Apparel Online India Magazine March 1st Issue 2019 | Page 60

The rise of the Tier-2 and Tier-3 cities
T
he Sixth Central Pay Finance has classified cities on the basis of their
population. Before the Sixth Central Pay Commission, the classification of
cities in India was based on two parameters: Compensatory City Allowance
(CCA), further divided into categories A-1, A, B-1 and B-2; and HRA, further
divided into categories A-1, A, B-1, B-2 and C. Under the recommendation
of the Sixth Central Pay Commission, the CCA classification was abolished in
2008. The earlier HRA classification of cities was changed with A-1 becoming
X; A, B-1 and B-2 becoming Y; and C and unclassified cities becoming Z.
X, Y, and Z are more commonly known as Tier-1, Tier-2 and Tier-3 cities
respectively. The Reserve Bank of India classifies centres into six tiers based
on population. The tables below show the classification.
Tier-2 are usually regional hubs such as state capitals or industrialised centres
which include cities like Ahmedabad, Surat, Madurai, Nashik, Meerut and
Amritsar. On the other hand, Tier-3 comprises cities that are just beginning
to wake up and take form. This includes minor cities like Dehradun, Jammu,
Etawah, Kannur, etc.
The primary reasons why investments are focusing on smaller cities are
available properties and affordable prices. Moreover, special initiatives
taken by the respective Governments for providing smaller cities with
infrastructural facilities, building management and creation of SEZs has
played a vital role in promoting these small towns as cities of the future.
Along with metros, Tier-2 cities hold at least Rs. 800 billion as household
income today. Considering population and per capita income together, the
purchasing power of these cities is nearly Rs. 4 trillion, which is at par with
the four metros. Similarly, a report by EY points out that Rs. 26.4 trillion of
Classification of centres (Tier-wise)
Population classification Population (2001 Census)
Tier-1 1,00,000 and above
Tier-2 50,000 to 99,999
Tier-3 20,000 to 49,999
Tier-4 10,000 to 19,999
Tier-5 5,000 to 9,999
Tier-6 less than 5,000
household income in India is concentrated in Tier-2,3 markets as opposed
to Rs. 800 billion in India’s big eight metros. There is a vast demand and
supply gap in these new wave markets. While 23 of these cities represent
19 per cent of the household income, they have only 12 per cent of retail
market presence.
Also, the retail sector in Tier-2 and Tier-3 cities witnessed a much higher
investment of US $ 6,192 million between 2006 and 2017, against US $ 1,295
million that came to Tier-1 metro cities during the same period, according to
a JLL India report. The report which highlighted growth potential of smaller
cities identified top 20 cities such as Lucknow, Jaipur, Chandigarh, Kochi,
Patna, Bhubaneshwar, Indore and Nagpur among the leading cities that
will drive retail growth on the basis of total retail stock, upcoming supply,
retailer presence, retailer expansion plans and investments.
Historically, the largest set of Indian consumers have been those who belong
to the ‘next billion’ income segment, accounting for 45 per cent of the
population and 39 per cent of total spends. The middle class, which was the
promise for many companies since the mid-1990s, has been growing but
has never been the largest segment. But by 2025, this ‘affluent’ consumer
segment will become the largest, accounting for about 40 per cent of the
total consumption of India, up from about 26 per cent in 2015. This segment
resembles the global middle-class consumer and will herald the rise of the
middle class in its most literal sense for the first time.
60 Apparel Online India | MARCH 1-15, 2019 | www.apparelresources.com
109°F offers the latest trends to the shoppers in Tier-2, Tier-3 areas at really sharp prices
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 lie 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