It is a significant moment for the Indian retail sector. Shedding all hesitations, the India government gave the right jerk to clear the bottle-neck crises. India now welcomes 51 per cent FDI in multi-brand retail. Retailers are betting high on its positive outcomes, especially its role in facilitating equity raise. Rohit Bhasin, Leader- Retail and Consumer Industry, PwC India says, “FDI in retail will generate employment since new entrants will need to hire staff. Current employees of unorganised retail players do not receive healthcare or other benefits. Once individuals become absorbed in retailer operations, they can access more equitable wages and benefits. Modern trade’s effect will be most apparent at the bottom of the population pyramid, as it will unleash opportunities such as non-agricultural employment for rural youth and a better quality of living for the existing agricultural society.”
The FDI in retail will facilitate capitals to flow in, developing seamless supply chain management. This efficient supply chain that links farmers and small manufacturers directly with retailers will maximise value for stakeholders. Together with back-end infrastructure, this will minimise wastage, especially of fresh foods and vegetables, increase farmers’ realisations, encourage best practices in crop management and improve food safety and hygiene. At the end of last year, 100 per cent FDI in single brand retail has been permitted. However, despite the clearance from the government on FDI issues, everything may not be always smooth, and for some wrong reasons, this too has raised some issues of debate.
A look into the background: the Swedish furniture brand, IKEA, with a business size of euro 25 billion, has recently showed its keenness to enter India with an investment of euro 1.5 billion to set up 25 stores in India within a period of 15 to 20 years. The investment will be phase by phase with the initial investment of euro 600 million, followed by euro 900 million later. Surprisingly, the announcement didn’t come from the head quarters of IKEA, instead from the press announcement by the Government of India after the meeting held between Commerce and Industry Minister Anand Sharma and Mikael Ohlsson, CEO of IKEA, at St Petersburg in Russia on June 22.
IKEA, the single brand retailer, is present across 44 countries with about 340 exclusive stores. So far IKEA and footwear major, Pavers England, are the two international brands who have applied for wholly-owned operations in India. The CEO & Managing Director of Pavers England Limited, Utsav Seth, reveals that they don’t have qualms over the issue. “For us it’s not a problem since we’ve already complied with 30% local sourcing. Today, we’re buying more than 36% goods locally.” Pavers have applied for $20 million investment and aim to have 100 stores in 36 months.
The market is abuzz with the news that brands like GAP, Abercrombie, Prada, Hennes & Mauritz and Arcadia are also showing keenness to set up wholly-owned retail business setups since the government has permitted 100% FDI in single-brand retail.
The bone of contention
While relaxing FDI, the government has also implemented the clause of 30% souring from local small enterprises whose investment in plant and machinery does not exceed $1 million. This is particularly not agreeable for IKEA who insisted that to comply with the clause will take 10 long years since the gestation period for its branded store is 4-5 years. Hence, it sought the government’s consideration of relaxing the stipulation on yearly basis. On the criterion of the local suppliers, IKEA also maintained that it is impossible as well as impractical since the suppliers to IKEA will always grow in size because of the business they will do with IKEA and will eventually become illegible to remain a supplier according to the government’s rule. A Panipat based supplier, who doesn’t want to divulge his identity, questions the pragmatics of the clause: “Any company who has an association with IKEA must be having a minimum wealth of around `2-3 crore. The factory will be in a minimum area of 1000 sq mt and will register an annual turnover of `10-12 crore. This will be the size of the company when it is supplying only to IKEA. If they have any other clients as well, which they will have for sure, you can imagine that how weird it is to restrict them to USD 1 billion mark.”
DIY: are Indians ready?
“IKEA makes functional home furnishing products at prices so low that as many people as possible will be able to afford them” – this is the vision of IKEA and their low pricing strategy is actually seeing enough of scope in the Indian market where consumers have thin wallets but have high aspiration. The tactic is based on strict monitoring on the suppliers by the product designers and product developers directly. Their furniture is based out of Do it Yourself (DIY) concept. The concept gives the clear advantage to the retailer which in return is passed on to the customers. There’s no cost of assembling is involved, hence, the shipment costs come down consequently with the dip in operational cost.
However, IKEA’s concept of Do It Yourself (DIY) will be how much acceptable to the Indian customers is a big point of debate. IKEA sells flat pack at lower prices which an end user has to assemble. Considering the Indian mindset, the idea will take some time to catch up or requires much awareness building campaign to highlight the advantage factors.
But, here are fast evolving Indian consumers, and young couples of India, who have set eyes on acquiring a property and dreaming of possessing a beautifully done home will not hesitate to cheer the concept that gives them two-way benefits of low price and a brand to reckon with.
This is not a good message for a few numbers of organised retailers in the furniture space. In China IKEA has cut down prices by 60 per cent since 1998 when it entered the country.
