Small towns shining

By Mohini Bhatnagar | 03 Nov 2004

Small towns and even villages are blinking ever more rapidly on the radars of big retailers.

Sales of products in nearly all categories in second rung cities like Indore, Kanpur, Ludhiana, Jalandhar, Nagpur, Coimbatore, Nashik among others are rising rapidly on the back of rising disposable incomes as well as due to the demonstration effect of big cities.

According to a recent study by AC Nielson-ORG Marg small cities have pockets of big spenders and that the level of ownership of certain high-priced consumer durables such as laser discs, home theatres and MP3 players is higher in small towns than in large metros.

There has also been a dramatic shift in lifestyles with aspirations being fuelled by cable television, which has exposed Indian audiences, particularly the middle class, to global lifestyles and standards of living. This, accompanied by an increase in disposable incomes, has led to increasing aspiration levels among consumers. All this is evident in the mushrooming of entertainment complexes, restaurants offering international cuisines, etc. In fact, with an increase in the disposable income and the propensity to spend, a similar surge is evident in semi-urban regions and villages also.

MNC retailers were the first to discover the spending power of small towns. Dominos was the first fast food chain that opened its outlets in smaller towns. To everyone's surprise, the chain recorded its second highest sales in India after the metros of Mumbai, Delhi, Chennai and Kolkata, in the industrial town of Kanpur, in UP. Pizza Hut and McDonald's are also known to have received a great response in Ludhiana and Amritsar in Punjab.

The astonishing consumer response to fast food outlets and branded goods from clothing, household goods or music cassettes and CDs is now driving more and more companies towards smaller towns. The biggest advantage in small towns, according to some retailers, is the low real estate costs in town like Nasik, Coimbatore, Kanpur, Lucknow, Salem and Vishakhapatnam, which enables them to achieve higher margins.

Pizza Hut, owned by the global Yums restaurant chain, is aggressively penetrating smaller towns and expects a 20 per cent growth from its outlets in these areas. Pizza Hut plans to have a 100 restaurants by the end of this year in places like Jalandhar, Meerut, Kochi, Mysore, Nashik, Coimbatore, etc.

The South-based Pizza Corner is taking the franchisee route to expansion, having already set-up 28 outlets. Of these, 23 are company-owned while five are franchised. Pizza Corner's next tier expansion will be into cities like Vijayawada and Visakhapatnam in Andhra Pradesh and Coimbatore and Salem in Tamil Nadu.

McDonald's fast food chain, which began its operations in New Delhi and Mumbai is now expanding to Punjab, Haryana, Uttaranchal and Himachal Pradesh. Vikram Bakshi, managing director, McDonald's India (North) says he plans to open outlets in Chandigarh, Shimla and Kasauli. He says there has been a very good response to McDonalds offerings in cities like Ludhiana and Jalandhar with huge potential in the smaller metros and cities.

It is not only the food retailers, which are moving up the countryside in droves. RPG Group company Music World Entertainment (MWEL), is planning to expand its network through a franchisee model and expects at least 25 per cent growth in revenue during 2004-05.

Music World's first outlet through the franchisee model was launched earlier this year in Vijaywada. The company plans to setup 100 new outlets in various parts of the country including Orissa, Jharkhand, Bihar, UP and Haryana.

In-house surveys undertaken by the company have found that there is a huge untapped potential for regional music segments and it plans to concentrate in that area. The company currently operates from 200 outlets in 31 cities, including 14 major showrooms, 35 destination stores and 152 retail shops.

South-based Amalgamated Bean Coffee Trading Company also plans to expand into three tier cities with its Café Coffee Day (CCD) brand of stores. CCD plans to have 200 stores across 60 cities by the end of 2004. At present the company has 170 outlets and is the biggest coffee chain in India.

CCD plans to reach cities like Kolhapur and Nagpur in the west, Hubli, Belguam and Vizag in the South, Allahabad, Varanasi, Ambala and Patiala, in the North, Jodhpur and Mount Abu in Rajasthan and Bhubuneshwar, Ranchi, Cuttack, Darjeeling, Guwahati and Jamshedupr in the East. CCD feels there is huge demand waiting to be explored in the smaller cities. Says a spokesperson of CCD, "With our supply chain and logistics in place across the country, its a lot easier and economical to expand now."

Similarly, garment retailer, Arvind Brands, is planning to tap small towns with a vengeance. The company is increasing the number of outlets of its brands such as Newport, Ruf 'n Tuf jeans and Excalibur shirts.

Its strategy is first to convert small town consumers to readymade wear. According to Darshan Mehta, MD, Arvind Brands, the company plans to address the bottom end of the pyramid and entice these consumers to shift from tailored to readymade garments.

Arvind Brands plans to push the retail presence of Newport jeans, the once top-selling mass-market denim brand priced at Rs399, from 1,200 outlets across 480 towns to 3,000 outlets covering 800 towns by the end of 2004.

For food retailers, gaining acceptance in smaller towns means catering to local tastes in a concerted manner. Pizza Hut, Pizza Corner and Dominos are 'refining' menus to an even greater extent in order to provide offerings that appeal to regional palates. Pizza Corner already makes 20 per cent of its revenues at some of its outlets from the sales of its version of pizzas. Now it plans to add more offerings to suite the palates in the smaller cities of South India.

However, analysts say the success of these companies will ultimately depend on their price strategy. According to Anoop Sequeira, CEO, Pizza Corner, "Since consumers in smaller towns are more price-sensitive, their price and portion preferences have to be kept in mind."

Says a company official in Café Coffee Day, the only challenge in small towns is pricing. A cup of coffee at Rs35 is more likely to be accepted in the metros than in the smaller towns, where decor, ambience and the experience play a more important role.

Going rural
Some retailers have evolved their strategy around villages. These include tobacco and hospitality company ITC and petroleum marketers BPCL and HPCL. These companies are setting up elaborate shopping plazas / hypermarkets in villages to tap rural shoppers.

The hypermarkets cater to local needs and stock up items ranging from groceries to seeds and even tractors. ITC recently had a soft launch of its first rural hypermarket, Choupal Sagar, spread over five acres at Sehore in Madhya Pradesh.

With investments of estimated between Rs3 and Rs4 crore per store, ITC plans to open around 50 such stores across rural Madhya Pradesh and Uttar Pradesh over the next one year. Choupal Sagar has been attracting 700-800 people on weekdays, going up to 1,000 people on weekends.

Petroleum PSU, BPCL has made an entry into rural retail with its Hariyali Kissan Bazaar store at Shahjehanpur in Uttar Pradesh. BPCL also plans to extend the Bazaar, which stocks a host of items ranging from pesticides to farm equipment, to include large grocery and other items of daily consumption.

However, considering that rural incomes are heavily dependent on agriculture, these marketers may find their fortunes fluctuating with the monsoon.

For the smaller towns, setting up of branded outlets like Dominos, Pizza Hut, McDonald's and Pizza Corner means large investments inflow in addition to newer employment opportunities. Besides, they are likely to fuel just the kind of boom the Indian economy needs.

Indeed these retailers may soon find that they have just found themselves sitting on a gold mine.