Ikea price cuts show Indians prize affordability over aspirations

It opened its first store in the country in 2018, after struggling for more than a decade to secure the required permissions and conform with India’s rules. The homeware, furniture, appliances and accessories brand first applied for permission to start its retail business in India in 2006, only to give up three years later after failing to persuade the government to relax the requirement for foreign retailers to tie up with local partners.

Eventually, the Manmohan Singh-led UPA government agreed to let single-brand retail businesses enter without any local partners, and with full foreign ownership. The requirement that the 30% local sourcing be only from small and medium enterprises was also relaxed. Ikea reapplied in 2012 and it opened its first store – a 400,000-square-foot outlet in Hyderabad’s Hitec City – in 2018.

Four years later, the company is slashing prices on a significant portion of its inventory by up to 39%. In interviews to the press last week, top Ikea executives explained that the price cuts weren’t planned as an inventory-management exercise but as long-term, strategic decisions.

The cuts reflect two things about India. One, that it is both an aspirational market and a highly price-sensitive one; and two, that as a sourcing destination for raw material and other inputs, India offers cost advantages that allow for the possibility of reducing retail prices.

Hyderabad’s Hitec City is home to huge offices of global tech companies such as Amazon, Google, Oracle and Microsoft, and their hundreds of thousands of employees are the ideal shoppers for Ikea to target. But the mass market, with the volumes it is eyeing, is a tricky one. Discretionary spending in India is still quite low, so the company has had to create an affordable range to succeed.

First, the number of Indians with sizeable discretionary spending power is smaller than the country’s population suggests. India has not conducted a census since 2011, so the size of the population isn’t known. It was estimated at more than 141.7 crore at the end of 2022, according to projections by World Population Review.

According to the first advance estimates released by the government last month, per-capita income is ₹1,13,967. On February 13, the government shared the latest income tax data in the Lok Sabha, which showed that 1.4 crore individual taxpayers reported annual incomes between ₹5 to ₹10 lakh in the financial year 2020-21. Less than one crore people reported incomes above ₹10 lakh a year.

Second – and this is more important – the Indian consumer is picky and wants to see the value that will accrue from a purchase before committing to spend.

When it launched in India, Ikea announced that it would have a presence in 49 cities by 2028. Of these, 30 would have physical stores while the rest would be serviced through e-commerce. Homegrown e-commerce platforms have demonstrated that smaller towns do have the capacity to spend, as Mint has previously noted.

When Myntra held its ‘fashion week’ sale in October 2020 — just weeks after the devastating second wave of covid claimed tens of thousands of lives — it saw more than 45 million customers visit the portal. About four million of these bought 13 million items in total, more than double the number in the previous year’s festive season. More than half of those purchases came from tier-2 and tier-3 cities and towns.

This shows Ikea the importance of tapping India’s cost advantages to cut prices and make its goods more affordable to Indian shoppers. When it first launched retail stores in India, Ikea sourced barely 3% of its global supply chain from India, although it had been sourcing certain items such cushion covers, rugs and other textiles from India since the 1970s. It is since estimated to have doubled its sourcing from India and may have to accelerate these efforts further.

Ikea’s struggles to enter the Indian market may have ended in 2018 but its struggles to enter price-sensitive middle-class homes continue to this day.