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Retail Trends

IKEA Sets Sights on India

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IKEA has applied to the Indian government for permission to invest $1.98 billion to open 25 stores in that country over the next 15-20 years. After a meeting last month between IKEA CEO Mikael Ohlsson and India trade minister Anand Sharma, the retailer’s concerns over the government’s stipulation that a percentage of products must be sourced from local enterprises seem to have eased. IKEA is intent on driving its business in emerging markets to offset its high level of dependency for top-line growth in Western Europe, a region where IKEA is finding it increasingly difficult to lay down new stores and is struggling to grow sales against a backdrop of economic crisis. Sales generated in emerging markets have risen from around 12 to 16 percent of total sales over the last five years. With the proportion of middle-class consumers among India’s vast 1.2 billion population rising every year, IKEA clearly sees the country as an opportunity it can ill afford to miss.

Local customs There is a strong tradition of wealthier Indian households having products made to order by local craftsmen, generally at very competitive prices. As a result, international big-box home retailers have steered clear of the market. The concept of self-assembly is also something that may not prove a hit with the Indian middle class, traditionally used to farming out manual labor to household helpers. Such issues are not insurmountable, even if a protracted period of research and some trial-and-error are required. Issues that may prove harder to overcome are the low levels of car ownership and patchy road networks. IKEA is likely to have to locate its stores as near as possible to central urban areas, as it has done in China, and development deals will likely include demands to improve local infrastructure like utilities and access roads.

Sourcing issues The Indian government seems to have provided reassurances over its insistence that 100 percent foreign direct investors source 30 percent of products from local small and mid-size enterprises — probably by allowing that exports to the rest of the IKEA Group would be taken into consideration. IKEA is likely to have reiterated that it intends to increase sourcing from India from $450 million in 2011 to $1 billion in the coming years. By increasing procurement from India, however, IKEA will face significant challenges, not least the country’s relatively weak utility and transportation infrastructure.

Questions over transparency IKEA’s anti-corruption policy, governing not only its own staff, but those contracting on behalf of IKEA, has played a large part in its only having opened 14 Russian stores in 12 years. IKEA will likely find itself in a similar position with its India venture: The country ranks 95th out of 183 on Transparency International’s Corruption Perceptions Index, and the World Bank’s Ease of Doing Business report placed the country 132nd. Again, as with Russia, relations with decision-makers at the highest federal and state level will be crucial if the retailer is to have its way. Unlike Russia, however, the ruling party is apt to change and there are certainly parties more hostile to international retailers entering India among the opposition.

Long haul Ultimately, IKEA’s success or failure in the market will depend on the reception from the next generation of Indian consumers, something which is far from certain despite the retailer’s international appeal and its history of never having previously retreated from a major market. IKEA has a strong track record of investing for the long haul in challenging emerging retail markets, fully aware that it may not be profitable within the time period set out for its development. As has been seen in China, its cafeterias will be used by local groups as a drop-in tea center and window-shopping parents will deposit children in its play areas. It’s all about building the brand for a brighter future.