With WALMART’s India foray into front-end retail…sidetracked by a corruption probe, it looks like IKEA, the Swedish furniture giant,will be the multinational to bring in the largest retail investment to the newly reformed, massive, messy Indian market:
” Economic Affairs Secretary Arvind Mayaram said the Foreign Investment Promotion Board has cleared Ikea’s proposal to invest €1.5 billion ($1.9 billion) to set up 25 stores in India “.
The Cabinet Committee on Economic Affairs, which will now study the plan, is widely expected to give the go-ahead, especially because it has already received the foreign investment board’s recommendation. The board is required to send all investment proposals of more than 12 billion rupees, or $218 million, to the cabinet.
That $1.9 million is not arriving in one go—the initial investment will be $757 million with the rest spread out over some timeline. And IKEA, which set up shop in Thailand last year, hasn’t specified its 25 locations in India. I’m curious to see if they double up (or triple up, as the plans in Bangkok dictate) in the larger cities or move into smaller, more uncertain regions.
Its arrival in the country will certainly shake up the furniture sector, pegged at $8 billion and predominately informal. IKEA will also need, like Walmart—if it gets in—to be content with an urbane middle class in the country. (Although it can stretch beyond the limited luxury reach of recent foreign entree’s, like the Pavers England and Brooks Brothers.)
India’s retail appetite is rising, but not at the pace of other Asian economies….
Projections from the Economist Intelligent Unit predicts its sales growth will level off at 5.4% by 2015, while China’s will be more than double that—and even Vietnam will approach 10 percent. Indian apparel consumption is predicted to increase considerably, and, luckily for Walmart, its purchase of food is expected to surpass China. Furniture and household product spending is not.
The Hindu (news daily), recently assessed the hurdles IKEA would likely face in the country. One domestic furniture executive denied concerns that the chain would gobble up the market share:
” There is no collision course with IKEA. It will definitely add competition to the market as IKEA is an ultra big-box retailer. If it has to survive in India, it will have to play on the volume metrics. Real estate costs are highly prohibitive and they will have to create products suited for the Indian climate and style.”
IKEA has said that they won’t do the latter, promising that their products will maintain their Scandinavian aesthetic. That style issues seems a misplaced concern. Wealthier Indian consumers have proven they are comfortable with Western products. (The Hindu’s note about equipping consumers for the store’s infamous, exhausting ‘DIY’ assemblage also feels hyperbolic—if anyone can DIY, it is India.) But the real estate question is noteworthy—its costs are an important caveat to the brand’s expansion plans.
Those famed blue-and-yellow behemoths, averaging about 30,000 square feet, must plop down in cities whose commercial real estate prices are, according to a McKinsey report, on par with those in New York. In New Delhi, the costs are four-fold greater than in Bangkok. The Indian capital, though, with its per capita income a notch above $3,000, has something close to a seventh of Bangkok’s average spending power.