Sweden’s IKEA shelves $1billion India investment citing negative FDI rules

IKEA, the $21-billion by sales Swedish home products retailer, has shelved its $1-billion investment plan to set up retail outlets in India since the government is not keen on granting FDI beyond 51 per cent for single brand retailing.

Last week, the world's biggest furniture retailer took the decision to shelve its plans of investing nearly $1 billion in India after receiving indications from the new government that it would not increase the foreign investment in single-brand retail from the current 51 per cent to 100 per cent.

Currently, the law for single-brand retail allows a foreign company to hold a maximum of 51-per cent stake along with an Indian partner.

Last year, IKEA had rubbished the Indian retail growth success, saying that India was not a ready for big retailers as the country is not yet an emerging market in the retail sector.

IKEA India Property and Establishment Manager, Staf Lenders said at Technopak Retail Summit in New Delhi last year, "India is not ready for big retailers yet, may be we can talk about it in 2015-16. I am not impressed by the big investments happening in this market today. I want to see return on investment, which is not happening.

IKEA, founded in 1943 by Ingvar Kamprad in Sweden is a privately held home products retailer and now the worlds biggest and has pioneered flat-pack design furniture, which is sold internationally at low prices.

The company has 296 stores in 36 countries, most of them in Europe, the US, Canada, Asia and Australia.

With a new government in place without the ideological accoutrement of a Left ally, IKEA had hoped the FDI rules would be eased to allow complete foreign ownership.

But the Indian government does not appear keen to relax FDI norms any further at the moment. IKEA, it is learnt, has sent an internal communiqué to its stakeholders saying that the Indian FDI rules in single brand retailing were not conducive for investment, although it may change its mind in the future.

Previous commerce minister Kamal Nath had indicated during his tenure that India may increase the FDI in the retail sector after the general elections, but the current commerce minister Anand Sharma apparently has indicated to IKEA otherwise.

IKEA, which sources goods worth €350 million annually from India, has closed its retail research office in Gurgaon, which it had set up in 2007 and has not yet decided what to do with its employees, although it may absorb some of them in its sourcing division which currently employs 11,000.

It had also appointed nearly 30 people for its first showroom near Dwarka on the outskirts of Delhi.

Other investors bullish on Indian retail
The estimated $330-billion Indian retail market, now consists of major local players like Bharti, Reliance, Future Group and the Aditya Birla Group, while global brands like Reebok, Louis Vuitton, Wal-Mart, French Connection, Pantaloons and Jimmy Choo, operate in India with Indian partners through the single-brand retail window.

But due to the global economic slowdown, the retail industry in India has also been hit as retail sales growth fell sharply to 11 per cent in December 2008 from 34 per cent in the same period in 2007, according to a study by global consultancy firm KPMG. (See: Indian retail sales growth slumps as recession bites)

The report added that the slowdown was likely to last 12-18 months, depending on the government's measures to boost the economy and said a demand contraction following a slowdown in the domestic economy had impacted the sales of retailers; and urged the government to increase spending on infrastructure and other development initiatives.

Despite the recession, large domestic investors like Bharti and Kishore Biyani's Pantaloon are making huge investments in the retail sector.

The Mittal brothers of the Bharti Group, who have a tie-up with global retail giant Wal-Mart in the wholesale business, are planning a pan-India roll-out of farm produce retailing and exports over the next few years with an investment of around Rs12,500 crore (around $2.5 billion). (See: Bharti Group eyes Rs12,500 crore investment in farm produce retailing)

The Kishore Biyani-promoted Pantaloon Retail India Ltd announced yesterday that it will raise additional long-term funds of up to Rs1,000 crore through issuance of securities to various investors, to go ahead with its expansion plans. (See: Biyani's Pantaloon to raise Rs1000 crore through bond issue)

They believe that the worst is over for the retail sector and feel that normalcy in consumption is back and is up by 95-97 per cent, so the operating parameters are now in the company's favour in terms of retail, real estate cost, efficiencies and people cost.

In March, the company had announced that it would open 25-30 new stores of the company's hypermarket chain Big Bazaar and supermarket chain Food Bazaar by the end of the year.

Reliance Retail had announced in December 2008 that it plans to set up 100 Reliance Trends outlets by 2010-1, although it now seems that the company is going slow on this issue due to the economic downturn.