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Retail Space Demand Growing In Tier 2 And 3 Cities

Monday, January 12, 2015
By Shubhranshu Pani

Shubhranshu Pani is Regional Director - Retail Services, JLL India

Because the organized retail potential in metros is rapidly reaching a saturation point, the next phase of retail real estate growth will happen in  smaller cities

Currently, tier 2 and 3 cities account for a smaller proportion of operational shopping malls in India. However, with rising consumer aspirations and demand, the 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 is fuelling demand for organized shopping spaces. While the major metro cities are continuing to launch bigger, international-standard malls, tier 2 and 3 cities are currently graduating to next level by initiation of shopping mall developments. There are notable exceptions to this - Lulu Mall in Kochi is, in fact, the largest mall in India as of today.   

The more interesting part of this story is that because the organized retail potential metros is rapidly reaching saturation point, the next phase of retail real estate growth will happen in these smaller cities of India. In particular, growth in tier 3 cities will be driven by cost advantages in terms of lower land prices and therefore rentals. Added to this the benefit of ecommerce where the smaller towns are exposed to latest fashion will translate to better acceptability of the newer shopping center brands / fashion brands.

Both developers and retailers are targeting the untapped tier 2 and 3 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 the notable quality mall developments that have come up in tier 2 and 3 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 early days for the organized retail developments in these cities. It will take a few years more for penetration to increase 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, but it does not end there.
 
Operational And Logistical Challenges
Physical infrastructure such as roads and concomitant facilities like power and electricity supply are among the major challenges in Tier 2 and 3 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 tier 2 and tier 3 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, 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 2 and 3 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 2 and tier 3 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 2 and 3 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 2 or tier 3 city, 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 please note , that India is many geographies and culture- each city is a different culture and a different consumption pattern. Please ensure the brands have fashion acceptable to the local culture.
 
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 2 and tier 3 is significantly lower than the tier 1 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.

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