Ikea India faces tough challenge to gain critical mass

Ikea India opens its first store today, in the city of Hyderabad.

The inaugural store has reportedly cost Ikea INR10 billion (US$145.8 million) which represents 10 per cent of its total investment proposal in the new market. The store spans about 400,000sqft and represents one of the largest foreign investments in the Indian home market, to date largely dominated by unorganised players.

But even though winning customers in the highly fragmented, untapped and unorganised Indian retail market will not be easy for the Swedish home furniture giant, it will surely accelerate a shift to organised retailing, according to data and analytics company GlobalData.

Sumit Chopra, director of consumer and retail research at GlobalData, says rising disposable incomes and improving living conditions of urbanites present vast opportunities for home furniture manufacturers in India.

“Ikea’s foray will impact the market share of branded players. The Indian Home market is highly fragmented with the top five players accounting for just 2% market share. In addition, Ikea’s strategy to build a strong offline presence and build a brand image among customers where they can see and feel products associated with the brand and use e-commerce as a supplement channel – will also provide new experience to the consumers. As a result, branded players will have to offer differentiated products and services.”

Against such a the backdrop, GlobalData forecasts the Indian home sector will grow at a compound annual growth rate (CAGR) of 10.9 per cent between 2016 and 2021 and reach INR4.979 trillion by 2021.

Of the three product categories – home improvement and gardening products is the largest,  accounting for 52.3 per cent value share in 2016, while homewares is expected to be the fastest-growing category at a CAGR of 13.4 per cent.

Improving economic conditions, booming housing sector and relaxation in the sourcing norms for single brand retailers with more than 51 per cent foreign direct investment will create opportunities for international home sector brands in India. Driven by increasing smartphone penetration, GlobalData expects the online channel (which accounted for just 0.1 per cent of total home sales in 2016), to grow at a CAGR of 28.5 per cent from 2016 to 2021.

Value-conscious market

However, winning customers will not be easy for international players such as Ikea, as the majority of Indian consumers are value conscious and when it comes to big ticket products, says Chopra. They prefer purchasing from unorganised markets offering acceptable quality products at affordable prices.

While a lack of infrastructure and poor supply chain, especially in tier 2 and 3 cities, is going to be a major challenge for Ikea. Maintaining competitive pricing amongst those offering product differentiation and good quality will also be crucial.

Leading Indian online players – Pepperfry and Urban Ladder – are expanding into the offline space and offering differentiated formats under an omnichannel business model, which will also create potential local competition for Ikea.

“Both organised and unorganised sector players will have to revisit their product strategies considering the stiff competition they will face from Ikea’s ‘affordable solutions’,” says Chopra.

“However, it is still to be seen how value-conscious Indian consumers respond to Ikea’s ‘DIY’ furniture concept, which is completely new to the Indian market.”

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