Interventions

Organised retail boom in small cities

National and international retailers are expanding businesses in tier II and III cities, and this has fueled the demand for organised shopping spaces. These cities offer favourable opportunities to both mall developers and retailers - not only in terms of lower land cost and rentals but also the rising consumerism, brand awareness and aspiration.
Organised retail boom in small cities

Currently, tier II and III cities in India account for a smaller portion of operational shopping malls in India. However, with the rising consumer aspiration and demand, potential of these cities, in terms of retail real estate, is increasing. Both national and international retailers are expanding businesses in these cities, and this has fueled the demand for organised shopping spaces. While major metros continue to launch bigger and international-standard malls, tier II and III cities are gradually graduating to the next level. There are notable exceptions- Lulu Mall in Kochi is, in fact, the largest mall in India as of today.

Interestingly, as the organised retail potential in the metros is going to touch saturation point, the next phase of retail real estate growth will happen in the smaller cities of India. Growth in tier III cities will be driven by cost advantages in terms of lower land prices, and therefore rentals.

Both developers and retailers are targeting the untapped tier II and III cities markets to gain first-mover advantage. Retail activity also is widening in these tertiary cities due to increase in consumer purchasing power, and there is tremendous growth potential for shopping malls.

Some notable quality mall developments that have come up in tier II and III cities over the last couple of years include Trillium in Amritsar, North Country Mall in Mohali, Elante in Chandigarh and MBD Neopolis Mall in Ludhiana.

These cities offer favourable opportunities to both mall developers and retailers – not only in terms of lower land cost and rentals but also the rising consumerism, brand awareness and aspiration. However, it is still in nascent stage for the organised retail developments in these cities. It will take a few years more to increase penetration and retail real estate to mature, as these tertiary regions still lag behind in many ways, and are not free of challenges. Perhaps the most serious hurdles, from a viability point of view, are the inherent political and social risks in many of these cities, and the list does not end here.

Operational and Logistical Challenges
Physical infrastructures such as roads and concomitant facilities like power and electricity supply are among the major challenges in tier II and III cities. Mall developers have to keep their operating cost low in order to attract retailers in these cities, but at the same time must provide mall management and facilities which are on par with the metros. There is also lack of quality support services in these cities, and these are essential for developing malls as well as running them optimally.

Infrastructure
Many of these cities lack good infrastructure in terms of roads, power and water supply, etc. This lack is, of course, a stumbling block for any kind of real estate development potential – but we have seen that while Indians may put up with bad roads and shortage in utilities back home, they expect malls to provide them with all the facilities.

Tenant Mix

Mall developers need to get the tenant mix right in any case, but all the more so in tier II and III cities. The trade and tenant mix should be formulated keeping in mind catchments, local culture and shopping inclinations of the consumers. Local flavour and brands need to be introduced along with national and international brands. Mall developers must especially ensure that non-performing categories are not introduced in these cities. They must achieve and constantly maintain a balance of attractive retail categories and high rent paying categories. The number of brands willing to go to tier II and tier III will be far lesser and hence the malls will be constrained by limited choice of brands

Providing an Experience
Even with e-commerce reaching practically each and every nook and corner of India, the role of brick-and-mortar stores and shopping malls remains significant. Physical retail formats provide consumers with a ‘real’ shopping experience and also entertainment and leisure activities. Especially in tier II and III cities, shopping malls must be positioned as ‘experiential’ shopping destinations. Many mall developers in smaller cities fail to achieve this vital positioning.

While launching a mall in a tier II or tier III cities, it is essential for the developer to have a well-planned concept and positioning of the mall. Before entering the market, he must ensure that there is no oversupply in the market. The quality of the mall needs to be in sync with the consumer requirements and demands. Once the mall is ready, it is essential to engage a mall management agency to ensure smooth functioning. The developer also needs to involve local media and marketing agencies with a well targeted marketing and publicity plan.

Mall developers should note that India is made of many geographies and culture- each city is a different culture and has a different consumption pattern.

Guidelines for Retailers
While entering any market, it is essential for retailers to understand and study local consumers’ shopping habits. Local culture must be integrated with global appeal – standardised formats will not necessarily work in these cities. Retailer must recognise that there may be limits to the purchasing power of the consumers in smaller cities, which makes capturing a large consumer base by offering the right mix of product and price all the more important. Consumption in tier II and tier III is significantly lower than the tier I and that has to be factored in. The markets are new, and the customer will take time to experiment and explore with fashion there could be a waiting time in some of the markets. Brands need to be patient. The acceptability of high fashion and provocative fashion will be moderate.

(Guest Author: Shubhranshu Pani, Regional Director – Retail Services, JLL India)

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