More and more apparel brands are moving in the hinterlands in search of bigger markets. It is celebration time for brands as they find non-urban consumers with tastes similar to their metro counterparts. Priyanka Saha finds out, what the shift means and how it will be detrimental to a company’s growth
Factors for sudden burgeoning of markets in smaller cities
Call it the recession impact, apparel brands have restructured their budgets to tap the non-metro markets.
The last two years have seen the retail presence of apparel brands burgeoning in the tier 2 and 3 markets. It is interesting to know that many brands have more stores in tier 2-3 cities as compared to metros. A number of factors contributed to this sudden mass movement.
Before the economic slump, the retail industry went through a phase of unprecedented growth, that also lead to spiraling rental, infrastructure costs and increased inventory costs. The metros witnessed a boom in the apparel sector with malls mushrooming in every nook and corner and investments by government and industries acting as a catalyst. This led to congestion of space and hence an increase in rentals.
Meanwhile, markets developed with each passing season and consumers became more brand conscious with economic stability. A recent report by Ernst and Young “The New Market Shehers: Tapping Potential Beyond the Metros” claims that consumers in tier 2 cities show an increasing preference for the premium products and services of established mass brands. It also states that India’s non-urban consumption is now more than 70 per cent.
Taking cognizance of the high disposable incomes of the non-urban population, and the opportunities foresighted Siyarams started exploring the tier 2 markets. The brand has 20 stores in metros, 25 in tier 2 and 25 in tier 3-4 cities. “An 80 per cent of organised retail lies in metros and only 20 percent in smaller cities. Thus the opportunity to expand in tier 2 cities is tremendous. We believe by the end of 2014, 50 percent of Indian retail will comprise in smaller cities” says Gaurav Poddar, Director, Siyaram’s.
According to Ashok Rajgopal, partner, Media and Entertainment Practice, Ernst & Young, “We are witnessing an enormous opportunity in the non-metro urban markets with a large consumption base which was only marginally affected by the recession and now has enhanced purchasing power. Brands have now realised the potential of focusing on these non-metro urban markets which are key drivers for future business growth.”
Another factor which spurred the brands to non-metro cities were low property rates. Anurag Rajpal, Vice President – Apparels, Spencer’s Retail Limited opines, “The rent to sales ratio is fair as compared to metros. Hence, stores break even much faster and grow with reasonable percentage on like to like basis.” To add to the benefit is the low cost manpower.
Exploring the local market is quite a task, owing to geographical and cultural differences prevalent in different areas in our country and at the same time without compromising on the quality the brand represents. V Mart, has been expanding in tier 2-4 markets since the last three years. Lalit Agarwal, MD, V Mart says, “ The major challenges we faced were to provide value to the customer by selling it at the lowest price points and managing the merchandise mix according to customer base.”
Lotto entered the non-urban market last year. The challenges faced by the brand at back-end were logistics and store development and at the front-end it was creating a standardized store experience, understanding the local consumer and training the staff.
Another challenge anticipated by brands is to find the right market, usually because the markets in smaller cities are scattered. There was also a deluge of discount brands, and the entire consignment and MG concept was in full swing. “Its a challenge fighting out with the local retailer in terms of price points (branded vs un-branded). We have done well when it comes to price points or affordable luxury/fashion space as our prices are moderate and we offer the best in class product”says Rajpal. Then there are other concerns. “It is also difficult to tackle the franchisees who wanted to work only on high margins,” adds Poddar.
Limitations of smaller cities
There are brands that woke up to this emerging trend and made an early entry to consolidate themselves. It was essential to make the best of the low rentals and garner market share, as an increase in the number of brands would eventually mean, an increase of rentals. V Mart has 23 stores in tier 3-4 cities and 17 stores in tier 2 cities as compared to four in metros. It has outlets in Arrah, Basti, Junagarh, Gonda, Patiala, Sultanpur and many more. “We had an advantage of being the first mover to the smaller cities where formats like ours did not exist” says Agarwal. The company has a strong buying and sourcing team that enables it to provide fashion to customers at low prices.
However, Agarwal feels the pinch of a smaller cities, “The per piece spending power is very low in smaller cities. Working on low margins is the major limitation. Apart from that the consumer behaviour is different from city to city so a standardized format cannot work here.”
Poddar opines that limited number of high footfall areas, that is, sometimes one store per city can get a brand saturation. “Most customers are bargain hunters and want schemes all year round. The franchisees also want a lot of extra perks and benefits which at the end hits the company’s margins.”
Infact, while the growth rate at the smaller cities is quite high, the potential of metros to expand is much higher, as the smaller cities fail to grow beyond a certain point and do not have the potential to manage so many players. Moreover the political, social and economic instability tends the market to fluctuate.
