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Ikea to comply with riders on its India investment proposal

IKEA has announced plans to invest Rs 10,500 crore in India. The proposal is now awaiting clearance from the Cabinet Committee on Economic Affairs. In India, the company may have to alter its business model to comply with riders on its investment proposal.

An IKEA store in Sydney

An IKEA store in Sydney

Jitendra Balakrishnan lived in the US for 13 years before returning to India in 2008. While there, he did much of his shopping in IKEA stores. He has visited the Swedish company's stores in other countries as well. "I have visited more than 10 different stores in three countries. Each store looks the same. Their food menu is not elaborate (15 to 20 items), but the key differentiator is the holistic customer experience they offer," says Balakrishnan, an analyst with an MNC.

A part of that experience will be missing when IKEA sets up shop in India, judging by the fine print. While clearing the Swedish company's proposal to enter the retail sector, the Foreign Investment Proposal Board (FIPB) has made it clear that the approval comes with some riders. IKEA will not be able to operate food and beverage outlets within its stores. In addition, it will not be able to sell products in 18 of the 30 categories it had initially applied for. Those 18 categories include gift items, fabrics, books, toys and consumer electronics.

An IKEA spokesperson refused to comment, saying the company is yet to receive any formal communication from the government on the matter.

Ikea has announced plans to invest Rs 10,500 crore in India. The proposal is now awaiting clearance from the Cabinet Committee On Economic Affairs.

"IKEA must be mentally prepared for these circumstances. It will have to find a middle path," says Ankur Bisen, Vice President (Retail & Consumer Products) at retail consultancy Technopak Advisors. He believes the government is playing it safe with FDI in retail. "IKEA is being denied permission in areas that the government thinks are politically sensitive."

Food services do not contribute much to IKEA's revenues, accounting for less than five per cent of its topline of ?23.54 billion in 2010. However, by negating the need to go out for a meal, these food outlets ensure that some customers linger at its stores. In India, the company may have to alter its business model. "IKEA is known to open "big-box" stores (above 200,000 sq. ft.) with a standardised design. So far, they have not tweaked the model anywhere in the world. But India is such a strong pull, they will not mind opening stores without food courts," says Bisen.

Harminder Sahni, Managing Director of Wazir Advisors, says home improvement is still the bread and butter for IKEA. "The home furnishing category is all about experience. People do not mind travelling extra to buy IKEA products."

According to Technopak, the home decor segment is expected to grow from $10 billion in 2009 to $15 billion by 2014. Earlier this year, IKEA had sought relaxation of a norm that requires single-brand retailers to source 30 per cent of their material from local small and medium enterprises (SMEs). In September, while retaining the 30 per cent requirement, the government indicated that foreign retailers did not necessarily have to source material from SMEs.

IKEA has announced plans to invest Rs 10,500 crore in India . The proposal is now awaiting clearance from the Cabinet Committee on Economic Affairs.

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