With competition in India’s metros and Tier I retail markets intensifying on account of escalating labor and real estate costs, many brands are veering towards the Tier II and III cities. Household appliances, fashion and FMCG brands have been pursuing growth in smaller cities and for the last few years.

Growth fuelled by consumer interest, and lower operating costs

Eight cities are classified as Tier I cities on the basis of their higher standard of living, higher incomes and well-established business circle. Brands prefer these for opening their offline stores as customers here have a higher spending power. Though the retail industry still expects many new brands to open their stores in these cities, it is aware that both brands and stores have reached a saturation point in Tier I. Perhaps that is why one third of new stores are now being planned in Tier II and III cities and towns.

What’s encouraging is that consumers in these cities are becoming increasingly interested in fashion. Almost 60 per cent of brands are expanding sales in Tier II and III cities. Also, the cost of operating a business in these markets is about 30 to 40 per cent lower than that of Tier I which makes them more lucrative.

E-commerce sales provide a major fillip

E-commerce sales are also driving growth of the Tier II and III markets. A recent RedSeer report notes, total e-commerce sales reached $ 53 billion in 2018. Of this, non-metro customers, which constituted 42 per cent of online shoppers in 2016, are expected to rise to 55 per cent by 2020. Even major e-commerce players like Flipkart, Amazon and PayTm Mall are aware their next wave of growth is likely to come from smaller cities. Amazon India recently revealed, over 82 per cent of its customers are now in Tier II or smaller cities. To exploit this situation, Amazon brand has tied up with StoreKing and Vakrangee to provide customers in smaller markets, access to the convenience of online shopping. To achieve this, it aims to encourage first-time online shoppers to embrace e-commerce.

Flipkart offers EMI on debit cards, allowing shoppers to buy expensive products with monthly installment. The eretailer has also launched ‘made-for-brand billion’ to meet the needs of its customers in small towns.

Besides established players many e-tail start-ups are also turning their attention towards markets in smaller cities, and providing localised services to gain market share. A recent example is Club Factory, a Chinese e-commerce platform which is attracting young customers in smaller cities with its fashionable products at a cheap price.