V Mart gets 85-88 percent of its revenues from tier 2-4 cities. The brand’s stores are different in every city depending on the size and category. The formats are different due to diverse demographics, catchment area, competition, etc. Whereas, for Lotto a consistent store format supports branding. What changes is the merchandise and products according to the location, as a customer from Punjab might have different preferences from a customer in the North-East.
Siyaram that includes brands like MSD, J.Hampstead and Oxemberg also prefers a standardised store format across all outlets to generate higher brand recall. However, Poddar cautions, “The stores in smaller cities need not be extra swanky, as sometimes an overly expensive looking store prevents an average pocket-size customer from entering the store with the fear of products being very expensive.” His company has five brands in the stores, the composition of which differs from place to place on the basis of market and consumer needs. Sensing this, a little modification in furniture and fixtures have to be done.
Rise of the non-metro consumer
Customer is the king, even in non-metros. A research report by Ernst and Young suggests that consumers in smaller cities exhibit consumption patterns that are similar to those in metros. There is also an uptake and increase in the preference for premium brands and services of established mass brands. In a way, choices made by non-metro customers mirror those made by their metro counterparts. Media plays a great role in giving limelight to the brands and Bollywood influences every day fashion.
Hence, today a customer in Kolhapur is very similar to a customer in Mumbai and Pune. “The only dissimilarity is in the size of the population but the aspirations are the same. Both are giving due importance to grooming and dressing especially people in 30s” says Poddar.
However, Poddar feels the buying strategy is at times different in tier 3 cities. He expounds, “The tier 3 customer generally goes to the same retailer to buy goods. Naturally there’s a very strong bonding in terms of trust between the two. Also with low awareness and education level in tier 3 sector their buying behavior is such that the consumer doesn’t ask for things explicitly by brand name but for the generic products. In such a scenario the brand becomes subservient to the retailer and he pushes whatever brand fetches him the greatest returns. While in the case of tier 1 consumers it is felt that they are more brand literate and tend to consume on the basis of their income pattern and benefits they associate with the brand themselves.”
Another perceptible similarity that binds both customers is ‘Value for money’ and good service. Even international brand like Tommy Hilfiger feels that customers across the country are very discerning and want truly updated international collection as well as service. Hence, the brand has not made any local changes and offers the same collection and store experience. However, brands agree that products offering does differ for customers depending on their location. Certain hi-fashion or futuristic fashion products have limited appeal especially in women. Due to difference in lifestyle and standard of living, customers in metros are different from customers in tier 3 cities in their spending pattern and choice of collection.
Tommy Hilfiger observed sales records of customer purchases and found out that their customers came from all over India to buy from big city stores. “In a pioneering effort in 2007, we decided to take our brand closer to consumers and opened initial stores in cities like Ahmedabad, Jalandhar and Lucknow. Since we offered a ‘unified global appeal’ without compromising our offer from global to these tier 2 cities consumers, we got a fantastic response”says Shailesh Chaturvedi, MD, Tommy Hilfiger. Encouraged by this positive response, the brand expanded and now has stores in 21 cities including Amritsar, Patiala, Ludhiana, Jaipur, Indore and Nagpur. “No other international brand is present in so many towns in India”claims Chaturvedi.
Potential cities for future
Brands find the potential to become a big market in every city that has not been explored. What matters is the infrastructure, government policies, per capita income and other facilities that support them.
V Mart is planning to open stores in Srinagar, Aligarh, Gazipur and Deoria. Whereas, Siyaram’s has a major focus on tier 2, 3 and 4 cities, with concentration in states like Madhya Pradesh, Uttar Pradesh, Andhra Pradesh and Maharashtra. Poddar opines that when the target is tier 1 cities, the company has effective brand communication, but with a base in tier 3-4 cities it has to focus more on retailers. This is because of retailers’ better understanding of the consumers that helps in promotional strategies.
Some cities that have been identified by market experts and have the potential to be big markets in future in the north are Chandigarh, Ludhiana, Jalandhar, Dehradun, Lucknow and Jaipur. In the west it is Indore, Raipur, Baroda and Bhopal. For the south it is Vizag, Cochin, Secunderabad, Vijayawada, Coimbatore, Madurai and East is Durgapur, Patna, Ranchi, Jamshedpur, Bhubaneswar, Cuttack and Guwahati
Spencers Retail had planned their expansion cluster-wise, starting with the north and west, followed by south and east. It expects business share and profitability to increase from tier 2 and 3 cities.
Siyaram’s plans to open more retail and large format stores pan India to reach out more easily to its customers. Poddar says that cities in Maharashtra, Madhya Pradesh and Andhra Pradesh are slated to do very well and have the potential to be big markets in India.
As more brands enter smaller cities, tier 2, 3 and 4 cities are beginning to play a decisive role in the expansion of the consumer industry. As a foresight, we believe that these cities will become pillars for the retail apparel business, as the potential is immense and largely untapped.