Doing Business in India: The Rise of Tier-II and Tier-III Cities

There are few markets in the world that are as exciting and promising as India. But the Indian landscape can be equally challenging and riddled with idiosyncrasies. We’re exploring these unique aspects of India in our series on ‘Doing Business in India’ to help newer businesses understand this market. We’ve already discussed price competitiveness, a criterion that can have serious impact on newer businesses. In this article, we look at another important aspect of the Indian market, its burgeoning secondary markets in Tier II-III cities that will drive business growth in the coming years.

In the last decade, the contours of ‘urban India’ have changed and blotted outside its well known ‘metro’ cities. Businesses have opened their eyes to the fact that there is more to India than Delhi and Mumbai! India is urbanising rapidly, the percentage of urban migration has gained an unstoppable momentum- according to some estimates as much of 470 mn Indians will call cities their home by 2025. This has meant the birth of newer cities and towns.

India’s Tier II-IV towns are numbered at 600. A report (PDF 3.8MB) by Ernst & Young titled ‘India’s Growth Paradigm – How Markets Beyond Metros Have Transformed’ looks at 50 cities that make the cut as business centres. Apart from 8 metros (Delhi, Mumbai, Bangalore, Hyderabad, Chennai, Kolkata, Ahmedabad, Pune), it recognises 42 ‘new wave’ cities – of these, there are two new metros – Jaipur and Surat, followed by 10 high potential cities and 30 emerging markets.

India’s New Wave Cities
According to a report (PDF, 2.8MB) by Boston Consulting Group (BCG), population in tier II- IV will increase 4.5 times by 2025, while their spending on FMCG will be around 104bn USD by the same year.

This has meant the rise of tier II and tier III cities that so far were ignored, as markets that are driving growth in the country. India officially has 8 metro cities that have a population of over 1 million. In the last few years Tier II cities have burgeoned as important marketplaces - these include Nagpur, Indore, Chandigarh, Thane, and Vadodra among others. Two newer cities, Jaipur and Surat have joined the club of the metros with their household incomes predicted to scale to 800mn in a year or two.

As India grows economically, its rising purchasing power has naturally made its emerging cities promising, yet untapped markets. The EY report points out that 26.4 trillion of household income in India is concentrated in tier II-III markets as opposed to 800bn in India’s big 8 metros.

Having been off the radar so far, these cities offer ample opportunities outside of saturated metros. They provide various other advantages, chief among them are cheaper real estate and affordable labour that help businesses reduce costs. BCG also predicts that by 2025, tier II and III towns will account for 45% of India’s consumption and will add 30% of affluent households who will be a significant market for premium luxury products.

An important factor that has increased consumption in these markets is the growing penetration of the internet and easy accessibility to information with the growth of smart phone use. These factors are greatly influencing and altering purchasing habits in these cities.

Connectivity plays another major role in bringing these cities to the fray. Recognising the potential of these upcoming cities, the government’s Smart Cities Mission is looking at developing 100 smart cities at the cost of USD $15 billion – to improve transportation and other infrastructural facilities. The Indian government’s ambitious Regional Connectivity Scheme is attempting to create and renovate airports, making accessibility to smaller cities affordable at the cost of $35 per ticket. Recently, airports in north Indian cities Allahabad and Dehradun have also become operational.

Untapped Markets
There is a vast demand and supply gap in these new wave markets. While 23 of these cities represent 19% of the household income, they have only 12% of retail market presence.

Tier II- III cities are emerging as the most promising retail markets. Malls and retail spaces find them profitable due to the low real estate rates, while they have a large available market. In some tier II cities such as Lucknow, Kanpur, Indore, Bhopal, Nagpur, populations have crossed 2 million, thus offering tremendous opportunities to grow in volumes. While in some other cities such as Vishkapatnam, Chandigarh and Vadodra, the per captia income of over .02mn is among the highest in the country.

New businesses venturing into the Indian market have begun recognising these new wave cities of India and are actively charting appropriate strategies and communication tools to cater to them.

An Important Luxury Market
Retail brands and luxury names entering India have Tier II cities as an important aspect of their India plan. Three years ago French luxury brand Lacoste realised that it could no longer ignore Tier II cities where it got a lot of traction from. It decided to expand in these cities via the franchise route. French Lifestyle brand Longchamp that ventured into India last year is also looking at Tier II cities as promising markets.

Euromonitor International’s March 2016 report—‘Beyond the Metros: India’s Growth Frontiers’— found that a large number of consumers from Tier II cities visit metros for luxury purchases.

Luxury brands such as Louis Vuitton, Gucci, Christian Dior, Louis Vuitton, Canali and Judith Leiber among others are also acknowledging these secondary markets as hubs for newer clientele due to their growing purchasing power.

Selling Online to Smaller Cities
Owing to mounting internet penetration in Tier II and Tier III cities, e-tailers are also crafting strategies to make headway into smaller cities. Two years ago Amercian Ecommerce giant, Amazon, tied up with local store owners and entrepreneurs to open Amazon outlets in tier-IV and V towns. These outlets help customers place orders and act as pick-up points for all orders.

Last year, Manish Tiwary, VP, category management at Amazon India, conceded that 70% of Amazon’s new customers came from Tier II and tier III cities. Earlier this year, the company claimed that it saw a 235% annual growth in tier II and tier III cities for a four day promotion it ran.

Secondary Cities Drive Automakers
Auto companies are also concentrating their efforts on making inroads into Tier II–IV markets. Opening service centres and distribution networks in smaller cities, bringing in affordable smaller cars are part of any auto company’s strategy today.

They are diversifying their products and offering cars that are suitable for these cities. French automaker, Renault, has completed five years in India and boasts of 300 dealerships across India. Key to the company’s expansion strategy is its focus on Tier II and Tier III cities where it has a majority of its distribution outlets. The company was extremely successful in marketing its small car Kwid to smaller cities and is targeting them for the upcoming launch of Renault Captur.

Last month when Harley Davidson opened its first concept store in India, it decided on Kolhapur, a tier III city in Maharashtra. The company is looking to expand to Tier II and Tier III cities and offer customers accessibility for sales and service requirements.

Various factors have altered the face of the Indian economic landscape. Cities that were dormant once, are today at the centre of business strategies for some of the world’s biggest companies entering India. If you are looking to foray into this exciting market, considering India’s newer markets should be an integral part of your expansion strategy.

If you are looking to foray into the Indian market or would like to know more about it, do get in touch with us. Our team of international consultants with years of experience in facilitating foreign companies do business in India, are here to help.

Elizabeth Raj | Blogger

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