Ikea is withholding its entry into India in spite of New Delhi’s move to open its market to foreign retailers as the Swedish homewares company accelerates its expansion in other Brics countries.
Mikael Ohlsson, chief executive, told the Financial Times that India’s requirements that single-brand retailers source 30 percent of their goods from local small and medium-sized companies was an obstacle to its investment that needed reviewing.
Mr Ohlsson said the outright ownership of operations granted to foreign single-brand retailers earlier this month was “a very positive change”. But he warned that the conditions applied to local sourcing were “concerning” and more easily met by food retailers than single-brand companies with established, global product ranges.
At a time of fragile western consumer markets, Ikea is building a presence quickly in leading emerging markets. Last year, its fastest sales growth was in China and Russia.
The world’s largest furniture retailer is tripling its rate of expansion in China to three new stores a year, and is seeking to open more stores in Moscow in the year ahead.
Mr Ohlsson said his company, which sells its products in 26 countries, was seeking clarity on restrictions imposed on entry to India, one of the most promising consumer markets. He proposed that the Indian government consider refinements to meet political requirements, like granting a “grace period” before reaching sourcing targets.
“We need to see what [the restrictions] will mean for us,” Mr Ohlsson said. “We are patient because the conditions need to be right. In this sector, when everything seems to be okay, then we will be in.”
Ikea was considered a likely entrant once foreign ownership rules were relaxed. Regulatory uncertainty and expansion in other markets means that the unlisted company, which takes about five years to open a store after deciding to invest in a country, would not sell its products in Asia’s third-largest economy for some time to come.
“We have always been cautious. Now we will take a step-by-step investment in existing stores,” Mr Ohlsson said.
Ikea has plans to double what it sources from India for its global product range to €1 billion a year within three years. Mr Ohlsson said the retailer wanted to widen its sourcing from carpets and textiles to metals and LED lights, and expand its India-based IT services.
India’s opposition leaders have claimed that greater foreign direct investment in the retail sector in Asia’s third-largest economy would not create new jobs or reduce prices. They argue that it would, instead, deepen poverty and put lots of local traders out of business.
Arun Jaitley, a leader of the Bharatiya Janata party, warned that opening retail to foreign companies before India had strengthened its own manufacturing sector would lead to an influx of cheap Chinese goods.
Gitanjali Gandhiok, principal at Odgers Berndtson, an executive search company in Delhi, said it would be “self-destructive” of India not to allow modern retail to flourish.
“The US faced casualties in the 1980s when big businesses, including box and discount retailers moved into local neighbourhoods, and this is a situation India faces today.”
Ikea’s sales rose 6.9 percent to €24.7 billion in the 2011 financial year. Net income rose 10 percent to €2.97 billion.