Beyond the Metros: Small Cities Big Opportunity   Leave a comment

As the metros saturate and become more expensive to operate in, many Retailers are expanding to smaller towns and cities across india to tap a new breed of customers who are getting richer and increasingly willing to shell out money to shop at modern retail formats.

The modern retail revolution in India began in Delhi and Mumbai over one and a half decades ago and gradually spread to Hyderabad and Bangalore and other tier I cities of the country. These prominent locations offered clear advantages to retail chains: millions of potential consumers with solid purchasing power, high level of urbanisation, availability of quality retail real-estate, and good physical infrastructure. However, over the years, competition intensified and rentals and operational costs became very high, affecting the overall profitability of retailers. The result: many players have begun to seriously look at growth opportunities in smaller towns beyond the metros where the competition is less, rentals are still reasonable, salaries are comparatively low, and consumers have begun to prefer the sophisticated atmosphere of modern retail outlets over crowded bazaars.

Modern retail is expected to grow by a whopping 50-60 percent per annum in tier II and III cities of India over the next few years, compared to only 35 percent in tier I cities, research figures show. Clearly, the metro citizens are not the only ones aware of various brands, fast-food, and modern lifestyle – thanks to satellite TV and inexpensive mobile phones, Bharat is today better connected with India, and smaller towns have got an evolving consuming class that aspires to be like the big-city consumers.

A recent Nielsen study confirms that the tier II cities are seeing a rapid rise in consumer spending. While the modern trade sector grew 28 percent in 2011 all over India, this was overshadowed by sales in modern retail stores in cities such Jaipur, Indore, and Surat which grew by around 40, 39 and 27 percent, respectively. This trend of expansion of modern retail in smaller cities is going to strengthen in future, the Nielsen study says.

The Opportunity

Modern retail activity is picking up in smaller cities and their contribution to the overall retail pie is growing quickly. Says Dheeraj Dogra, National Director (Retail) with BNP Paribas Real Estate: “In 2005, the top six Indian cities accounted for 66 percent of the total modern retail in the country. In 2009 – in just a span of four years – their contribution got reduced to 47 percent. The contribution of tier II, III, and IV cities in India’s modern retail is growing at 20-25 percent every year.”

Industry watchers say the reason for this exponential growth is that people beyond the metros are slowly getting exposed to fashions and consumption trends of the metros, which is increasing their urge to spend. This is an opportunity waiting to be tapped by the modern retail chains, but to effectively do this, they need to reorient their thinking.

Says Ashish Garg, MD of the discount chain Promart, who has decided to shun the metros in favour of smaller towns: “Most modern retailers have opened stores only in the metros, making the market over-crowded. But nobody is really focussing on the tier II, III, IV, V, and even VI cities. The non-metro towns too have huge purchasing power. I think modern retail chains are not reaching where there is huge untapped demand – they are just crowding the metros.”

Agrees Rakesh Pandey, President (Retail and Business Development), Raymond: “While the tier I and II towns are attractive from the perspective of business expansion, accelerated growth can only be sustained by creating and developing markets in smaller towns.” Adds Anupam Bansal, Director of footwear maker Liberty Shoes: “In metros, the expenses keep on increasing while sales do not rise in the same proportion. So definitely, small-town markets have a big role to play in adding to the bottom line of retailers.”

One example of the rising importance of off-beat locations for modern retail is the fact that Indian towns with a population of less than a million have overtaken the metros in e-commerce. Kashyap Vadapalli, Chief Marketing Officer of eBay India, told the media some weeks ago that rural aspirations are now in the same line as that of the metros and tier I cities, and smaller cities offer tremendous potential for retailers. He said around 70 percent of the country’s annual ecommerce business of Rs 46,000 crore today happens outside the top 10 cities of the country.

To top this, the locations beyond the metros offer a definite advantage to national retailers through lower labour and real-estate costs – the same amount of money goes much further in smaller cities than in the state capitals. All this results in something that is music to the ears of retailers: quicker and easier break-even of new stores, which otherwise can only be achieved at much higher sales in the metros because the rentals are high. Explains Pandey of Raymond: “While the format and design of The Raymond Shop is identical in the metros and the tier IV and V towns, the breakeven is much faster in smaller locations because of lower expenses related to real-estate, operations, and manpower.” But it is not that off-beat cities cannot match the big metros in sales – the purchasing power of small-town consumers often comes as a surprise to national retailers. In fact, many which have established their footprint beyond the metros are often overwhelmed by the response.Bansal of Liberty Shoes says their stores in tier II towns sometimes end up doing business that is equivalent to or even more than that of tier I cities. For example, the Liberty store in Madurai does an average business of Rs 20 lakh a month while that in Bijapur does about Rs 14 lakh monthly. “On the revenue front, I find that small towns are much more profitable as the customers there have a huge disposable income and are looking for an opportunity to shop,” he says.

