Facing the issues of high rentals and low footfalls, one-third of retailers at shopping malls in large cities like Mumbai, Delhi-NCR, Chennai, Bengaluru and Kolkata are moving to Tier II and III cities, according to an Assocham survey.
This clearly shows that in order to make the most of the golden opportunities present in 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.
As markets in metro cities mature, retailers are gradually moving into non-metros to make the most of changing behavioral patterns. These changes are mainly brought about by increased earnings, western influences, increased number of working women and a growing desire for luxury items. Despite the current inflation, Tier II and III towns are showing strong momentum with an improved demand appetite. In terms of market size, it is expected to grow from US$ 5.7 billion today to over US$ 80 billion in value by 2026.
Its not surprising that 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 and Delhi. Many specialty and evolved categories such as hair conditioners, air fresheners, prickly heat powder and cheese rank quite high on the the shopper list in smaller towns and cities. Even fashion products, watches, and apparels are showing signs of growth in smaller towns.
The small town India has become the next big destination for retail business. The consumers in these small cities want to splurge on food, shopping and entertainment like their counterparts in the metros. People travel all the way to urban cities to purchase quality products. 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.
Dominos, the quick service restaurant was the first to open outlets in small cities. Its second highest sales in India are recorded in the industrial town of Kanpur, in Uttar Pradesh. Expecting a 20 per cent growth from its outlets in these areas, Pizza Hut already has already set up stores in cities like Jalandhar, Amritsar, Ludhiana, Meerut, Kochi, Mysore, Nasik, Coimbatore, etc. McDonald’s too 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 plans to invest more than US$ 1.3 billion over a period of three years. The major focus areas being food, grocery and lifestyle. 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.
As reported in an article on Indiaretailing.com 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. 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.
While the metros will continue to witness emergence of new malls and lifestyle stores, almost a third of new development will come from Tier II and III cities. Even stand alone stores are placing 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 looking at smaller cities include Orra, Malabar Gold and Diamonds, Rajesh Exports Ltd., Kalyan Jewellers, and Thangamayil Jewellery Ltd.
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. Besides, from the marketing perspective, the mediums are rather restrictive and hence it is challenging to execute any form of aggression penetration. Today, almost all Indian 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 retailers have started tapping.
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.
Some beauty and cosmetic brands like Revlon, Ponds, and Emami even reworked on the pouches and product packages keeping in mind the buying capacity of consumers in smaller towns and cities.
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. This leaves the Tier II and III field wide open for mass market brands like Big Bazaar, Pantaloons, Titan, The Mobile Store, etc.