We have all gotten used to seeing the glitzy stores of leading brands like Zara, H&M, M&S and Vero Moda in malls across metros. These brands came into India eyeing the vast $50 billion market opportunity in apparel — a category which is growing at 12-13% per annum. Almost 65% of this opportunity is contributed by the unbranded/unorganised sector. But today, the branded market segment is growing at a faster rate of over 20% CAGR compared to the 8-10% growth in unbranded apparel. These international brands have had reasonable success in the metros, with sales being driven by the increasing spending power, high population density and availability of quality retail space. However, increasingly these brands are eyeing tier II and III cities to provide impetus to their growth. Brands are opening stores in cities like Patna, Nagpur, Vadodara, Meerut, Imphal, Bhubaneshwar, Jamshedpur, Jamnagar, Surat, etc. A leading indicator of this shift is large format stores: Lifestyle has opened stores in cities such as Dehradun, Jalandhar, Nashik, Surat; Shoppers Stop is present in 38 cities and Reliance Trends stores are spread across 160 cities, and so on.
Growth in these cities is being driven by a multitude of factors — latent consumer aspirations, increased brand and fashion consciousness (partly driven by the influence of social media and increasing media exposure), easier access (increasing percolation of malls in these towns) and a higher level of discretionary spending power. Most large global brands have recognised this opportunity and after stabilising operations in the metros, are focussing on non-metros for the next wave of growth. Large format brands are leveraging their learnings from metros to tap the consumer demand in these cities. While a good quality retail space is rare, lower rentals in these cities is an attractive incentive to set shop.However, there are concomitant challenges.
The ability to recruit and train local talent to match global standards is foremost. While this may be time consuming in the short run, attrition levels in these cities are likely to be much lower, thereby justifying the training investments. In addition, demand drivers are likely to be very different within the tier II/III towns. Fashion styles acceptable in a small town in South India may work well in a tier II/III city up north. Getting the merchandising right will be a key driver for success. We estimate the growth in tier II and III cities to be around of 25% for the next 7-10 years as against mid-teens in the metros. Over the next decade, we actually estimate an equal revenue split between metros and tier II/III cities. This in itself is a significant opportunity which no large retailer can afford to ignore.
The author is executive director & head — consumer, FIG and business services group, Avendus Capital