However, the aspirations, behaviour, and tastes of customers in smaller towns are different from the metros, and retailers have to customise their business model keeping this in mind – what may succeed in metros may not necessarily succeed in smaller cities. Says Seshu Kumar, Head of Rural Retail with ITC’s Agri Business Division: “In terms of buying behaviour, people from tier II or III towns need a higher amount of information, education, and support at the shop floor. So the self-service format may not work well in these locations.” Sandeep Sharma, Chief Manager, Retail Sales, Indian Oil Corporation (IOC), agrees and suggests that metro retailers should actually travel to the smaller cities and spend some time there to understand the behaviour of consumers which is very different.

Bansal of Liberty Shoes says the fashion quotient is always lower in smaller cities and people there are still looking at the core products. “In small towns, the pride in a national brand is much higher. Consumers are less aware and less exposed to international brands compared to the metros. However, they are gradually becoming brand-conscious,” he adds. Ram Chandra Agarwal, CMD, V2 Retail, points out that brand loyalty is much higher in smaller cities compared to the metros. “Unlike consumers in the metros who change their brand preferences quite often, people in the tier II, III, and IV cities show greater brand loyalty and spread the word-of-mouth communication speedily. This helps in better brand retention and recall value among consumers.”

Mall developers have already sensed the potential of smaller towns and many of them are now chalking up plans to establish a presence there. The metros – especially Delhi-NCR and Mumbai – are suffering from an over-supply of malls, while high street locations have exorbitant rentals. In contrast, the opportunities in upcoming towns are greater and much more economical. Says Sunil Jha, CEO of Shristi Infrastructure Development: “The non-availability of suitable land in metros at an affordable price is a deterrent to mall development. Such land is easier to find and much less expensive in an upcoming city.”

The Challenges

The tier II, III, and IV cities offer a huge potential to retailers to spread their wings and boost their top line, but smaller markets pose their own challenges. The biggest one is that they are not supported by adequate infrastructure. Another is the lack of proper communication channels and logistics. Retailers also have to grapple with smaller and untrained labour pool which many times poses operational difficulties. It is also a struggle to handle customer expectations. Most people in these cities are shifting up from a low price point to a higher one and not all of them are willing to pay extra money for the shopping experience that modern retail offers.

Gaurav Rustagi, Head, Future Consumption, Coca-Cola India, says the single largest complexity is that retailers targeting markets beyond the metros confuse scale versus opportunity, which are two different things. “Growth is faster in smaller cities but the challenge lies in managing complexity. Most manufacturers leverage scale to cut costs and therefore one objective is to drive volume per city/outlet.”

To overcome these challenges, Agarwal of V2 Retail suggests that retailers should develop their own inhouse mechanisms such as transport facilities, logistics, and supply chain along with a partnership with the local authorities. “The manpower has to be trained by retailers sufficiently to understand the concept, products, market, and the nature of consumers. The young Indian is changing, and he desires and deserves better. The consumers in smaller cities look for the value of their money spent. The retailers should target to provide that value to them.”

Bansal of Liberty Shoes says constant education of customers will help overcome these issues to a large extent. Retailers operating in smaller towns need to conduct promotion activities to educate the customers about the benefits of high-quality products even though these may be priced a bit higher. There also has to be an absolute connect with belowthe- line (BTL) activities, as above-theline (ATL) do not benefit the retailer much in smaller towns. Adds Agarwal of V2 Retail: “Sending direct mail, getting customers’ feedback, oneto- one interaction at the local level, distributing door-to-door pamphlets, and mouth-to-mouth publicity – this is what works well in towns beyond the metros to drive footfall and make brands popular.”

Locations and Formats

Like anywhere else, selecting the right location for stores is the key to success in smaller towns too. There are various angles to be considered. The basic parameter of successful retailing is the aggregate demand generated by the catchment area, and most national retailers see the population base as critical in choosing which cities to open stores in. According to RS Rekhi, CEO of Aadhaar Retail of the Future Group, Big Bazaar needs at least 3 lakh footfalls a month to break even. However, for smaller towns with a small population base, it goes forsmaller stores to ensure viability.

Liberty Shoes typically targets towns with a population of 5 to 6 lakh or more. For the stores, the company prefers a large frontage near the market to ensure high traffic passes in front of it. Garg of Promart has a highstreet- only strategy: “In tier III, IV, and V towns, we will be locating ourselveson the high street because typically that is where people of these locations mostly go to shop. We have to serve the masses and we cannot remain aloof in a mall.”

High streets in smaller towns are doing quite well, says Sanjay Prabhu, Chief Managing Officer, Beyond Squarefeet Advisory. “People there have never been exposed to the kind of atmosphere that modern retail offers. We should not differentiate these consumers from others; instead, we should pamper them. Malls in small towns are also working with brands to raise awareness levels of customers,” he adds. For Agarwal of V2 Retail, the choice of location depends upon the type of city and customer footfalls in the area.

“For planning stores, we keep in mind the area’s per capita income, regional festivals, and the tastes and aspirations of the local consumers.”

