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IKEA stores in India closer to reality, Walmart still a far cry Email this page
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NEW DELHI: In a country where haggling is the name of the game when it comes to trade, it is only apt that the highlight of 2013 for the Indian retail story is the hard bargains by multinationals with the government over foreign investment norms in the sector.
Be it Swedish furniture retailer IKEA’s push to let it open cafeterias at its outlets as part of its Rs 10,500 crore investment in India or Walmart’s quibble over sourcing requirements for foreign multi-brand retailers, there was no end to pushing the envelope.

Ironically, however, when the government agreed to dilute the sourcing criteria Walmart decided to part ways with its Indian cash and carry partner Bharti ending their six-year-old partnership.

In a year marked by economic downturn, the estimated USD 500 billion retail sector in India saw growth slowing down to 10-11 per cent from high double digits growth earlier, according to Boston Consulting Group, Asia Pacific Leader (Consumer and Retail Practice) Abheek Singhi.

The silver lining, however, was that many companies moved closer to profitability during the year and more urban consumers migrated from traditional stores to modern format, he added.

When it came to FDI inflows in India’s multi-brand segment, the year had nothing to show but the single brand had plenty to cheer.

After a series of presentations by its officials, the government approved IKEA’s Rs 10,500 crore proposal in May paving way for it to set up home furnishing stores along with cafeterias in the country. Earlier, as per the government policy the company was not allowed to open cafes and restaurants at its stores.

Besides IKEA, the single brand segment also saw the likes of French sports goods retailer Decathlon, fashion brand Promod, crockery maker Le Creuset, Fossil Inc and Hennes & Mauritz bringing in FDI worth about Rs 1,470 crore.

IKEA had proposed setting up 10 furnishing and homeware stores as well as allied infrastructure in over 10 years in India. Subsequently, it planned to open 15 more stores. It has already identified Haryana, Andhra Pradesh, Maharashtra and Karnataka as possible states to set up its stores.

So far, IKEA’s has been the largest investment in single-brand segment ever since the government allowed 100 per cent foreign investment in this sector last year.

The multi-brand segment, however, had no such story. Both foreign and domestic retail firms, including Walmart, Tesco, Carrefour, Bharti, Aditya Birla Group, Tatas, Reliance and Pantaloon wanted government to change FDI norms.

The various firms wanted sourcing rules similar to that of single brand retailers, who are allowed to “preferably” source from small and medium enterprises (SMEs), and also allow to put only 50 per cent of first tranche of foreign investment in back-end infrastructure.

Walmart had, in fact, told the government that it could not meet the sourcing norm in the multi-brand segment that requires 30 per cent procurement from small industries, stating it can procure only about 20 per cent.

Heeding to the request of retailers, government eased norms for FDI in multi-brand segment, diluting the contentious sourcing clause and allowed global multi-brand retailers to source 30 per cent of their products from small and medium enterprises only at the time of start of business.

The foreign chains were also given the green signal to set up stores in cities with less than ten lakh population to accommodate demands of the likes Walmart and Tesco.

The investment requirement on back-end infrastructure by a foreign retailer was also kept at 50 per cent of the first tranche of investment only. The mandatory requirement is that foreign retailers have to bring in a minimum of USD 100 million capital for setting up shops in the country.

The move came under fire from opposition BJP that accused the UPA government of surrendering before global retailers.

Looking back, Singhi said: “The policies were inconsistent. The government could have done better and if the aim was to promote local manufacturing, it could have simply raised the requirement to 50-60 per cent without restricting it to small and medium enterprises.”

Contrary to expectations, instead of going ahead and announcing its multi-brand segment plans for India post the relaxation of FDI norms, Walmart said it was parting ways with its Indian partner Bharti Enterprises.

The US retail major announced that it would buy out its Indian partner in their 50:50 cash-and-carry joint venture Bharti Walmart, which runs 20 wholesale stores under the Best Price Modern Wholesale brand in India, for an undisclosed sum.

Bharti will in turn acquire USD 100 million of Compulsory Convertible Debentures (CCDs) held by Walmart in Cedar Support Services, a company owned and controlled by the Indian firm.

Stating that FDI norms in India played a part in its break-up with Bharti Enterprises, the company said it was studying the feasibility of the policy in multi-brand retail before finalizing plans to enter the segment.

For Walmart, it was also a case of setting its house in order before going for expansion in India’s multi-brand segment. It could heave a sigh of relief when the Enforcement Directorate, which probed alleged contravention of foreign exchange laws regarding the company’s investments in Cedar Support Services, found no violation of FDI guidelines. -PTI

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