The issue of Indian government’s cap on foreign direct investment (FDI) has long been

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a bone of contention for luxury brands. They are keen to enter the Indian market, but wary of ceding control from the tightly integrated vertical structures of design, production and distribution that characterise luxury conglomerates and their star brands today.

The government’s decision on Thursday night to allow 100 per cent FDI in single brand retail is likely to have great significance for the burgeoning luxury market in India. Some such brands have come and gone in India, finding that tie-ups with local brands don’t meet their expectations of infrastructure, benchmarks for retail service or indeed, annual turnover. Other brands have flourished by adopting various strategies, most commonly in tie-ups with Indian companies such as Genesis Luxury or Blues Clothing Company.

The government’s decision to allow 100 per cent foreign direct investment in single brand retail and 51 per cent in multi-brand stores has enormous significance for luxury brands, both — that are already established in India and those eyeing Indian market’s potential that is estimated to grow from its current annual worth $5.75 billion to around $14.72 billion by 2015. Yet Indian companies that have built enormously successful tie-ups with foreign luxury brands based on the limitations imposed on foreign brands by the FDI cap may not welcome this decision by the Indian government.

Abhay Gupta, executive director of Blues Clothing Company, which franchises Versace Home in India, was insistent that the potential of allowing 100 per cent FDI in single brand retail would not affect the strength of what Blues Clothing Company has to offer foreign brands.

“We would continue working with all current brands, as well as ones that are in the pipeline.” He welcomed 100 per cent single brand retail, since the entry of more brands into India could help unleash untapped market potential with a strong supply side push. He insisted that tie-ups bring important local knowledge, power and connections to foreign brands attempting to navigate the admittedly tricky waters of the Indian market. Gupta believes this is more cost effective for foreign brands than hiring local people since it shares risk between the luxury brand and the franchisee.

Sanjay Kapoor, MD, Genesis Luxury that has tie-ups with brands such as Paul Smith, Bottega Veneta and Canali, was equally welcoming. He said, “The easing of FDI norms in multi-brand retail as well as single brand retail would open doors for some iconic multi-brand and other mono-brand stores in luxury retail to gain entry into India. That would imply more choice for the consumer and greater awareness of international luxury brands, which is all very good for the market. Besides, supply chain improves and prices come down. Overall the industry gains from better overseas practices and global business processes which such partnerships bring with them.”

However, many luxury brands are well known for the tight control they prefer to keep on every aspect of their brand, and high infrastructural costs in India have not helped in gaining ground for many high-end brands. The luxury boom which occurred across Asian countries such as Japan and China starting in the last 1970s, was indeed driven by luxury companies rejecting traditional franchise structures and opening their own stand alone stores, thus driving the massive growth in profitability of luxury brands.

However, India has proved a difficult market for many luxury brands to enter, making comparisons with rest of Asia premature, and perhaps, erroneous. It could be that a mixed mode of brand tie-ups as well as single brand retail will characterise the future growth of the luxury market in India.