Apart from retail growth in urban and tier-I cities, there is also a radical shift witnessed in consumption patterns in smaller towns with people moving beyond necessities and using products that were once sold only in urban areas. The article throws necessary insight into the strategic decisions of retailers and brands moving to tier-II and -III cities and towns.
Hit by high rentals and low footfalls, one-third of retailers at shopping malls in large cities like Mumbai, Delhi-NCR, Chennai, Bengaluru and Kolkata are shifting to tier-II and -III cities, according to an Assocham survey. This clearly shows that with the golden opportunities being promised by these cities, brands are planning their strategies well to move into these markets. Urban India accounts for 30 per cent of the population, which currently accounts for 64 per cent of its consumption. The number of urban dwellers has been rising and will continue to swell in the coming years. As markets in metro cities matue, retailers are moving into non-metros to make the most of changing behavioural patterns brought about by increased earnings, western influences, increased number of working women and a growing desire for luxury items. Despite the current inflationary environment, tier-II and -III towns are showing strong momentum with an improved demand appetite. In terms of market size, it will grow from US$ 5.7 billion today to over US$ 80 billion in value by 2026.
Various studies have pegged the size of middle class between 350–400 million people, out of which approximately 100 million people live in tier-II and -III cities. One should not be surprised to learn that today luxury cars sell more in small cities than in the metros. Big Bazaar’s single largest bill till date comes from its store in Sangli, a little known town in Maharashtra, and not from metropolitans like Mumbai or Delhi. Many specialty and evolved categories (such as hair conditioners, air fresheners, prickly heat powder and cheese) rank on the top of the shopper list in smaller towns and cities. Even fashion products, watches, and apparels are showing signs of growth in smaller towns.
India, today has become the next big destination for retail business. Consumers in small cities want to splurge on food, shopping and entertainment like their counterparts in the metros. The non-metros are not made up of poorer cousins of the people living in the metros. “We have observed growing awareness among people about toys and brands in smaller towns but the availability of branded products is a concern. People who live in smaller towns travel all the way to urban cities to purchase quality products. Market research has shown immense opportunities in tier-II cities and this is the reason we have opened outlets here,” says R. Jeswant, Sr. Vice President, Marketing & Sales, Funskool India Ltd. Donear NXG already enjoys immense popularity in tier-II, III and IV cities. They intend to open 100 EBOs of Donear NXG in the current fiscal year.
According to an estimate by McKinsey & Company, discretionary spending in India is expected to comprise 70 per cent of the average household’s consumption by 2025, up from 52 per cent in 2005. Tier-II and -III cities – where the population is under one million and between one million and four million, respectively – are observing a strong demand for gold jewellery, with consumers preferring lightweight and branded products. Moreover, due to the lower cost of living in these locations, consumers in smaller cities are willing to spend more on jewellery than people residing in bigger cities.
Brands foraying into smaller towns
- Dominos was the first fast food chain that opened its outlets in smaller cities. Its second highest sales in India were recorded in the industrial town of Kanpur, in Uttar Pradesh.
- Pizza Hut, owned by the global Yum’s restaurant chain, has also become aggressive in its attempt to gain a foothold in the smaller cities. Expecting a 20 per cent growth from its outlets in these areas, Pizza Hut already has stores in cities like Jalandhar, Amritsar, Ludhiana, Meerut, Kochi, Mysore, Nasik, Coimbatore, etc.
- McDonald’s fast food chain, which commenced operations in New Delhi and Mumbai, is now expanding to the smaller cities of Punjab, Haryana, Uttarakhand and Himachal Pradesh, customising its offerings and promotions to gain faster acceptance.
- Vishal Retail, the Rs. 600-crore group, opened its 100th retail outlet at Jabalpur in Madhya Pradesh.
- Aditya Birla Group planned to invest more than US$ 1.3 billion over a period of three years. The major focus areas identified by the Group are food, grocery and lifestyle.
- Reliance entered the non-metros attracted by low rentals. It has now plans to start a hypermart chain in Ahmedabad following its success in Hyderabad.
- Woodland, a brand of the Aero Group, was earlier targeting only metros but following its success in tier-I cities, it is now expanding to smaller cities as well.
- Making a beeline for the smaller cities, the garment retailer, Arvind Brands, is also planning to increase the number of outlets of its brands like Newport, Ruf n Tuf jeans and Excalibur shirts.
- German high-end domestic appliances maker Miele plans to expand to cities like Indore, Nagpur, Raipur, Coimbatore, Vijayawada, Jaipur and Ranchi.
