New Delhi: India’s smaller cities could drive the next wave of growth for retailers beyond the top 20 cities as the share of organized retail in these markets remains low. In addition, a shift in consumption patterns over the last decade paves the way for higher spends on discretionary items in these markets.
In its report titled ‘Kearney India Retail Index’ released on Thursday, the consulting firm said tier 2 and tier 3 cities are hotbeds for growth, opening up opportunities for retailers to expand. These markets have witnessed faster evolution in growth in disposable income, mobile internet, and supporting infrastructure.
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“This is especially evident in the share of luxury retail spending, which grew from around 9% in 2013 to 55 to 60% in 2018 in non-metro cities, especially Jaipur, Udaipur, and Chandigarh," it said.
It also helps that the pandemic has led retailers to look at smaller cities with renewed interest. These markets, reporting fewer cases of covid, were quick to rebound and led sales recovery for a range of retailers.
The report has identified cities like Faridabad, Kanpur, Vijayawada, Rajkot, Madurai, Kozhikode and Nasik, among others, as markets that are likely to drive retail growth beyond the top 20 cities. Kearney said most retailers today are looking beyond the top 100 cities to fuel their expansion as consumers’ appetite for branded goods, access to quality retail infrastructure, and improvements in backend processes have expedited retail growth in the emerging cities.
Between 2006 and 2017, tier 2 and smaller cities received five times more investments in retail infrastructure than tier 1 and metro cities, according to estimates by Kearney. “This influx of investments has put these cities on a fast track to reaching the retail potential of tier 1 cities," it said.
The report ranked more than 800 Indian cities on their retail market potential. Delhi, Bengaluru, Mumbai, Chennai and Kolkata continue to lead as the top five retail destinations when it comes to e-commerce adoption, presence of power brands, apart from penetration and per-capita expenditure across key product categories such as apparel, footwear, accessories, jewellery, personal electronics, and food and grocery. Interestingly Bengaluru has overtaken Mumbai to bag the second spot on the back of strong e-commerce and brand penetration.
Metros and tier 1 cities have held the top slot as the major consumption centres for organized retailers in India for the last two decades. This was largely on account of better retail infrastructure, affordability among the more upwardly mobile shoppers in these markets and investments in top malls etc. However, Kearney noted that the contribution of metros and tier 1 cities toward the growth of India’s retail industry has been shrinking.
To be sure, several retailers, such as Aditya Birla Fashion & Retail Ltd (ABFRL) that operates brands such as Peter England, Allen Solly, and formats such as Pantaloons in India, apart from retailers such as Bata, Titan and others, are renewing focus on tier 2 and 3 cities.
In its December quarter investor presentation, ABFRL said that it is eyeing aggressive store additions, with an aim to penetrate deeper into tier 2 and 3 towns and new markets. Mint had earlier reported that footwear retailer Bata has set out a plan to open 500 franchise stores in smaller cities by 2023 as it plans to deepen its pan-India retail network where it currently has 1,550 Bata-owned and franchised stores,
“Over the years, most of the organized retailers have established strong presence in metros and tier 1 cities. The next wave of growth in retail will be led by emerging cities beyond tier 1 and emerging hotspots within metros and tier 1. It is imperative for organized retailers, across different product categories, to evaluate optimal level of penetration across these markets," said Siddharth Jain, Partner, Kearney.
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