FE Editorial : Accommodating Ikea

Written by The Financial Express | Updated: Nov 22 2012, 06:43am hrs
A commitment from a leading global player to invest over Rs 10,000 crore over a period of timewith R4,200 crore in the first phasecannot but encourage other multinational retailers from wanting to do business in India. Whats creditable is that the government ceded ground to the company on points where it made little sense to have differences. Ikea was particularly keen that it should not be forced to source goods from medium and small enterprises (MSME) of a specific sizedefined by the value of plant and machinery of $1 millionsince once the MSME was brought up the curve and made the necessary investments, it would no longer be eligible under the $1 million norm. In the event, the government has done well to simply say it is preferable that retailers buy from MSMEs. That should go a long way in lifting the comfort level for other prospective entrants to the Indian market as should the fact that the timelines for complying with the mandated 30% sourcing from MSMEs have been eased. Indeed, putting too many restrictions on foreign retailers, especially single-brand players, can be counter-productive. Its true that Ikea will not be setting up 50 storesover time, it may have just two dozen outlets across the country. But India is going to be a strategically important for the Swedish furniture maker and the potential for Indian vendors to supply to the company would be enormous, whether for sales in the home market or in other countriesIkea, for instance, has a presence in 38 countries and earns revenues of approximately 27.5 billion euros.

Indeed, the government would do well to rethink some of the restrictions imposed on foreign multi-brand retailers too, especially those related to local sourcing. Since no mid-priced or discount retailerwhether a Walmart or a Tescocan afford to import food and groceries, most SKUs in these categories will be procured locally anyway. Even for other categories like general merchandise, retailers would be only too glad to develop a vendor base in India since it would work out to be far more cost-effective. The process may take time but even players like Marks & Spencer are scaling up local purchases and the presence of a few more large global retailers could give Indian manufacturing a bigger boost than one might imagine. As it has been with Ikea, the government needs to be pragmatic when laying down the rules for multi-brand retail.