The investment required varies from retailer to retailer depending on the format. Says Agarwal of V2 Retail: “The average investment required in small towns may vary from Rs 2 crore to Rs 5 crore for trading goods, with 30 percent ROI expected.” For Garg of Promart, each store needs an investment of about Rs 25-60 lakh, with 12-15 percent ROI expected.

According to industry players, some things that are critical to ensure success in smaller towns include choosing the right format, selling the right brands, and offering the right value proposition. Says Anirudh Dhoot, Director, Videocon Group: “For small towns, the key to success is small and medium format stores and products of middle-level brands.The value-for-money range of bigger brands is also likely to do well.” Jha of Shristi Infrastructure Development agrees: “The value brands and formats are most conducive to smaller towns. Customers there are looking for value valuefor- money products. Hypermarkets, supermarkets, and big-box formats are perfect winners in these towns.”

According to Agarwal of V2 Retail, providing value and variety in stores is the key to success in small towns. “The consumers should feel like a winner every time they visit the store. To them, even one rupee spent should look like getting them a value worth six twenty-five paise coins,” he says. Garg believes the ideal store size in small towns is 800-2,000 sq.ft., depending upon the city, with fair pricing being the best model.

Franchising has proved to be a successful strategy for many brands in setting shop in smaller towns. This helps them pass on the investment to willing partners even as they benefit from expanding their national footprint. This is the strategy followed by the jewellery brand Gili. Says its CEO Rahul Vira: “Jewellery is all about trust. So while expanding our business, we took the franchisee route because the local person from that particular town would easily be able to convince the customers about the product.” Agrees Garg of Promart: “People in small towns require a personal touch, and retailers have to create connectivity between the buyer and the store. So we have opted for the franchise model for these cities as the franchise-holder is directly connected to the local customers.”

What Can Go Wrong

Riding on the economic boom of the last decade, the smaller towns of India are rapidly turning into mini-metros. Many malls are being developed in these places and big brands are opening up stores to cater to the rising aspirations of small-town customers. However, not all retailers have experienced success beyond the metros – some have not been able to survive or were disappointed by the results. What goes wrong?

The two prominent reasons of failure of national retailers in smaller cities include the wrong choice of location for opening stores and not taking care to customise the product mix according to local preferences. Says Bansal of Liberty Shoes: “Location is an important reason of failure. Another is not understanding the consumer mindset. If a retailer tries to go with the same product as elsewhere, the consumer may not be ready for it. Retailers need to adjust their business model according to the local tastes and dynamics of the area. They have to study the market and the customer profile and offer the product mix accordingly.”

According to Dhoot of Videocon, a major reason for the failure of national-level retailers in small towns is the strong influence of traditional retailers on their customers in terms of service, reliability, and credibility. “Also, their cost of operations is much cheaper than national retailers. Smalltown businesses are mostly run by the owners themselves, so their decisiontaking ability about special offers and prices at their stores is much moreflexible and quicker than the national retailers,” he adds.

Jha of Shristi Infrastructure Development argues that high fixed overheads and even higher expectations from the market are the main reasons why national retailers fail beyond the metros. “The footfallto- spending ratio is low in smaller towns, as the people consider a mall as a family destination for entertainment and not necessarily as a place to shop,” he adds.

According to Prabhakar Kumar, Director, Nice Property Management, inappropriate pricing is the main cause of failure of modern retailers in smaller towns, followed by the opening of big-format stores whichoften prove unsustainable. “Retailers should first understand the local market and the purchasing power of the people. Many players plunge in straight away without first gaining any insights into consumer behaviour of a particular location,” he adds.

Dogra swears by the “know your customer” mantra for success. “More than half the battle is won in smaller towns with these three magic words. Once you have the pulse of the customer, the rest is bound to fall in place,” he says. Sharma of IOC recommends a long-term approach. “While retailers can make money in these cities, they require patience too. Whosoever is approaching tier III and IV cities must have long calls. What generally happens is that retailers lose out on patience and decide to wind up,” he says.

For the Long Haul

Retailers are betting big on smaller cities and have huge expansion plans beyond the metros. Liberty Shoes is planning to add 100 stores every year in the country, 80 percent of which would be located in tier II cities. Promart intends to open 100 stores in smaller cities of Punjab, Uttar Pradesh, Haryana, Karnataka, and Maharashtra. This year alone, it would invest Rs 110 crore for expansion and is targeting average sales of Rs 5,000 per sq.ft. from its stores.

Modern retailers have realised that rising incomes in smaller cities have increased the propensity of people to spend. There is a huge customer base getting richer to shell out money for anything from branded apparel, shoes and watches to consumer durables and mobile phones. A foray into the small towns is seen as an investment for the long term, because if theydo not expand beyond the metros, somebody else will step in, tap the pulse of the customers and take the market away. The cost of getting that market back will be very expensive later for players who shy away from moving beyond the metros today.


Posted July 16, 2012 by avinash2060 in Uncategorized

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