Swedish furniture retailer’s minimalist designs. “This time, the crowds are bigger," said Reddy.

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For Ikea, which has had a slow run in India, the big-bang opening was just the kind of boost it needed. Between 22 and 26 June, the store saw a footfall of nearly 1 lakh. Sprawled at 4,60,000 sqft, the Nagasandra store offers the classic large-format Ikea experience—the two-level store has 7,400 products, and over 60 room sets on display that packs in more than most single furniture stores can. Its 1,000-seater restaurant and bistro doesn’t serve filter coffee but there is chicken tikka curry, dal makhni, parathas and other India fare, besides Swedish meatballs, of course.

But drumming up excitement has never been a problem for Ikea – in 2013, when it landed approval to open stores in India under the single-brand retail investment policy in 2012, it was the biggest foreign investment in retail the country had seen. The Ingka Group company committed to bring in 10,500 crore worth of investment and to open 25 stores by 2025 in nine cities. The Bengaluru store is only its fourth.

It’s fair to say that the Ikea disruption the market has been waiting for is yet to come. In the last four years, its expansion has been cautious and incremental, slowed down further by the pandemic. “We have kept an okay pace, despite all the challenges," Susanne Pulverer, CEO and chief sustainability officer for its India business, said in an interview.

As of today, there are bigger players in India’s organized furniture market than Ikea—besides wooden furniture, there are plastic and steel furniture makers. Nilkamal, one of the largest producers of moulded plastic furniture, generated revenues of 2,730 crore in 2021-22; Godrej Interio, another furniture company, had revenues of 2,500 crore last year. But Ikea is no minnow. Data from business intelligence platform Tofler shows that Ikea generated revenues of 608 crore in 2020-21, three times higher than furniture marketplace Pepperfry ( 202 crore) and over five times the revenues of Urban Ladder ( 114 crore).

The Bengaluru store—its third-large format (after Hyderabad and Navi Mumbai) store —is critical to the retailer’s next big leap. But there are other pieces of the puzzle that still needs to fall in place.

Not vocal for local

You can’t grow a business in India if you don’t get the price right. Pulverer agrees that Ikea’s long-term strategy is affordability. In mid-2021, it slashed product prices (even after a first round of price cuts in 2020) to reach the customer base of 200 million. But it has not been easy to keep prices low. “We have not been immune to the price increases because of the pandemic and the war. That has affected everything from raw material, production to transport; the whole supply chain has been impacted and disrupted. We have absorbed a lot of the price rise and corrected and adjusted wherever we have seen the possibility," she added.

What will be critical for Ikea in cutting its import costs is to increase its local sourcing—which remains at 26-27% now, up from 19-25% in 2018-2021. The company says that it’s been trying to up that to about 50% and set up a local ecosystem for the long term. “Local sourcing must grow for us because it’s the right way forward —for affordability and pricing, as well as to provide job opportunities and become locally relevant."

In contrast, for example, 86-90% of its competitor Pepperfry’s supply is sourced from India.

But retail analysts said that might not be too easy. Ikea sources material from Europe and Asia, including China, one of its largest purchase sources.

In 2020, the government moved to hike custom duties on imported furniture to 25% from 20% to safeguard the interests of India’s micro, small and medium enterprises.

All of this has led to Ikea’s Indian unit widening its net loss to 807.5 crore in 2020-21 from 720.7 crore in the preceding year, according to the latest available data with Tofler. Net sales at Ikea India Pvt. Ltd grew 7.36% during the period. Sales in FY21 increased at a much slower pace than the 64.68% year-on-year growth the company recorded in the year ended March 2020.

The other gap in its strategy is online presence—only customers in Bengaluru, Hyderabad, Mumbai, Pune, Ahmedabad, Surat, and Vadodara can order its products via the app or the website. Some of that has to do with the Ikea DNA. “Experiencing a full-size store would be the best way to know us," said Pulverer. In India it has adopted a multi-format approach. It is planning smaller 5,000 sq ft stores for quicker expansion and to be close to the customer, and more city stores like the one in Mumbai. In June, Ikea said it will open a 72,000 sq ft, small format store in Ghatkopar—its third in Mumbai. Ingka Centres, part of the Ingka Group, also plans to open two separate shopping centres in India—both in the Delhi-NCR region. “The mix of offline and online, along with remote selling points, would be important," said Pulverer.

