International retail chains like Walmart, Tesco, Carrefour and others, keen to tap the Indian market, are likely to follow the IKEA route from now on in terms of sustained negotiation with the government to spell out their needs and worries, while holding out the promise of FDI. Experts agreed that the IKEA success would enthuse other foreign chains to engage with the government more to be able to set shop in India , but they pointed out that single and multi brand players operated in different categories and that their requirements were quite unique to themselves.
Relaxation of the single-brand policy to ease the sourcing norms as well as the recent clearance given to IKEA by the Foreign Investment Promotion Board (FIPB) for its complete range of products including cafes and restaurants, have conveyed to the global majors the significance of continuous dialogue with the government.
Pinaki Ranjan Mishra, partner (retail), Ernst & Young, agreed that IKEA case was a positive development, that may encourage even the multi-brand players to engage more with the government. But he added that single and multi-brand players had different set of hurdles to cope with.
Statewise clearance to retail chains is the toughest roadblock for global retail majors, an industry source said. With the general election slated for 2014, many of the multi-brand chains may like to wait, to see if there’s any rollback of policy in case there was a change in the government. Many states are also poll-bound, making retailers quite cautious at the moment. But the fact that IKEA could have its way, and rather quickly, is a positive message for the multi-brand players too, and they may like to talk more to the government, the source added.
According to Arvind Singhal, founder and chairman, Technopak Advisors, a leading retail consultancy, “that is already happening behind the scene”. He was referring to international groups like Walmart and Tesco engaging with the government on policy matters.
In the four months since 51% foreign investment was allowed in multi-brand retail, not even a single application has come from any company yet. In fact, at the World Economic Forum in Davos, commerce and industry minister Anand Sharma said that UK-based Tesco had sought clarifications from the government on the FDI policy.
Sharma, keen to attract FDI, told top executives of Walmart and Tesco that they could seek any clarification on the policy, and that the government was ready to hand-hold them. This came immediately after IKEA got the FIPB approval for investing Rs 10,500 crore in India in a phased manner.
When asked whether IKEA had shown the way on how to deal with the government, a Bharti Walmart spokesperson said, “we remain excited about the opportunity to grow our business in one of the world’s most brilliant economies, expand opportunities for farmers and help lower the cost of living for families in India.” The spokesperson added, “since the government of India announced the new FDI rule in mid-September of last year, we have continued to study the requirements placed on FDI in multi-brand retail to better understand how our business would operate in a complex environment.” Bharti and Walmart are in a 50-50 joint venture for a cash and carry business in India, and the two are expected to extend the pact for front-end multi-brand retail as well.
French retail chain Carrefour did not reply to a questionnaire sent by Business Standard.
Since its application to the Department of Industrial Policy and Promotion (DIPP) on June 22, 2012, IKEA has been engaged in dialogue with the government for clearing several roadblocks. First, it made representations to the government against the “impractical” guideline on 30% mandatory sourcing from medium and small scale enterprises. Even as the Union Cabinet had approved the single brand policy with that guideline in 2011, it was changed after IKEA made it clear that it was not possible to comply with such a sourcing norm. The revised guideline said that a single brand foreign retailer must source 30% from India, preferably from small and medium enterprises.
Once the sourcing battle was won, IKEA faced another hurdle when FIPB gave a conditional nod to its proposal in November 2012, striking off more than 50% from the list of its product categories it wanted to sell in India. After many exchange of letters and meetings, FIPB cleared the IKEA proposal in full, which will now be taken up by the Cabinet Committee on Economic Affairs (CCEA).