- Dr Batra’s Health Care, a homoeopathy clinic chain, is eyeing tier-II and -III cities for further franchise expansion across India. The brand currently has 141 clinics in 72 cities out of which 22 are operational via franchisees in India. The brand has plans to open 350 clinics by 2016.
- The company Gold Gym is considering tier-II and -III cities to tap the country’s growing fitness market and plans to launch more than 30 fitness gyms by June 2015.
- Cartridge World Australia also believes in growing further via franchisees in smaller towns. They plan to tap tier-II and -III cities, as there is a big void in good quality printing at affordable costs in these markets. The brand plans to open 25 new stores in these cities.
While the metros will continue to witness emergence of new malls and lifestyle stores, almost a third of new development will happen in the tier-II and -III cities. Even stand-alone stores will opt for greater emphasis on visual displays, staff training and modern ambiance with their entry into even smaller towns. Companies such as Gitanjali and Titan Industries Ltd. have significantly expanded their retail operations in the past few years and they continue to penetrate into new markets. Jewellers who are already expanding to or keenly looking at smaller cities include Orra, Malabar Gold and Diamonds, Rajesh Exports Ltd., Kalyan Jewellers, and Thangamayil Jewellery Ltd. Most of the players are taking retail space on rent or lease basis while some are even opting for the franchise route to reach new locations while controlling their costs.
Though rural India or smaller towns and cities have a lot of rich shoppers but they are widely dispersed. Even then the real growth lies in the 8,000 towns and 6,30,000 villages dwelling in the geographies of India. But Ivana Perovic Shah, CEO, AP Group feels: “Of course, smaller towns are cash rich but they do not embrace the concept of plastic money. They like to express power and prestige through high-end brands, and the acceptance for the same is quite high. Though, it is not a volume game. Besides, from the marketing perspective, the mediums are rather restrictive and hence it is challenging to execute any form of aggression penetration.” Today, practically all the soaps showcase lifestyle and life in tier-II and tier-III cities. This substantiates the fact that there is huge aspiration among the people in these cities, which the retailer has to tap.
Finding a viable retail model outside tier-I top ten cities
Availability and cost of retail space is another major consideration in the development of organised retailing. Prime locations in tier-II and -III cities are 30 per cent cheaper than their counterparts in the metros. Average rental values for ground floor space can be as low as Rs. 50–60 per sq.ft. a month, against Rs. 100–120 per sq.ft. in the bigger cities. Though the retail space is available at competitive rents in small tier-II towns but sales densities are low. For instance, for a hypermarket, retail sales density in a tier-II town ranges between Rs. 6,000 and Rs. 8,000 per sq.ft., as compared to Rs. 10,000 to 15,000 in a tier-I city like Mumbai. Though the other operating costs are close to 30 per cent low, it becomes challenging for brands to sustain as margins and sales are low. Retailers may need to think of innovative formats and product lines to grow customer base here. So maybe a retailer can innovate to sell air coolers instead of air conditioners in smaller towns or may launch mobile grocery and vegetable vans to encourage people to shop. Stores in smaller towns may add more product categories to sustain profits. Brands like Donear NXG look at the basics of retail expansion like catchment area, visibility, vicinity, influencing local partner, purchase dynamics of the consumers and many other metrics for that matter. “We have dedicated play areas in all our stores. We have laid a lot of emphasis on the décor and ambience of the store to add vigour. Every aspect of the Funskool Store, from its prominent displays to its special play and demo area for kids, has been designed keeping in mind the objective of giving children an unforgettable ‘touch and feel’ experience with the company’s wide array of products,” says Jeswant. According to Shah: “Family-run department stores (a one-stop shop solution for the whole family) works very well in smaller towns.”
Rajesh Jain, MD and CEO, Lacoste India believes: “Following a strategy of selective distribution network to reach the right target audience, to ensure maximum mileage from the marketing mix and to provide a superlative experience to the customers, we mapped the global outlook of the recipients in tier-II cities. On the basis of location, catchment, project, target group profile, neighbouring brands and access, brand segmentation, and position periphery, we chose ideal and key locations to establish Lacoste boutiques and experience. Some major developments as recorded were in Jaipur, Chandigarh and Jalandhar where boutiques registered an annual growth of more than 33 per cent in their revenue generation.”