The nature of the market

India’s furniture market is a tough one to crack – it is complex, fragmented, price-sensitive and dominated by unorganized, smaller retailers. It is also largely offline—and, so, perhaps, the last frontier for e-commerce. According to management consultant Redseer’s data, the size of the furniture and home goods in India in 2021-22 was $16 billion (in terms of gross merchandise value), and is estimated to grow to $41 billion by 2026. But around 75% of the current market is dominated by unorganized players (some analysts have even pegged it as high as 80-85%).

“This is expected to become 65:35% by FY26 with online sales increasing, and offline companies trying to sell online, and also because customers want good quality products," said Abhishek Tandon, senior consultant, Redseer.

The furniture business did grow during the pandemic, as people upgraded their homes and bought work-from-home pieces, retail analysts say. But revenge buying will only last so long. The inflationary pressures on consumption pose a challenge for branded furniture retailers. Rajat Wahi, partner, consulting, Deloitte India, said the pace of economic recovery and how branded furniture companies scale up operations without high-fixed costs would be a challenge. Brands such as Ikea are now talking about the hub-and-spoke model, where they set up a large format store and, subsequently, smaller stores or physical touch points to get closer to the customer. “Delivery and post-delivery service and assembling are areas that need to be addressed," Wahi added.

The field of play

If you are looking for the best furniture in town, all you have to do is visit one of our stores. They are not located on the outskirts of the city. Just saying." That was an ad by Bengaluru-based home solutions company Wakefit, taking a swipe at the Ikea store 17 km from the city centre. Wakefit, which started a sleep solutions company, launched its furniture range in July 2020. In 2021-22, in its first full year of furniture sale, it clocked about 140 crore of furniture sales, with 20-22% revenue contribution every month.

The tongue-in-cheek bravado aside, there is a sense of nervousness among Ikea’s competitors. In the March quarter, Pepperfy launched 11 collections by its house brands, one of them being a Scandinavian collection by CasaCraft. The other rivals in the field are Wakefit, Urban Ladder (acquired by Reliance Retail Venture in 2020), Godrej Interio, Homecentre, Hometown, Pepperfry and horizontal retailers Amazon and Flipkart.

Many of them are also looking to grow their presence beyond the metros. Godrej Interio started expanding its online presence during the pandemic. The decades-old company now wants to ramp up its e-commerce play, and serve 5,000 pin codes from its own website. With offline expansion also on the cards, it expects a 25% jump in revenue in FY23. “We want to offer value-for-money products also, apart from our high-end furniture. Our logistics set-up means that we can be present even in a smaller district," said Subodh Mehta, senior vice-president, Godrej Interio (B2C business).

Ashish Shah, co-founder and chief operating officer, Pepperfry, says the company stands to gain from its focus on local sourcing and a steady supply chain. Due to the disruption of the global supply chain, a container which used to be imported from Malaysia pre-pandemic at $800, has shot up to $5,400, making furniture imports difficult and prohibitive. “Thankfully, 86-90% of our supply is sourced from India. We work with around 200 merchants in the Rajasthan and north India belt," he says. It has also opened franchisee stores in big cities as well as small towns. Pepperfry’s online marketplace has rapidly ramped up its offline presence, and has 175 studios in 91 cities. It added 100 studios in the last 10 months, and delivers to 300 cities today.

Even a relatively newer player like Wakefit delivers DIY bedframes across India. For the remaining part of its furniture catalogue, it services 23 cities currently, said Chaitanya Ramalingegowda, director and co-founder of Wakefit. WoodenStreet, which recently raised $30 million led by WestBridge Capital, plans to expand to 200 stores from the current 50 stores, in two years. Pulverer said it has an obligation to go beyond the metros, “but we need to be ready for that expansion."

“There is room for everyone but of course, we want to lead," Ikea’s Pulverer says. “We are not focusing so much on competition. Our focus will be on growth, building the brand, people and profitability."

Pepperfry believes that all brands stand to gain from the chatter around Ikea. “When Ikea launched its Hyderabad store, the footfall in our stores and my website went up significantly for the next 3-4 months. When brands such as Ikea enter, they create excitement in the market. That helps all players," he said.

“Ikea makes their stores a destination, and creates superior reference points. That’s where Ikea’s role is as a global retailer but that’s yet to unfold. It will help formalize the market here," said Ankur Bisen, senior partner and head – consumer, food and retail, Technopal Advisors.

Analysts believe it’s just the start of Ikea’s journey and it has the potential to be a game-changer in the long run, despite a few hiccups. Ikea makes solid investments on the ground and are not bothered about the short term, said Harminder Sahni, founder, Wazir Advisors. “A number of global retailers in India went slow in the first few years. Ikea, too, is not in a hurry," he said.

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