This post has been updated.
IKEA’s love affair with India may have hit a speedbump.
On Jan. 15, the Swedish company recalled millions of its “Made in India” Troligtvis travel mugs from 400 stores globally as “test reports showed that the product may (contain) migrate levels of chemicals exceeding the prescribed limits.”
“The risk of any immediate negative health effect is very low but IKEA urges customers that have the travel mug to return the product to any IKEA store for a full refund,” the company said in a statement.
The company has been selling Troligtvis travel mugs in India and other global markets since August-October last year. The company specified that the issue was only with the cups made in India, and those marked “Made in Italy” were “perfectly safe to use.”
This, experts say, could strain IKEA’s relationship with India.
“The moment a brand asks its customers not to buy a “Made in India” product, it is clear that it is palming off the issue to the country,” N Chandramouli, CEO of Trust Research Advisory, a Mumbai-based market intelligence firm, told Quartz. “This act of pointing back to (the) supply chain with a faulty product is akin to shifting the focus from the real problem. More so, when, the onus of ensuring the quality of the product singularly lies with the company (here IKEA), since they are the ones who are packaging and branding the product.”
In an India fix
This product recall is certainly not a first for the world’s largest furniture retailer. IKEA has a long-list of product recalls of items made in other countries, including MALM chest drawers, SUNDVIK changing table/chest, and children’s bib MATVRÅ, among others.
However, IKEA’s recall may be a deal breaker since it comes at a time when the retailer has been investing heavily in the country, experts said.
India is home to three of the 30 global cities that IKEA has identified as markets with the highest growth potential for its business. The company has committed investments of at least $1.5 billion into the country where it opened its first store with much fanfare in August 2018. In its first year, the Hyderabad store saw 4 million shoppers, encouraging IKEA to plan more outlets in Delhi, Mumbai, and Bengaluru. To attract more buyers, the company has even tweaked its business strategy for India and opened online stores in Mumbai and Pune.
Despite all this, IKEA has been struggling to meet India’s norms that mandate 30% local sourcing for foreign direct investment in single-brand retail. By 2020, the retail giant aims to double sourcing from India to €600 million (Rs4,670 crore) by 2020, up from €318 million in 2017.
In August 2018, IKEA Group CEO Jesper Brodin had said, “India will become one of IKEA’s biggest sourcing markets in the future.”
But that seems like a far-fetched dream as of now.
Even as IKEA has been sourcing from India since 1972 when it signed up Travancore Mats and Matting Company, an over 100-year-old firm based in the small town of Kerala, to supply coir mats. But nearly 50 years later, the company still has only 48 suppliers from India.
“The product recall may also impact future demand as the company may be cautious of sourcing the products from such regions. Therefore, the existing asset bases the company has invested in may become stranded,” said Yugal Joshi, vice-president at Texas-based consultancy Everest Group.
A better way to handle the situation would have been to avoid singling out “Made in India” products, experts said.
Now, what’s crucial is how IKEA handles the recall of the travel mugs.
“IKEA has failed to come up with a compensation plan that could compensate its loyal buyers adequately. It simply expects people to walk down to their stores to deposit the mugs. Not many disappointed customers will take the trouble of returning the product, which costs less than $2,” Chandramouli of Trust Research Advisory said.
The economic costs of recalls largely depend on the ticket size of the product, its utility value, and the scale of the recall, experts said. So, handling product recall of a low-value product such as IKEA’s Troligtvis travel mugs, priced at Rs124 apiece, is relatively affordable, more so, when the retailer has not announced significant compensation for customers.
But there’s more than just the financial damage that IKEA must be cautious about.
“A product recall not only results in loss of sale with the erosion of customer trust in a brand but it also burdens a company with the logistics cost of retrieving and replacing the product,” said Harish HV, managing partner, ECube Investment Advisors, an investment funding platform focused on environment, social and governance space. “Then there is a significant cost involved in identifying and tracking where the product has been sold, advertising the information, providing customer support, etc.”
For the future, IKEA may have to come up with a stricter policy for sourcing from India to avoid such a situation, experts said. The company must ensure that its Indian partners are compliant and audited from time to time. “The company needs to continuously validate its supply chain and the partners,” said Joshi.
Update: “Product safety is of the biggest priority for IKEA. IKEA has recalled the Troligtvis travel mugs due to test reports showing that the product may migrate levels of chemicals exceeding the prescribed limits. There are no medical issues and this is purely a proactive initiative keeping (the) safety of our customers in mind. India is an important sourcing destination for IKEA and our ambition is to maximise local sourcing from India to be able to offer even more affordable products for our customers. We fully support the Make in India agenda and our local sourcing today is close to 25% in the first one and a half year of retail operations,” IKEA India said in a statement to Quartz.