IKEA Knocks on India's Door

NEW DELHI—Swedish furniture giant IKEA Group asked India for permission to invest €1.5 billion ($1.9 billion) in the country to set up 25 stores in coming years, bringing some relief to New Delhi policy makers, as they try to bolster foreign investors' sagging sentiment.

IKEA's foray into India, made possible by a policy change last year that allows some retailers to own 100% of their Indian units, could help transform India's largely unorganized $500 billion retail sector. But the company will face significant challenges, including meeting the government's mandate that it source 30% of inventory from small-scale local industries.

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An Ikea store in Stockholm

IKEA, which has 298 stores world-wide and is known for selling affordable, modern furniture and household goods, said that if the Indian government approves its application it could have a significant impact on the country's retail sector, "vastly improving availability of high-quality, low-price products."

The company unveiled its plan after Chief Executive Mikael Ohlsson met with Indian Commerce Minister Anand Sharma on Friday at a conference in St. Petersburg, Russia.

Foreign companies have soured on India over the past year because of concerns about increased regulatory uncertainty, slowing economic growth and stalled proposals to liberalize foreign-ownership caps. Dwindling foreign capital flows have helped push the rupee to record lows against the dollar in recent weeks.

An IKEA investment could help Indian policy makers send a signal to other foreign investors that the country is still an attractive investment destination. "It's more about the image of India and the Indian story," said Arvind Singhal, chairman of consulting firm Technopak Advisors. "This is a very good endorsement."

India's move last fall to allow foreign firms to own 100% of some Indian retail ventures, up from a previous 51%, came after lobbying by IKEA and others who wanted to have full operational control of their businesses in India, rather than working with local joint-venture partners. IKEA's investment would mark the largest by a major foreign company to take advantage of that change.

It could take several years for IKEA to set up its first store, retailing experts say. The company will have competition when it arrives, as India already has at least two big-box housewares retailers. One chain, Lifestyle's Home Centre, which is controlled by Dubai's Landmark Group, has 12 home-furnishing superstores across India that sell most of the same items as IKEA, including sofas, bedroom sets, and kitchen and bathroom items.

While some Indian consumers still prefer to have their furniture custom-made or go to small-time retailers, many appear to be embracing the one-stop-shop concept. Jaspreet Singh Goomer, a 22-year-old accounting student, drove an hour and a half on Saturday from western Delhi to a Home Centre store on the city's eastern outskirts to buy furniture for his family's new house. "You can find anything here: it's all under one roof," he said.

Mr. Goomer said he hasn't heard of IKEA but would welcomemore furniture stores.

An Indian Commerce Ministry spokesman said IKEA submitted an application that envisions two stages of investment, a €600 million tranche in the first part, followed by a €900 million infusion later. The company didn't indicate a timetable.

The application seeks permission to engage in import, export, distribution, marketing, and warehousing, and spells out features of standard IKEA stores that would be present in Indian outlets, such cafés and children's play areas, the Indian ministry spokesman said. It wasn't clear how soon India would respond to the proposal.

IKEA's plans are a vote of confidence for India, but the pressure is still on the government to carry out economic reforms, analysts say. Gross-domestic-product growth was just 5.3% in the most recent quarter, the lowest level in nine years. A widening trade gap has left the country with a current-account deficit of about 4% of GDP, pressuring it to attract international capital.

"It doesn't take the pressure off the government," Seema Desai, India analyst for the risk-advisory firm Eurasia Group, said of IKEA's investment proposal. "India's balance-of-payments situation requires some more reforms for foreign-direct-investment flows to strengthen."

Lately, the Congress party that heads the current coalition government has struggled to build consensus with allies and opposition parties alike for almost all major initiatives. C. Raj Kumar, dean of the Jindal Global Law School outside New Delhi, said Congress needs to do more to persuade those opponents of the urgency of the required economic fixes. "It is possible to bring together widely divergent parties in the interest of the nation," he said. "There needs to be greater efforts at consensus-building."

Prime Minister Manmohan Singh, speaking to reporters Sunday aboard his official plane, Air India One, urged "all political parties to work with the government to restore the momentum of growth that this country is capable of and which this country needs."

Foreign investors say that while opening the "single brand" retail market to 100% foreign ownership was a positive step, allowing in "multibrand" retailers—such as Wal-Mart Stores Inc. and Tesco PLC—would have a much greater economic impact. Such companies currently aren't allowed to hold even minority investments in Indian retail firms.

Backers of letting in Wal-Mart and its peers say they would help modernize India's creaky infrastructure and farm-to-market supply chain. Critics, including one key Congress ally—Mamata Banerjee of the Trinamool Congress party—say those multinational firms would put out of business millions of small-time shopkeepers, who account for more than 90% of retail revenues.

To meet the mandate of buying 30% of its products from small-scale local industries, IKEA would have to help those vendors modernize their infrastructure and manufacturing capabilities to ensurethey can offerworld-class quality. "The Indian manufacturing base could get a lot more efficient over time," Mr. Singhal said.

In its statement, IKEA said it believes it can "live up to the guidelines and keep within the spirit of the policy" by building upon relationships it already has in India, where it works closely with 70 suppliers of good ranging from textiles to rugs to ceramics for its global stores. In 2011, the firm sourced $450 million of products from India. IKEA spokeswoman Malin Pettersson-Beckeman said the retailer plans to exceed $1 billion in purchases from India in the next few years.

But in its statement, the company said the 30% mandate will remain a challenge in coming years and urged the government to be flexible in what it defines as small-enterprise suppliers for purposes of the requirement. IKEA's biggest markets include Germany, the U.S., France and the U.K. Mr. Ohlsson said in an interview last year that high urbanization and growing middle classes in emerging markets make them an important source of revenue growth.

"Consumption in Russia and China is tremendously strong, while countries like Portugal and Spain are struggling," Mr. Ohlsson said in the interview last year. The furniture giant's sales in China have risen by more than 20% this fiscal year. The company has 11 stores in China and plans to open three more annually between now and 2016.

Indeed, some developing countries are fast outpacing European markets in sales growth.

Ms. Pettersson-Beckeman said IKEA will provide more details about its intentions for India operations once the Indian government approves its application.

Write to Amol Sharma at amol.sharma@wsj.com and Jens Hansegard at jens.hansegard@dowjones.com

A version of this article appeared June 25, 2012, on page B1 in the U.S. edition of The Wall Street Journal, with the headline: IKEA Says It Is Ready To Give India a Try.

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