Fashion Retail Opportunities in Tier-2 and 3 Cities

Retail expansion is on a steady dedicated rise in Tier-2 and 3 cities, catering to around 68% of the country’s population. Grabbing this opportunity, well-established fashion retail brands are looking at aggressive expansion in this arena. Jaineel Aga, CEO of a children’s fashion retail company planetsuperheroes.com claims, “We are very aggressively looking at tier-2 and 3 cities. We already have a store in Goa and have new ones opening in cities like Surat, Vapi, Mangalore and Bhubaneswar. The rent to revenue ratio offered in tier-2 and 3 cities and the consistent demand for our merchandise makes this is an obvious choice to cater to the demand in these cities.”

The major reason why renowned fashion brands are chasing expansion in tier-2 and 3 cities is that they will have a greater chance of success and profit, due to factors like high demand, less competition and low rentals and expenditure.  Hence, brands are not wasting any more time and moving to tier2 and 3 cities to gain the early mover's advantage.

Growing Demand

Through rising disposable incomes and easy accessibility to the internet, youth in small towns are also looking to buy the latest designs from branded outlets. Anarock Retail’s report suggests that tier-2 cities alone received investments of more than $6,000 million between 2006 and 2017, while tier-3 cities received around $500 million; and tier-1 cities collectively saw $1,300 million investments in the same period.

Cashing in on similar opportunities, international retail brands like Raymond, Being Human, Woodland and even online majors like Amazon, Shopclues, etc. are aggressively penetrating the tier-2 and 3 markets by expanding their business. Other factors that contribute to the raising demands in these cities can be traced back to factors like international airport connectivity across cities such as Lucknow, Kochi, Bhubaneswar, Nagpur, to name a few.

Business Model

Since the locations of these cities are mostly unexplored, real estate prices tend to be 30-40% lower than metros or tier-1 cities, which is a definite pull for retail brands. The store format of a retail outlet in tier-2 or 3 cities will range from 600 to 900 Sq. Ft. The overall investment for a franchise fashion retail outlet would range from Rs30 Lac-50 lakhs. This would include land rentals, inventory worth Rs 15-20 lakhs, interiors and fixtures worth 12 lakhs, and various other business expenses including IT, licenses and registration, franchisee security fee etc.

The monthly operational cost of a fashion retail store would approximately be 2-2.5 lakhs, which includes up to Rs. 60,000-80,000 in rent, 4-5 staff with salaries of approximately Rs 50000-60000 in total, and other bills including electricity, sanitation and water. Taking into account these expenses, a store in a tier-2 or3 city can generate revenues of up to 15 lakhs per month. The profit margins would range between 30-40% based on product popularity.