Despite its basic idea of offerings quality furniture at the lowest possible prices, IKEA is adaptable to the changes in market demands that vary from countries to countries. The compactness of design, what is prevalent in the European markets, received modification in the US markets where the norm of “Bigger the better” rules.
IKEA’s sourcing policy
IKEA’s two-third sourcing comes from Europe and rest from India. It has over 30 distribution centres across 16 countries. As the retailer owns majority of product rights of its products, changing suppliers is totally its discretion. In 2011 IKEA sourced goods worth $450 million from India and has the plan to take it further to $1 billion by 2016 and $2 billion by 2020. Regarding IKEA’s cost tightening supply strategy, some suppliers shared their experience with IKEA with our correspondent. The Panipat-based supplier informed that working with IKEA means compromising on profit margin. His company has exported three shipments till now. Each shipment was worth US$ 55,000. “We exported our shipments at a margin of 5 per cent. But just because IKEA orders in bulk, it gives you an opportunity to utilise your capacity to the fullest. And it is very worthwhile to have a business with IKEA, even at such low margins. Usually we supply at a profit margin of anything above 12 per cent with other companies. And with IKEA, you also get a brand name associated with you,” he comments. Abhishek Gupta, Managing Director, Trident Limited comments, “Profit margins vary from time to time depending upon market forces, raw materials and currency fluctuations. However, with the adoption of the latest technology, we are able to achieve lower costs and meet IKEA’s targets to be economically sustainable. Higher volume with IKEA also helps us achieve efficiencies and productivities to lower our cost.” Trident has been supplying solid and stripe towels to IKEA and the quantity ranges between 450 and 550 MT every month. Besides IKEA, Trident also supplies to Walmart, Target, JC Penney, Marks & Spencer, Ralph Lauren, Calvin Klein and many other leading brands across the world.
IKEA is also one of the leading advocates of catalogue retailing, thus saving on high costs of ATL advertising. This 300-page catalogue is printed in 27 languages and reaches to over 180 million people across the world.
Is IKEA that valuable?
But the question still remains when we take a realistic look at the proposals of IKEA – how much actually does India gain on IKEA’s entry? Is IKEA such a valued candidate in the context when the retailers of almost 20–times of IKEA’s size are ready to invest in India? At any point, Walmart can invest much higher amount, almost six-times more than that of IKEA, as a retail consultant opines, within the same time frame.
When comes the development issue, FDI in multi-brand retail calls for more importance, believe some experts. The larger the size of the retail format of the global retailer, the chance is more to generate employment. While IKEA claims to have generated 240,000 jobs, which include indirect employment, over 20 years, since it has started sourcing from the country, any big box multi-brand retailers have the capacity to generate about 3 million jobs within 5 years, according to the industry projections. The global cash & carry majors in India, such as Walmart and Metro Cash & Carry, have already invested anything between `1,500 – 1,600 crore. Metro Cash & Carry has been operating since 2003 and Bharti Walmart, a 50-50 JV between Walmart and Bharti Enterprises, has been here since 2009. Carrefour, the second-largest retailer in the world, too joined the league in 2010, and has opened two stores so far. They are also eagerly waiting for the government to allow FDI in multi-brand retail. These retailers claim that about 90 per cent of products sold in the country are locally sourced and they will remain bound to this policy if they are allowed to invest in multi-brand formats.
IKEA has a very well-planned strategy for the Indian market which is distinctly different from that of the big box retailers. They want limited presence at the select few cities in India, as the limited spending of the Indian consumers, just 1.5 per cent of a household’s income, on home furnishing does not encourage them to have a presence pan India. Obviously space is one problem for IKEA, who is known world over for its gigantic spacious outlets.
The question here is why do we value IKEA’s proposal? Is it for their investment plan or the prospect of seeing the government’s drying coffer getting a trickle of foreign fund? This trickle can do much for the morale of the global retailers who are keen to invest yet stepping out for the business-unfriendly clauses of FDI policies.
in the prospect
As far as the corrections in the proposals by IKEA are considered, the Swedish major may soften its stand on 10 years gestation period. Before the notification by DIPP, Dheeraj Kumar, Information Officer, DIPP informed,“Government wants investments to flow in India and will not discourage IKEA and their intentions to establish in India. The clause restricting IKEA to manage 30 per cent of its sourcing within one year is also under consideration, but nothing has been finalised yet.” Now in DIPP’s notification mandatory sourcing norm within five years is mentioned.
While the notification is out, the positive news that came through is – the cabinet made a slight modification of mandatory 30 per cent sourcing from local MSMEs to 30 per cent sourcing prefarably from local MSMEs.
However, there’s a new rule, which is a breather for the Indian brands. It states for change in foreign equity in the Indian brands, the government’s approval is no more required. In this context, we feel time here to think whether a little bit of leniency for attracting foreign funds will actually do good for the country or will it ruin the country as some industry as well political thinkers are foreseeing?