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Simon Finch Investment Manager

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Allen keys at the ready; Urbanites welcome India’s first Ikea

08 Aug 2018
The instantly recognisable blue box with yellow signage that dominates Hyderabad’s IT hub landscape is finally to open, marking Ikea’s first store opening in a country of more than 1.3 billion people.

Such is the burgeoning appetite for this universally sought after selection of flat-packed furniture and its wide selection of home furnishings, one can ask of the Ikea management “what took you so long?”

India’s middle class consumption (in Purchasing Power Parity (PPP) US$ terms) is expected to surpass China by 2030 and top the list by 2050.  A 31% share of global middle class consumption is one of the multitude of reasons for the likes of Amazon, more recently Walmart and now Ikea turning their attention to the Indian consumer.  It should however be noted that Ikea has been operating in India for the past 30 years, sourcing for its stores globally, with around 45,000 direct employees and nearly 400,000 people in its extended supply chain. 

Following the recent relaxation of foreign domestic investment rules under the leadership of reform-minded Prime Minister Narendra Modi, Ikea is now able to slide open the doors to a brand new store in Hyderabad, with plans for 25 stores across the country by 2025.  With just 30% of India’s population currently living in urban centres, it will see the economy transform as people migrate from the countryside to cities and towns.  This urbanisation is anticipated to lead to a similar growth trajectory to that seen in China, which moved from 30% living in cities in the early 1990s to more than 50% today. 

65% of India’s population are 35 years and younger, with significantly growing aspirations for home-ownership and all that it entails; televisions, refrigerators and other household items.  India has more than 800 million people living in a household with an annual disposable income of less than US$5,000, a universally agreed figure to separate those living at the “bottom of the pyramid”, China has less than 600 million in this category.  As India’s urbanisation shift unfolds, greater certainty of income will markedly reduce those living at the bottom of the pyramid, and in time, it will be these young, aspirational Indians with higher levels of disposable income that Ikea will be seeking to capture.  The government is intent on opening India up to greater foreign direct investment; Ernst and Young ranked India as the number one destination for Foreign Direct Investment (FDI) flows in 2015.  Ikea, like other global brands will be seeking to seize this golden Indian opportunity now.

Although the Ashburton Chindia Equity Fund is unable to invest in Ikea, due to it being a privately owned company, the Fund currently looks for opportunities to access the trend of the rise of the Indian consumer.  We continue to have an overweight to consumer discretionary companies, including fashion retailer Arvind and Dixon Technologies, a manufacturer and supplier of white goods and technology devices.  These companies among others will benefit from the underlying structural urbanisation shifts and favourable demographics.

For now, it’s Allen keys at the ready as Ikea welcomes its first customers on Indian soil.