Bloomberg News

IKEA India Plans Give Scant Reassurance to Foreigners

January 09, 2013

It’s the retail revolution that wasn’t.

A year ago, India’s government allowed foreign stores selling a single brand -- think Ikea and Inditex SA’s (ITX) Zara -- to enter a $420 billion retail market with longstanding restrictions for outsiders. Then in September, India said multibrand retailers such as Wal-Mart Stores Inc. and Carrefour SA (CA) were welcome to open shops with local partners.

The number of stores foreigners have set up independently so far: Zero. And only four international companies, all of them single-brand chains, have applied under the new rules.

Though Commerce Minister Anand Sharma says Ikea is poised to win approval to bring its colossal furniture outlets to India, analysts say the protracted negotiations it has endured will slow efforts to draw foreign investment to retail. The government hasn’t specified when it might approve Ikea’s plan.

“There’s too much bureaucracy in India,” said Taina Erajuuri, a fund manager at FIM Asset Management Ltd. in Helsinki, who invests in emerging markets including India. “The regulatory work has to be improved to attract” foreign chains.

Ikea, the home furnishings giant founded by billionaire Ingvar Kamprad, has said it will invest about 1.5 billion euros ($2 billion) to expand in India. Without providing a timeline, Ikea says it plans to open 25 stores in the country. Kamprad is ranked fifth with a net worth of $43.5 billion on the Bloomberg Billionaire’s Index.

Swedish Meatballs

The company first applied in June, only to face government opposition to sales of products including textiles, apparel, fabric, electronic items, toys and books, according to reports in the Economic Times. And the government wanted to restrict Ikea’s cafes, the newspaper reported. The company considers these outlets, which sell Scandinavian specialties such as meatballs, an essential part of its retail experience.

The furniture retailer is “able to bargain because they are the first,” said Arun Kejriwal, director at Kejriwal Research & Investment Services Pvt. in Mumbai. “If they succumb to any sort of pressure this time, they may not get clearances for anything else.”

Ikea spokeswoman Nivedeeta Moirangthem declined to respond to queries about the Economic Times report or the company’s bargaining position because the approval process is ongoing.

French Cookware

Prime Minister Manmohan Singh’s government last January passed regulations that allowed single-brand companies to open outlets without local partners. Pavers Ltd., a British shoe seller, was the first foreign retailer to get approval for full ownership. Pavers, which has had a joint venture in India since 2008, expects to complete the purchase of its partner’s stake by March and then run its own operations in the country.

The company plans to invest as much as $20 million over the next 18 months, and have as many as 500 outlets by 2016, up from 142 today, according to Utsav Seth, the chief executive officer of Pavers India operations.

“The business is growing more than 100 percent year on year,” Seth said. “That’s a strong enough reason for confidence to expand.”

The other two single-brand companies that have applied are watch and jewelry seller Fossil Inc. (FOSL:US) and French cookware manufacturer Le Creuset, according to India’s Department of Industrial Policy and Promotion. Neither has been approved.

Mom, Pop

Marks & Spencer Group Plc. (MKS) which has 24 stores in India, says it won’t take advantage of the relaxed rules. The company plans to open 10 new outlets in the next eight months through its tie-up with billionaire Mukesh Ambani’s Reliance Retail. “We’re happy with our partnership,” said Jan Heere, director of international for the London-based company, which is considered a single-brand retailer by India.

The government long said stricter rules for retailers selling multiple brands were needed to protect small businesses. While few of India’s hundreds of thousands of mom-and-pop stores would face direct competition from the likes of IKEA, they could lose many customers to the low prices and greater assortment of a big-box discounter.

Then in September, the government reversed itself, allowing multibrand retailers, saying their investments would help build transportation and supply networks. Companies such as Wal-Mart Stores Inc. (WMT:US), once restricted to wholesale ventures in India, were permitted to own as much as 51 percent of retail stores. Despite the policy shift, no international multibrand retailers have applied.

Regulatory Maze

Even with the relaxed rules, analysts say, a maze of regulations and scrutiny from central and state government departments has dimmed the enthusiasm of foreigners. Overseas retailers will be required to invest a minimum of $100 million in the country. At least half the investment must be in manufacturing, distribution and warehouses, and they need to buy a portion of their goods from Indian suppliers.

They also face infrastructure bottlenecks and bureaucratic roadblocks. Asia’s third-biggest economy ranks 132nd among the 185 countries in the World Bank Group’s Doing Business index. It is 173rd in terms of ease of starting a business, 182nd in dealing with construction permits, 105th in getting electricity connected and 94th in registering real estate.

“Something which needs to be delivered in one day is delivered in two,” said Prashant Agarwal, joint managing director of Wazir Advisors Pvt., a management consultancy in New Delhi.

Bribery Investigation

Wal-Mart, which in 2007 established a wholesale operation in collaboration with Bharti Enterprises Pvt. to supply restaurants and local retailers, has faced recent setbacks. Last month, the government said it is investigating allegations that Wal-Mart made retail investments before the market was officially opened. Wal-Mart, which says it is in compliance with Indian laws, hasn’t applied to open a retail business.

The company in November said it had suspended some workers at the Bharti Walmart Pvt. wholesale venture in a separate inquiry into potential violations of U.S. anti-bribery laws.

Scott Price, head of Wal-Mart’s Asia operations, said in a September interview that the company was considering a partnership to set up retail stores with Bharti.

“India has a huge opportunity to improve its infrastructure,” he said. “Modern retail is proven to help that process.”

Awaiting Clarity

There isn’t enough clarity on foreign investment rules in multibrand retail and it’s too soon for Wal-Mart to reveal expansion plans, spokeswoman Arti Singh said on Dec. 28. The retailer also needs to complete the internal investigations regarding bribery and compliance, she said.

The difficulties ultimately help Indian companies that have ventures with foreigners. Overseas retailers value domestic companies’ experience, said J. Suresh, chief executive officer of clothing retailer Arvind Lifestyle Brands Ltd., a unit of Arvind Ltd. (ARVND), which has a joint venture with Tommy Hilfiger and 13 licensing arrangements with foreign apparel brands. More foreigners are approaching him for tie-ups even though they are allowed full ownership of local operations.

“Everyone feels that India is a very difficult market and they need local expertise to succeed,” Suresh said. “There are some 20 statutory authorities behind retail. We have to make sure that we meet the law of the land. Then understanding the Indian market, product and advertising knowledge is required.”

To contact the reporter on this story: Malavika Sharma in New Delhi at msharma52@bloomberg.net

To contact the editor responsible for this story: Stephanie Wong at swong139@bloomberg.net


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Companies Mentioned

  • FOSL
    (Fossil Group Inc)
    • $100.14 USD
    • -0.18
    • -0.18%
  • WMT
    (Wal-Mart Stores Inc)
    • $76.32 USD
    • 0.51
    • 0.67%
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