FIPB clears IKEA’s Rs 10,500 cr proposal

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The foreign investment promotion board (FIPB) on Monday approved Swedish furniture giant IKEA’s Rs 10,500 crore-proposal to replicate its entire global model in India. It has also been permitted to set up cafeterias at its retail outlets as in other countries.

This proposal is likely to go for the cabinet committee on economic affairs (CCEA) approval on Thursday.

On November 20 last year, FIPB had given partial clearance for IKEA to invest up to Rs 4,200 crore. Under this format, the Swedish giant had been allowed to sell 15 out of 29 products that it had proposed to sell in India. It also forbade the company from operating restaurants in its stores.

Following this, IKEA made a presentation to the department of industrial policy and promotion (DIPP), which had then requested FIPB in the finance ministry to review its decision of granting part-approval to IKEA.

“The government is committed to play a constructive role in encouraging FDI,” commerce and industry minister Anand Sharma said.

“Globally, IKEA has a business model that integrates SMEs and domestic industry, making them part of its global value chain. Hence, FIPB’s clearance to IKEA is a positive development,” he added.

IKEA has envisaged an investment of Rs 10,500 crore in single-brand retail after India allowed 100 per cent FDI in the segment. IKEA, the world’s largest furniture retailer, operates 336 stores in 44 countries. It plans to set up 10 furnishing and homeware stores as well as allied infrastructure over 10 years in India.

In India, the retail giant will have to compete with already existing players in the segment that include Pantaloon Retail’s HomeTown, Lifestyle International’s Home Centre and Shoppers Stop’s Home Stop. Together these three account for just 5-10 per cent of the organised market which is estimated to reach $15 billion by 2014.

According to Mahesh Shah, president of Home Centre at Lifestyle International, “IKEA will have to understand Indian consumers and get right real estate.”

Amitabh Mall, partner and direct at Boston Consulting Group said, “Any global retailer has to understand its competitors, consumer aspect, shopping behaviour and strategies to get the right model for Indian market.”

Industry experts, however, feel that the journey for IKEA in India will be full of challenges. Harminder Sahni, managing director of Wazir Advisors said IKEA will have to get their price equation right in India to maintain profitability. “In the western world, they deal in the affordable space. In India, it will be a challenge given their huge store size,” he said.

“IKEA will take five-seven years before they get started. They need to tweak their model to suit the taste of Indian consumers,” Manish Parekh, executive director of Nilkamal said, adding that IKEA would bring more people to furniture retailing and help grow the market with standardised, machine-made furniture.

Till now, FIPB has cleared four single-brand retail proposals, out of which two are for setting up wholly-owned stores while the remaining two proposals are to invest in the country through joint ventures with local players.

These included IKEA’s proposal to invest over Rs 10,000 crore in India through a 100 per cent subsidiary. Another proposal is that of British footwear retailer Pavers England to open fully-owned stores. Besides, American luxury clothing retailer Brooks Brothers had proposed to set up stores through joint venture while the Italian jewellery maker Damiani plans to form a venture with Mehta’s.

The government had last year enhanced the FDI limit from 51 per cent to 100 per cent in the single-brand retail segment, paving way for international brand to sell their own brand of goods in India through wholly-owned subsidiary. Earlier, foreign companies could own only up to 51 per cent of such retail operations.

Besides, the government has also tweaked the initially proposed 30 per cent mandatory sourcing norm from MSMEs for the companies applying under single brand retail after IKEA showed its inability to go ahead with India plans because of the stringent sourcing norms. Henceforth, companies that propose to set up single-brand retail stores in the country are expected to preferably source 30 per cent of their goods from MSMEs, village and cottage industries, artisans and craftsmen.

yogimassharma@mydigitalfc.com

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