IKEA's challenge will be land acquisition for stores: Experts
New Delhi: Land acquisition will be a major hurdle for Swedish furniture retailer IKEA to set up its stores in India and it may have to even depend on public auction by government, according to real estate consultants.
The company, which has received nod from the government for its plans to invest Rs 10,500 crore earlier this month, may also have to tweak their business model for India considering the constraints for right space, consultants added.
"Land acquisition is a difficult and challenging proposition in India... The company may acquire land in two ways -- through public auction by the government or directly purchasing it from owners," Jones Lang LaSalle India Managing Director (Retail Services) Pankaj Renjhen told the agency.
IKEA India Chief Executive Officer Juvencio Maeztu is reported to have said that company will acquire land for opening stores, which will be spread across three lakh sq ft and is well-connected by highway and metro train.
Renjhen said acquisition from owners directly may take longer for IKEA "as they don't know India very well compared to a domestic player who has been in the country for years".
"The option of directly acquiring land has many issues involved and it may be a costly affair in terms of profitability for the company," he added.
Expressing similar views, Cushman & Wakefield India Director (Retail) Jaideep Wahi said: "The major challenge for them (IKEA) will be real estate, predominantly land cost. Globally, they are known for affordable products, but with so high real estate value in India, we will have to see how they are going to handle it."
Store size is very important for IKEA and to have such huge stores, they may have to move to suburbs, he added.
"I think they may tweak their model slightly for India," Wahi said, adding that IKEA's business model is right for only long term purpose.
"Such project will not be successful in a short period of time. It is not for 3-6 year timeframe," he said.
CBRE South Asia Chairman and MD Anshuman Magazine also said real estate is a big challenge for any retailer entering India.
"The kind of size that IKEA is looking at for opening a store, options will possibly be at outskirts of a big city. It is not very easy, but it is possible...It will take time for them to understand the market," he added.
Magazine said as IKEA will have to invest on realty, vendors, manpower, supply chain, product quality, etc. It is going to be a long-term affair for them as retail is very capital intensive.
Speaking specifically about IKEA's model, he said: "In this format of retail, you cannot make money until you scale up. Just to have good profit, you have to have big scale of presence, because one store may not make good money but it has to be compensated by another."
Comments from IKEA could not be obtained as an e-mailed query to the company spokesperson in India remained unanswered.
Earlier this month, the Indian government had allowed IKEA to invest Rs 10,500 crore -- the biggest ever FDI proposal in single-brand retail -- for setting up home furnishing stores in the country.
The company has proposed to set up 10 furnishing and homeware stores as well as allied infrastructure over 10 years in India. Subsequently, it plans to open 15 more stores.