The paradigm of emerging markets: Retail evolution in the Indian hinterland

by Tanya Krishna

28-March-2019  |  17 mins read

Around 35-40 per cent of growth at Madame comes from Tier-2 and beyond areas

India, in the recent past, has been witnessing a huge presence of fashion national and international brands, in the metros. At the same time, the past few years have seen the fashion brands experimenting with newer markets for better reach as well as revenue generation.

Growing incomes, increasing awareness and high aspirations in Tier-1 and 2 cities are encouraging several retailers to make a beeline in these areas. The international brands entered India eyeing the vast US $ 50 billion market opportunity in apparel–a category which is growing at 12-13 per cent per annum, much of these being controlled by unorganised retailers in Tier-2 and beyond markets. Now cashing in on similar opportunities, fashion biggies like Raymond, Being Human, Woodland and even online majors like Amazon, Shopclues, etc. are aggressively penetrating the Tier-2, Tier-3 markets by expanding their business.

Tapping the Tier-2 and Tier-3 markets

According to Census 2011, about 68.84 per cent of the country’s population lives in the rural areas, while the rest 31.16 per cent resides in towns and urban agglomerations, which certainly explains the kind of impact it can have on the Indian economy, once it gathers serious momentum. Lalit Agarwal, CMD, V-Mart, asserts, “There is a huge potential in Tier-2 and beyond areas for organised retailers. There is a high density of population in small towns, and because of the penetration of media, rising awareness and availability of information, people are getting more aspirational in their fashion choices. The rapid growth of e-commerce and display of same kind of content across the country is helping customers in smaller towns to keep pace in fashion with their counterparts in metropolitan cities. But since their pocket size is smaller, they fail to meet their aspirations. We saw huge opportunity in these areas, especially for retailers, who have value-for-money proposition, which can suit the pocket size and also the aspirational needs of consumers in these areas and their local life preferences.”

Monte Carlo has an expansive presence even in tier-IV towns of the country

Since these locations are mostly unexplored, real estate costs in these markets are 30-40 per cent lower than those in metros and Tier-1 cities, which are a definite pull for the retail brands. Not only mass brands like V-Mart, fashion forward retail labels like Being Human, Woodland, 109°F, Madame, etc. too are penetrating this market enormously. Bipan Jain, Managing Director, Madame, points out, “People in small towns are now changing from a simpler/conservative lifestyle to a bit flaunty one, which makes them a strong customer base for a brand like ours. We see immense potential in these markets and around 35-40 per cent of growth is coming from Tier-2 and beyond areas.” While industry experts opine that these areas have turned into a retail magnet, they are of the view that consumers may initially aspire to buy these brands but customer retention might be a challenge for retailers, who do not cater to price points and suitable merchandise for these markets. So, even as low real estate cost is an attraction, product prices and merchandise will play a large role for success in these locations. Rishabh Oswal, Executive Director, Monte Carlo Fashions Ltd, maintains, “For Monte Carlo, store presence in smaller markets is steadily improving owing to rising disposable incomes, increased penetration of branded wear and greater awareness of trending fashions among consumers. We are already in tier-II and tier-III regions and are further penetrating into tier-IV towns as well. There are number of major players, but there are also countless niche stores and private companies that cater to specific demographics. A clothing company possessing a broad line-up of proucts has a competitive advantage over its peers. The organized apparel brands have shifted their focus to improve quality while reducing costs simultaneously.”

Equal participation from e-commerce

Pegged at US $ 100 billion and growing at a CAGR of 8-10 per cent, the fashion and lifestyle industry in India is gradually embracing online as the channel of the future. This move is evident from a projected penetration of 15-20 per cent over the next five years, from the current 4 per cent. On the basis of research, online players too are entering the markets of Tier-2 and beyond areas expanding their horizon and business prospects by the day. Ritika Taneja, Head- Category Management, Shopclues, maintains, “We see a huge potential in these markets. Smaller cities have ready consumers hungry for fast-fashion products but they do not have options to choose from or a convenient price point. Growing internet users in Tier-2, Tier-3 have facilitated the entry of e-commerce in these regions. Also, our homegrown labels, priced competitively for these consumers, give us an edge over other online portals entering these markets. We understand the needs of Bharat (Tier-2, 3, 4 regions and beyond), where price points and value play a pivotal role in shopping experience.”

Meanwhile, in order to tap the huge market in Tier-2 and beyond the country, the e-commerce major Amazon is working through its pilot project ‘Udaan’, which integrates skill development and self-employment with assisted shopping. And Amazon Pickup is enabling customers to benefit from the emerging digital commerce opportunity. Since its launch, Udaan has expanded to 21 states and union territories, having over 12,000 stores covering 1,700 pin codes across India with partners like Storeking, Vakrangee and small entrepreneurs like Linq, India buys, apart from hundreds of mom-and-pop stores, which have signed up directly with Amazon.

For Amazon, non-metros continue to be the driver of new user growth and development, with share of new customers in non-metros moving past 75 per cent as on 2017.

