After IKEA hype, the reality bites

Company's entry proposal sets policy conditions

The devil is always in the detail. Closer scrutiny of IKEA’s India entry application makes it clear the celebrations may have been premature, as the euro 25-billion Scandinavian furniture major virtually wants an overhaul of the single-brand retail FDI policy.

IKEA has set rigid terms for the government. If approved, these would tantamount to a change in policy. The company had earlier refused to set up stores in India, despite the FDI (foreign direct investment) limit having been raised to 100 per cent, over sourcing hurdles.

The Cabinet had cleared the policy to step up FDI in single-brand retail to 100 per cent from 51 in November 2011 and the government notified it in January. Since then, only two FDI proposals have come, from IKEA and Pavers of the UK.

WHAT IKEA WANTS

• Compute 30% sourcing requirement after 10 yrs of entry
• Be flexible on definition of small industries 
• Link single-brand policy review to mandatory sourcing
• Exclude input costs while calculating sourcing quantum
• Will invest in 2-3 stores at present, expand later 

While IKEA had surprised many on Friday with its announcement at St Petersburg (Russia) committing a euro 1.5-billion investment, the question mark is already back on India’s single-brand retail story.

In its application dated June 22 to the Department of Industrial Policy & Promotion (DIPP), IKEA has said the group “understands that complying with the mandatory sourcing of at least 30 per cent of the value of products sold is not a day 1 requirement, as the gestation period of a typical IKEA store is 3-5 years.” It has added it would be impossible for the group to meet this requirement from day 1 or “any time soon thereafter”. The company wants the mandatory sourcing requirement to be computed, certified and checked for a cumulative period of 10 years from the date of approval, thereby seeking a complete change in the single-brand policy guidelines.

To a query whether IKEA has sought a 10-year moratorium on mandatory sourcing from India, a company spokesperson from the Sweden office said, “We have a long-term vision for India, including both retail operations and sourcing.” She added, “This is not an overnight job... Therefore, we suggest the mandatory sourcing requirement be based on cumulative periods of 10 years.”