How Tier II & III Cities are Unleashing Bharat's Retail Expansion Potential

For years now, India shining meant the rise and prosperity of urban India and brands catering to the growing demands of metropolitan and tier I cities. But post pandemic, there has been rapid growth in the tier II and tier III cities, making brands turn to Bharat. Today, the young individuals residing in tier II and tier III cities are as well-informed and in sync with the global scenario, issues and fashion as much as their urban counterparts. They may live in the ‘not-so-elite’ part of the country but their aspirations and purchasing power make them demand the same level of comfort, products, facilities and services that are being enjoyed by the urban dwellers since long. Businesses have recognized this growing demand and are now focussing to cater to the needs of these customers and tap into the riches of India’s interiors.

What brought about the change?

Pandemic: reviving the interiors

The pandemic forced many to return to their native places and introduced the concept of work from home (WFH). As it tremendously reduced the travel expenses, food and accommodation expenditure, it led to higher disposable incomes in the hands of young professionals.

Deeper penetration of e-commerce and social media

The internet has empowered tier II and tier III population like never before. With internet and social media influencing the fashion choices and sensibilities, and e-commerce and quick commerce giants ready to fulfil all fashion desires of India’s interiors, there is high demand for latest and trendy styles and a huge customer base that’s waiting to be tapped in. Tier-II to Tier-IV cities have surpassed their Tier-I counterparts in the realm of online shopping. Consumers from Tier-II cities and beyond have been found to spend an average of 2 hours and 25 minutes per week shopping online, spending approximately 16% of their income on e-commerce purchases, as per a 2023 study by Cyber Media Research (CMR).

“The next phase of growth for ecommerce will be driven by the new digital savvy consumers of tier II, III and IV cities in India. In contrast to urban dwellers, these individuals, constrained by limited access to physical stores and brand choices consider online shopping a gateway to fulfil their aspirations”, said Somick Goswami, Partner and Business Transformation Leader, PwC India in a Feb 2024 report.

As the festive season sets in, a recent report by Unicommerce says tier II and III cities are driving growth for two major e-commerce platforms. Integrated e-commerce enablement SAAS platform Unicommerce says both Flipkart and Meesho have seen significant growth in tier II and tier III cities, which are increasingly becoming major contributors to festive season sales. From affordable fashion to everyday household items, platforms like Flipkart and Meesho are catering to the growing aspirations of Tier II and III city consumers. These regions, often underserved by traditional retail, are experiencing a digital transformation, thanks to the expansion of internet access and e-commerce platforms. Unicommerce further notes that Tier II cities including Jaipur, Lucknow, Coimbatore, Surat and Patna and Tier III cities such as Kolar, Alwar, Kamrup, Sonipat and Gandhinagar are leading online markets by order volumes in festive season sales this year.

“I see a significant opportunity in the rise of social media and the expansion of retail culture in tier II and III cities, where the cultural and social gap between these cities and the metros has become remarkably narrow. With increasing disposable incomes and the millennial generation stepping into business roles, aspirations in these regions are now mirroring those of larger urban areas. This shift aligns well with our brand's growth strategy. We are actively expanding our footprint to tap into this growth in Tier 2 and 3 cities. Our goal is to solidify our presence in new regions and strengthen our network where we already have a foothold”, says Anil Sharma, COO Franchising and Retail, Ferns N Petals. The brand that offers a wide variety of gifts, including flowers, cakes, plants, and personalized items is currently focussing on expanding in cities like Allahabad, Kanchipuram and Vizag, which hold substantial growth potential.

What’s more, the tier II and III cities are showing trends that reflect a shift in the demand for brick and mortar set ups as well. Spike in demand for branded consumer durables, fashion apparel and accessories, cafés, gifting items, hospitality avenues has been observed in the last few years. “Tier II and III cities are experiencing a surge in new retail supply, with 25 million sq. ft of retail developments expected to come on stream in next five years on the back of growing consumer demand, availability of land and a lack of quality retail developments in these markets until a few years back”, says a recent report by JLL.

"Customers in tier II and tier III cities are more aspirational than even those in tier I. McDonald's as a brand has gained great traction there because of our value-for-money approach, which combines a great price point, experience, and high-quality product. In these cities, McCafé serves as more than just a coffee outlet; it's a lifestyle brand that resonates with aspirations for a global experience at local prices”, confirms Akshay Jatia, Executive Director of Westlife Foodworld. Though coffee is often seen as an urban trend, Akshay pointed out that tier II and tier III cities have been crucial to McCafé's growth. Surprisingly, these smaller cities are where McDonald's and McCafé have witnessed some of the most aspirational consumer behavior.

A September 2024 report by Axis Securities on India's hospitality industry, pegged the growth of the industry at 10.5 % over next three years. The report highlighted that the demands in the hospitality sector are not just limited to the metro or tier I cities but the tier II and tier III as well that are recording robust demand. In fact, the tier II and tier III cities are experiencing a 13% annual growth in demand while the supply growth to these regions is slower at 10%, says the report. “Enhanced road connectivity and expanded railways are fuelling growth from rural to urban areas, further boosting the demand.”

In FY24, non-metro cities accounted for 52% of new hotel developments, and of 30,000 rooms signed last year in 128 cities, about half were in Tier 3 locations, says another industry report. Hotel chains are capitalizing on this trend and spreading wings in tier 3, tier 4 locations.

“Surprisingly, our hotels in tier II and tier III are being received very well and we are ensuring we cater to this growing demand. For example, our hotel in Bareilly is doing very well. But since most of our franchisees in these locations are first time hoteliers, we need to ensure a thorough background check and due-diligence before signing the dotted line,” says Animesh Kumar, Director, Franchise Operations, Eurasia, Wyndham Hotels and Resorts.

With consumers and consumption patterns in tier II and tier III cities undergoing a rapid evolution and growth and many industries experiencing an upward swing and a positive momentum in these areas, it is safe to say that there is immense potential and opportunities that are waiting to be tapped in, in Bharat. As India shines, Bharat is getting ready to glitter.