Category — Market Entry

According to Reuters India, IKEA Chief Executive Mikael Ohlsson devoted much time to acquiring local knowledge of what consumers desire in their furniture, in order to give the company an edge.  Through their accumulation of knowledge, they will accommodate to the needs of the cultural majority.

“Most people don’t really know and can hardly imagine that we visit thousands of homes round every store in the world every year,” he told Reuters at a store in Malmo in southern Sweden.

“We sit down in the kitchen and talk to them … That’s the way we try to learn and understand. ‘What are you annoyed with? What are your frustrations? What would you like to have? How much can you afford? What are your alternatives?’” he said.

In regions where there are smaller rooms, showrooms exhibit smaller.  Beds are bigger in the U.S., but mattresses are firmer in China.  “As we become more and more global and we expand more in China and we grow into India, we will need, probably, to have a wider range,” Gillian Drakeford, IKEA’s China retail chief said. “Then each country will be able to secure relevance by taking the part they really need. But of course we will still secure IKEA’s identity.”

“DIY (do it yourself) works very well in Europe and the United States; they are used to it. If you look at markets like China and India, people are not used to DIY. That is a reason why Home Depot has failed in China,” said Kantar Retail analyst Himanshu Pal.  “Indians have been used to local furniture shop owners making entire furniture units and delivering it to your house.”

According to the Economist magazine, despite what some say, foreign firms operating  in India are prospering.  Recent acquisitions by foreigners, such as those by Britain’s Vodafone and Japan’s Dai-ichi Sankyo have done poorly causing some global investors to get discouraged about India.

However, how accurate are these tales?  The stock of FDI in India is now around $220 billion, or 12% of GDP.  This includes everything from research centers in Bangalore to cement plants.

Unlike FDI in China, which has been directed at building factories for export, investment into India is aimed at the domestic market-only 12% of the firms’ sales were foreign.  India has a number of high-profile firms that are listed on Indian stock exchanges, while being controlled by foreign firms, such as Suzuki, Nestle, Unilever and Siemens. These are well-established businesses with deep roots in India and high profitability.  Foreign-controlled firms among the top 100 companies listed in India made a 24% return on equity in the year to March 2011 – better than domestic firms’ returns.  Their market value doubled over the five preceding years.

Some foreign firms had the foresight to convert minority stakes in good Indian firms into controlling ones.  For example Japan’s Suzuki took control of Maruti, India’s biggest car manufacturer by volume.   However, British American Tobacco still owns only 31% of ITC, a conglomerate that has grown so quickly it is now a global player in its own right. Other foreigners have pulled out.  Honda sold its stake in Hero, an Indian motorbike-maker, in 2010 and is now competing directly against it.  The firms that have control of fast-growing subsidiaries have been keen to boost their stakes still further.  Siemens raised its stake in its unit from 55% to 75% in 2011.  Often the valuations of Indian subsidiaries are uncomfortably high.  Nestle India is valued at 50 times its profits – more than double the ratio of its Swiss parent.

Faced with lower stakes than they would like, foreigners have found another way to extract more value from their subsidiaries: charging them “royalty fees”.  On Jan 22^nd Hindustan Unilever became the latest firm to do so – announcing that the fee paid to its foreign parent would rise from 1.4% to 3.15% of sales. For India, the trend towards higher royalty payments is a backhanded compliment.  It shows that some foreign-run firms in India make tasty profits, which is why their parent companies guzzle more of them.  As a sign about outsiders’ appetite for India, this may be very important.

What all this means

For those patient and insightful enough to go the distance, India offers substantial profits. A long term view and the ability to take time to understand what makes India tick is key. Nestle, Siemens, Unilever, Amway, IBM and many others have done this.

Soft and Gentle, the UK’s fourth largest female deodorant brand in terms of market share was recently acquired by the British subsidiary of India’s Godrej Consumer Products Ltd (GCPL), for about $31 million.

Adi Godrej, Chairman of GCPL, said, “Over the last few years, Keyline Brands (owned by GCPL) has grown in double digits in a very tough market environment. Our UK business has historically had a higher mix of distributed brands than owned brands. Strategically, we have been working on changing the mix towards owned brands. With the Soft and Gentle acquisition, the salience of owned brands will become greater. We expect this acquisition to be accretive in year one.’’

Keyline Brands was acquired by GCPL in October 2005 and its portfolio includes a number of niche personal care and home care brands such as Cuticura, Aapri (both skin care), Inecto and Touch of Silver (hair care).

What this means:

Godrej is steadily moving forward in global spread not only in emerging countries but also in carefully selected niches in India-friendly markets such as the United Kingdom.  Other CPG players in India have been nervous about expanding into developed country markets and facing up to the likes of Unilever and Procter & Gamble on their home turfs.

France’s Sephora, owned by LVMH Moët Hennessy Louis Vuitton,  has just opened up a large  store in New Delhi’s Select CityWalk mall in the Saket neighborhood.

Besides a huge selection of Sephora’s own makeup, skincare, and accessories, the store features brands such as Dior, Estée Lauder, Clinique, Burt’s Bees, Make Up For Ever, Benefit, Stila, Bliss and StriVectin, among others, Sephora’s line of. The store is Sephora’s first to have a “shop-in-shop” with ayurveda-based brand Forest Essentials holding court. A blogger called it the “Subzi Mandi of Makeup” (the vegetable supermarket of makeup).

Retailer Sephora opened its first store in India, New Delhi

There are no immediate plans for additional stores in the country.

What this means

While Delhi is a vibrant market for luxury makeup, one store is not going to make a huge impact on the overall revenues of this company.  This is also a joint venture via their Singapore affiliates, so perhaps the brand is conducting a low cost experiment.  Import duties raise the price of many of the brands sold a this store so it will be interesting to see how much traction it generates.