Customer Acquisition is the key

109°F offers fast-fashion to Tier-2 & Tier-3 towns of India
109°F offers fast-fashion to Tier-2 & Tier-3 towns of India

A report published by JLL suggests that the retail sector in Tier-2,3 cities has drawn an investment of US $ 6,192 million between 2006 and 2017, against US $ 1,295 million that was drawn by Tier-1 and metro cities during the same period. While the industry has started taking an increased interest in these areas, an effective customer acquisition strategy is the key moving forward. Radhesh Kagzi, President, 109°F agrees, “Acquiring and retaining a customer is a prerequisite for success in any market whatsoever. We are making the latest trends available to the shoppers in these areas at really sharp prices. We understand that the spending power is vis-à-vis lesser than the metros, but the desire to own fashion is probably higher. Even as the brand works under a standard parameter for all its markets, we do customise few options, specifically for the Tier-2 and Tier-3 stores. The average ticket size for us in these areas is about 12 per cent lower than the metros.”

Not only effective price points, customers in Tier-2 and beyond areas also look for better shopping experience and amenities at retail outlets. “We try to place ourselves in convenient location and give them an experience, which is modern, equipped with all the amenities and assistance as required. V-Mart offers a large variety of quality products and good fashion, which is aspirational to them at attractive and affordable prices. We also customise a lot of products in accordance with the local taste and need of the market. All these together help us to retain our consumers. Besides, our loyal customers are great propagators of our brand,” informs Lalit. For the company, the average ticket size in smaller towns is between Rs. 550 – Rs. 720.

Shopping Pattern and Other Challenges

Even as the country has found a whole new market for retail revolution to take place, retailers continue to face challenges along the way. There sure is an increasing understanding that fashion is no longer bound by geography and that styles are short-lived and in order to have a good return on investment, retailers need to retain their customers in multiple markets. “There are many challenges in establishing any kind of business, especially in Tier-2,3 cities right from finding property to finding talent, electricity connection, internet bandwidth, efficient logistics support or understanding consumption pattern, preferences of consumers, etc. There also lies challenges like adherence to local law and order, local compliance issues, certification, license issue, among others. V-Mart is past all of them and is catering to these areas smoothly,” prides Lalit. The value retail store chain boasts of having more than 1,200 million loyal customers.

Besides overcoming these challenges, organised retail brands are also working on playing the discount game more smartly. Instead of pitching them as cheap alternatives to brands in urban areas, they are organising sales and seasonal discounts and are being flexible with the pricing strategies. While few consider that the rural consumers do not react effectively to the discount season, others opine that these work almost the same way across geographies. For an online player like Shopclues, these areas contribute 75 per cent of business during EOSS. Meanwhile, retailers unanimously agreed that the sweet spot for consumers from small towns lies between Rs. 300-Rs. 1,000.

Puma Sports
Puma Sports believes in offering similar brand experience at all its stores pan India

Talking about the customer shopping pattern, Bipan of Madame, points out, “Consumers in the Tier-2 and 3 markets are conservative and less excited about experimenting with newer silhouettes. They prefer more traditional/basicwear. However, price isn’t a huge criteria now. Overall sales forecast is the predominant challenge as the customer base is really small. But with the help of e-commerce, acquiring new customers has become easier.” In terms of store size, for Madame, it ranges from 60-100 sq. mt., and around 400-500 sq. ft. for 109°F and for a multi-brand store like V-Mart, the average store size ranges between 6,500-10,000 sq.ft. Meanwhile, Atul Bajaj, Executive Director, Product, Merchandising and Supply Chain, Puma Sports India, asserts, “Tier-II and III are actually very important areas and the best part today is that the consumer there is as much aware as their counterparts in metros and they want the same brand experience which a brand offers in metros. If a brand offers them that experience, comsumers in semi-urban and rural areas are willing to buy your product. A lot of times for Puma, tier-II, IIII towns are more profitable than the tier-I because their rents are more rationalised as well.”

Moving Ahead

With the recent announcement of policies and changes on the personal income tax front in the interim Union Budget 2019, it is sure to lead the additional disposable income and rural growth. Also, there is approximately Rs. 1 lakh crore worth of disposable income in the consumers’ hands, which will ultimately help consumption. As Lalit affirms, “Once again the Government has validated the fact that the youth and income earners, who earn below Rs. 5 lakh per annum, are a big chunk of the population size (almost 95 per cent) in India. The reforms introduced in the interim budget will add to the lifestyle betterment and ultimately result in a consumption spree, which will definitely benefit the retail brands.”

There is an increasing understanding that the retail sector is bound to grow in the times to come. Ritika apprises, “While expanding the brand, footprint is expected to take the label to a wider audience; big retail players (like, V-mart, Vishal Mega Mart, Pantaloons, etc.) have therefore started focusing and investing heavily in Tier-2 and Tier-3 towns. According to most of the fashion journals, the fashion retail industry in these areas is expected to increase business by triple times by 2025. Currently, Shopclues covers 29 states with operations in 30,000-plus pin codes and plans to add 5,000-plus pin codes, which will mostly be in the rural areas.”

Honest price shop concept like that of V-Mart, which primarily follows a cluster-based model approach to expand, has already covered 162 towns in 16 states and is operating more than 201 stores, largely in the tier-2 and beyond markets. The retail store chain has added close to 31 stores last year and will continue to open around the same in the coming years as well. According to Lalit, the potential consumption and aspiration in these areas will grow by more than 15-20 per cent in the coming years. For Puma Sports, tier-II and III areas play a huge role and it garners “about 50 percent of the brand’s overall business and this is expanding at a faster rate in comparison to tier-I cities”. Puma prides in offering a unique proposition between sports and style and that’s something that has been working greatly for the brand in all parts of the country. Overall the consumption will continue to grow and with the convenience, the small city dwellers will get the availability of their favorite fashion brands in close proximity. There sure is a huge scope for the organized retail to expand in every corner of the country.

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