As India’s cabinet started its countdown to opening up one of the world’s most attractive retail markets to foreign groups, Mikael Ohlsson, the chief executive of Ikea, was driving through the Hindi-belt dreaming of selling flat-pack furniture to its rising middle class.
The unlisted Swedish retailer had previously not opened stores in India, a market of 1.2bn people, on the restrictive terms offered to it under Indian regulation.
Present in Russia, China and 24 other countries, Ikea, alongside other big retailers such as France’s Carrefour, Walmart of the US and UK’s Tesco, was missing out on the untapped market of the world’s fastest growing large economy after China.
“We want to open in India,” Mr Ohlsson says. “There is a real need of good home furnishings at low price in India with what is happening in the coming 20 years in Indian cities.”
This week Ikea and other retailers edged closer towards capturing that lucrative business when the Indian government – after months of foot-dragging and consensus building – agreed to allow single brand retailers to own 100 per cent of their subsidiaries in India.
It also allowed foreign groups to invest up to 51 per cent in multi-brand retailers (as supermarkets are known as in India) in a politically-sensitive market liberalisation of a highly protected sector.
Analysts have long predicted that India’s largely “mom and pop” retail market, worth as much as $450bn, will be transformed by 2015 with the expansion of an organised retail sector with 300m customers.
They and senior policymakers such as Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, argue there is no economic rationale for keeping foreign retailers out. Rather they say foreign investment will help improve food quality and supply chains.
But multinational retailers have so far responded cautiously to an announcement they have waited years to hear, not least because of the conditions the government has placed on investment. Fears over a perceived inevitable political backlash over their labour relations and tough bargaining with farmers also act as a deterrent.
Already, one leader of the opposition Bharatiya Janata party has threatened to set Walmart stores alight.
Nonetheless, Walmart India describes the foreign direct investment liberalisation as “first important step”.
“We will need to study the conditions and the finer details of the new policy and the impact that it will have on our ability to do business in India,” says Raj Jain, president of Walmart India.
Likewise, Ikea says it will “look into the details of the decision to determine what it means in terms of possibilities for Ikea in India”.
Conditions include a minimum investment of $100m, restricting stores to cities over a population of 1m and guaranteeing sourcing from small and medium sized companies.
Clive Black, analyst at stockbroker Shore Capital, says the liberalisation is still at an early stage, and that a group such as Tesco already had placed a significant amount of its capital in China and the US.
“We don’t expect Tesco to come out and make a major imminent step change in its capital expenditure programme in India. India, alongside China and the US, could be absorbing a lot of Tesco’s free cash flow down the line, but India will be a much more gradual process in the near term.”
International supermarket chains have prepared for this liberalisation by opening wholesale ventures with local partners. Walmart and Bharti, owner of India’s largest mobile phone operator by revenues, established a partnership, while Tesco has teamed up with the industrial group Tata to launch cash-and-carry stores. Germany’s Metro has also entered the wholesale cash and carry business, but has no plans to expand retail in India.
But trades union leaders warn that India will bitterly regret allowing the likes of Walmart into its market.
“We are appalled by this decision and stand fully behind the trade unions in India who have made it clear that opening the doors to foreign companies like Walmart will be catastrophic for India’s small traders,” says Philip Jennings, the general secretary of UNI Global Union.
Global retailers are likely to target India’s large metropolitan areas and prosperous states rather than try to unfold pan-Indian strategies in an environment of under-developed infrastructure.
Shrinivas Rao, the Asia-Pacific chief executive of Vestian, a retail consultant, warned that a big concern was the government’s decision to allow individual Indian states to take a final call on whether to grant access to a foreign retailer.
“States can make their own call,” said Anand Sharma, the commerce minister. “Retail licences are given by the states and by the local authorities. Anyone who wants to open a hypermarket must get a licence from a local authority.”
Additional reporting by Andrea Felsted in London, Anjli Raval in New York, James Wilson in Frankfurt, and Scheherazade Daneshkhu in Paris