Product pricing and packaging for small town markets
When consumers started asking for Ponds Miracle instead of Ponds White and fairness cream at the local kirana in the small town of Dausa, it left the merchants and retailers wondering about the growing product sensitivity in that area. Until now, the Indian consumer was considered only price conscious, but now even product consciousness was creeping in, which posed a new challenge in smaller towns. But some of the beauty and cosmetic brands like Revlon, Ponds, and Emami had to rework on the pouches and product packages keeping in mind the buying capacity of consumers in smaller towns and cities. “Much of the jewellery that will retail in smaller cities will have to be lighter weight and trendier in design, with less gold and not very high quality diamonds. There is obviously a shift in purchasing decisions happening and the young consumers seek branded jewellery today, laying more emphasis on craftsmanship and less on the amount of gold being used,” says company sources at Gitanjali.
As a retailer, providing the tier-II city with a complete assortment is crucial. The big format stores may not work with the tier-II cities, as the masses would still like to go to the conventional stores looking for the right product mix. “Prices and packaging of Funskool products and licensed products have always remained constant and standard for all markets across outlets with retailers across the country. The product range that is offered is also similar to the ones that are being offered through the bigger retailers in metro cities. However, the purchasing power as well as exposure to brands being higher in metro cities, we may have lesser number of individual higher priced SKUs or certain categories of toys in our stores located in tier-II and -III towns. With 16 warehouses across the country, we are able to replenish stocks in quickly and this gives us an edge over our competitors. Infant and pre-school toys have a higher percentage of sales in the lesser developed markets initially but as the market matures, shares of categories like board games, puzzles and creative toys begin to get bigger,” says Jeswant.
Products such as hair conditioners, air fresheners, prickly heat powders, fizzy drinks and processed cheese are no longer looked upon as luxury items. Instead, census towns, with their large, dense population and lessening dependence on agriculture, are expanding the consumer base for packaged consumer goods. The owner of Laxmi stores in Mawali is often confounded to see customers being able to identify an old, non-promotional package of cream or soap and ask for the latest freebie offered with the new version, having seen the advertisements on TV.
Hot expansion spots for retailers
The report titled ‘National Survey of Household Income and Expenditure’ (NSHIE) identified two sets of key cities – the boom towns and the niche cities. Although the boom towns and niche cities are quite small in terms of population, income and spending as compared to the mega cities, their rate of growth is definitely encouraging for organised retailers.
Boom towns are high in expenditure per household; they largely comprise of young population, which resulted in fastest growth in disposable income since 2000. And hence these towns are emerging as the largest markets following the mega cities. For instance, Surat, Kanpur, Jaipur, Lucknow, Nagpur, Bhopal and Coimbatore are the cities that constitute this group.
On the other hand, niche cities are somewhat smaller in terms of overall population, but still high on spending per household. Their household expenditure is nearly the same as that found in mega cities with the highest spending propensity. Faridabad, Amritsar, Ludhiana, Chandigarh and Jalandhar are the cities in this group.
“We have drawn up a list of towns we would like to be present in over the next one year. Our next two stores are slated to open up at Ghaziabad and Amritsar. We intend to focus on towns where there is currently a dearth of toy retailers with sufficient shelf spaces dedicated to branded toys,” says Jeswant. “Our expansion plan to tier-II and -III cities is rather conservative right now. We are in the process of consolidating our business overall but see a huge potential in these cities. We would be opening 7–8 new doors in these cities in 2015,” informs Shah.
Within India, the tier-I and -II cities of Mumbai, Delhi-NCR, Chennai, Kolkata, Bengaluru, Pune and Hyderabad are the leading cities for retail as well as real estate operations. These cities account for over 70 per cent of the country’s total retail stock. While Delhi-NCR has a large retail stock that is comparable with leading Chinese and emerging ASEAN cities, stock in Mumbai is largely comparable with the tier-III cities of Changsha and Hefei in China.
The gap between the retail stock of Delhi-NCR and Mumbai seems high given the small income gap. Mumbai has recently witnessed major improvements in infrastructure, which could help the city to spread its retail penetration further.
Source: Real Estate Intelligence Service, Jones la Salle
Growth via alternative channels
For most e-retailers, 50 per cent of their revenues come from tier-II or -III cities. This is because there are a few branded retail chain stores outside the tier-I cities and are largely serviced by unorganised or unbranded markets. For shopclues.com, a substantial part of their business comes from tier-II and -III cities, as they have a large mix of regional products in their catalogue. However, many consumers in smaller cities have aspirations to buy branded products and their ability to afford them is increasing. This should drive future e-commerce company revenues.
Most e-retailers indicated that approximately 20 per cent of their current traffic comes via mobile of which 60 per cent is through mobile internet and 40 per cent through the app. Majority of these transactions happen in tier-II and -III cities, as they do not have internet access. E-commerce companies expect a higher proportion of transactions to take place through mobile phones going forward, and therefore are investing in mobile technology and cheaper and affordable handsets to ensure good user experience.
