India’s overseas investment board approved furniture retailer Ikea’s proposal to open outlets in the country, bringing the Swedish chain closer to becoming the first major foreign retailer to set up its own stores.
The Foreign Investment Promotion Board cleared the retailer’s proposal, Commerce Minister Anand Sharma said in a statement yesterday. The board last year barred Ikea, the world’s largest furniture maker, from operating cafes and restricted the kind of items it could sell at stores.
The approval means Ikea may gain access to a retail market that the Associated Chambers of Commerce & Industry of India and Yes Bank Ltd. (YES) predict will double to 47 trillion rupees ($874 billion) in 2017. Ikea still needs approval from the Indian Cabinet to proceed with its plan to invest as much as 1.5 billion euros ($2 billion) to set up 25 stores.
“We consider this as a very positive development,” Juvencio Maeztu, Ikea’s manager for India, said in an e-mailed statement. “We are now waiting for approval from the Cabinet and subsequently a notification so that we can initiate the process of establishing Ikea stores in the country.”
The government’s approval for Ikea is “overall very good for the retail sector,” Bharat Chhoda, retail analyst at ICICI Direct, said before the decision was announced. The steadfastness shown by the government will probably “be very positive for the entire sector, showing that the government is looking to fast-track” such proposals, Chhoda said.
Prime Minister Manmohan Singh’s government last January passed regulations that allowed single-brand companies such as Ikea to open outlets without local partners.
The government in September allowed foreign multi-brand retailers such as Wal-Mart Stores Inc. (WMT:US) and Carrefour SA (CA) to own as much as 51 percent of retail outlets. A similar decision was suspended in 2011 due to political opposition that paralyzed parliament.
“The government is committed to play a constructive role in encouraging foreign direct investment, especially in areas which create jobs and provide technological advancement,” Sharma said in the statement. “Ikea has a business model which integrates” small- and medium-sized enterprises and the domestic industry, he said.
Pavers Ltd., a British footwear retailer, was the first foreign single-brand retailer to get government approval for full ownership.
Large outlets constitute a small chunk of India’s retail market, which is dominated by small grocery stores. These shops, known as kirana, often sell goods on credit, and account for 68 percent of the total value of groceries sold in the country, according to the report by the Associated Chambers of Commerce and Industry of India and Yes Bank.
Ikea, controlled by Swedish billionaire Ingvar Kamprad, has 338 stores in 40 countries, operated by the company as well as its franchisees, according to the group’s website. More than half the retailer’s revenue comes from stores in Europe, its annual report shows. The company has 28 stores in Asia, according to the report.
India’s rules require foreign-owned retail companies to locally source at least 30 percent of the value of goods sold.
India’s furniture market is dominated by small, unorganized players who could be the worst-affected when Ikea sets up its stores, Arun Kejriwal, director at Kejriwal Research & Investment Services Pvt., said in an interview ahead of the ministry’s decision.
“Furniture in India is a fairly disorganized product, you hardly have any national players,” Kejriwal said. Ikea’s wide portfolio of relatively cheap products will pull customers from the smaller retail outlets in cities, he said.
Foreign investors still face a maze of regulations in India’s retail market. They will also be required to invest a minimum of $100 million, with half being used to build facilities for manufacturing, distribution and warehouses within the first three years of their foray, India’s Department of Industrial Policy & Promotion said in September.
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