To go or not to go?
“Development in a tier-II and -III city is more challenging as the target audience is in the process of changing its buying and consumption patterns. In a metro, one has competition, and the consumption pattern is already set, so the value proposition is a little different. However, in all cases, the ‘experience’ one delivers to the customer is what defines one’s success. Tier-II and -III cities are untapped markets where it is important for retailers to establish their brands,” says Dr. Prodipta Sen, Executive Director, Alpha G:Corp, in the article ‘New Horizon: Tier-II and III cities’, in Shopping Centre News.
Hence, there is a pertinent question of retail penetration as well. For many brands, the key challenge is whether to expand their presence in established sectors or to move into new territories. Most brands are convinced that they need to remain focused on tier-I cities, as there are many untapped niche areas to be looked at. For some, especially the luxury segment, it is also an issue of brand dilution, as majority of the Indian consumers continues to remain price conscious even today. Hence, it does not make economic sense for upmarket brands to even think of moving inwards. “We are toy makers and believe that toys are an essential product whether one lives in a metro or smaller town. Our mission has been to provide quality toys to all children to make their development phase interesting by enabling them to play with safe and branded toys, games and puzzles. Our endeavour is to take our complete range of products beyond the metro cities. The stores also give us an opportunity to increase our brand presence and to reach out to a wider target audience,” says Jeswant. “We aim to provide customisation of products to tier-III and -IV towns in the state. These stores come with convenience to customers to get their garments tailor-stitched with Arvind cut and style. We plan to have 20 EBOs in Gujarat, while nationally the brand aims to have 60 stores by the end of the current fiscal,” reveals company sources at Arvind.
This leaves the tier-II and -III field wide open for mass market brands like Big Bazaar, Pantaloons, Titan, The Mobile Store, etc. Although there is a strong interest from companies to expand into smaller towns and cities in the coming years, there is a gradual move that is happening to that end.
“We expect the toy market to grow much faster in tier-II and -III towns in future. The challenge is to expose customers to the range of toys that are available and to make it affordable while ensuring the highest quality standards. With our manufacturing capabilities and marketing strength, we are confident that we can make this happen,” shares Jeswant.
Other than the inherent challenges to enter and operate in tier-II and -III towns, organised retail offers considerable advantages for the smaller cities as well. Whereas on one hand the success of organised retailing in tier-II and -III cities rests largely on further development of appropriate infrastructure, supply chain and logistics, local government support, changing habits, income dispersal, etc., on the other, this entry has helped improve the living standard of the local population by practices such as contract farming, local sourcing, aiding the growth of ancillary industries and by providing employment to locals. Farmers in Punjab have been greatly benefited by the arrival of large retailers like ITC and Reliance, who are creating a huge demand for fresh fruits and vegetables. These companies have signed agreements with farmers to source products directly from them eliminating middle-men dealings.
Organised retail has also been able to pass on the benefits of efficient sourcing to customers by improving supply chain efficiencies. Small town markets provide greater opportunity for the growth of private labels. Blood Jeans is a local brand of Bengal and today it captures 60 per cent of the market.
Modern and organised retail is expected to grow to almost 25 per cent of the total retail industry by 2020. The good news is that tier-II and -III cities would be the ones to push it towards this goal. The advent of organised retail in smaller cities and the rural hinterland is a win-win situation for all the parties concerned. The retailers benefit from increased sales and higher profit margins for their premium brands and private labels by reaching out to the richer classes in the non-metros.
Key characteristics of semi-urban towns & cities
- High density urban centres account for merely 4–5 per cent of the land area .
- Districts with <50 per cent urban population can be considered semi-urban, and they account for over 90 per cent of land area.
- Districts with <20 per cent urban population can be considered rural and they account for over 45 per cent of land area.
- While awareness on various products and services is increasing due to growing media and internet penetration, trust continues to be a key factor driving purchases in the semi-urban areas.
- Companies in sectors such as FMCG increasingly rely on ‘trust channels’ and BTL activities to increase sales and awareness.
- Even luxury brands are increasingly engaging with consumers directly and through local partners in small cities.
- Popular brands in sectors such as food and beverage, apparel and beauty salons are expanding in tier-III and -IV cities, often aided by franchisees or other forms of local partnerships.
- Online players have stepped in to fill the demand-supply gap created by the lack of physical stores in these cities.
- Several regional brands catering to specific needs of local consumers have strong presence in various categories aided by local marketing techniques and efficient supply chains. Examples include Sosyo (soft drink brand in Gujarat), Sapat Tea (West India) and Today tea (North India).