Flocking to T2 and T3 markets: How brands pursuit the next growth
India's retail market is expected to reach USD 1.1 trillion by 2020. Competitions in T1 markets get even more fierce, costs increase and growth slows. The battle field is extending to T2 and T3 cities
Published - 09-July-2019
India's retail market is expected to reach USD 1.1 trillion by 2020 with an annual growth rate of 12%, according to IBEF Report 2018, driven by rapid income growth, growing urbanization, younger consumer groups, and rising middle class. With improved business environment and positive prospects, local brands and international brands enjoy the rapid development and to see the fierce competitions in Indian market. As labor and real estate costs increase and growth slows, the competitions become more intense on Tier-1 markets, the battle field is extending to Tier-2 and Tier-3 cities.
In recent years, increased income and accelerated development of mobile Internet made a huge difference to the lives in lower tier cities and rural places. Retail brands of household appliance, fashion and FMCG began their pursuit for growth in T2 and T3 cities and towns. According to IBEF report, traditional offline retail sees 10% annual growth rate, while online retail and assisted online retail sees 20%.
As retail growth in T1 cities slows down, T2 and T3 cities become engines of growth
The 8 T1 cities, including Mumbai, Chennai, Delhi, Kolkata, Hyderabad, Bangalore, Pune and Ahmedabad, top the class based on better standards of living, higher incomes, and well-established business circle. These are the prioritized destinations for brands, to open offline stores in an effort to win city customers with certain spending power. The Indian retail industry still expects new stores to open in T1 cities. However, since both brands and stores have reached a certain penetration in T1 cities, the space for growth is limited. At least one third of new stores will open in T2 or T3 cities and towns instead, bringing along the advanced business systems, job opportunities and retail environment to these emerging markets.
Brand managers noticed that consumers in lower tier cities and towns are showing increasing interests in fashion. It’s predicted that 50%-60% fashion brands have plan to expand sales in T2 and T3 cities, adding 35%-40% growth to overall fashion sales. Given business cost in smaller markets are about 30%-40% lower than that in T1 cities, fashion brands may get lucrative return with such a move.
Judging from online sales data, it is clear that e-commerce sales can be an important driving force for T2 and T3 market sales growth. RedSeer report shows e-commerce sales reached USD 53 billion in 2018. Non-metro customers constituted 42% of online shoppers in 2016, and this figure is expected to rise to 55% by 2020.
After a few years of aggressive user acquisition, Flipkart, Amazon and PayTm Mall have pretty high penetration rate in T1 cities internet users. They are aware that the next wave of growth comes from new mobile Internet users in lower tier cities. Amit Agarwal, SVP and country head, Amazon India, once revealed in an interview after festival sales in 2018 that, more than 82% of its new customers were from T2 cities or below. Amazon is taking ecommerce to India’s heartland with Project Udaan, now called Amazon Easy. It has established partnerships with StoreKing and Vakrangee, enabling customers in smaller markets to get access to the convenience of online shopping. It aims to help break down various transaction barriers for first-time online shoppers like trust, lack of Internet access, language and as well as digital payments, to embrace e-commerce. It has covered 14,000 stores in 21 states. Paytm Mall and Shopclues also adopted similar methods. Flipkart offers EMI on debit cards, allowing shoppers to buy those expensive products with monthly installment. To meet the needs of customers in small towns, Flipkart launched affordable made-for-India brand Billion.
In addition to e-commerce giants, e-retail start-ups also turn their eyes toward markets in smaller cities, and began to provide various localized service to gain market share. Club Factory, a cross-border e-commerce platform, seeks deep penetration into small cities and attracts young customers with fashionable products at a cheap price.
It is worth noting that international luxury brands achieved a 26% increase in total sales in 2018, contributed by young purchasers and rich families in T2 and T3 cities. (Data source: Assocham)
Consumer Behaviors in T2 and T3 Market
Offering desired products at an affordable price based on the needs of customers is the one and only way to enter into these emerging markets. Such customers are basically The Next Billion. It’s a vast customer base, four times the size in T1 cities and their markets are uncharted with large potential.
India's small towns have distinct languages, custom and cultures. One thing in common for these towns is growing demands for digital devices and emerging aspiration for fashion. However, customers in smaller markets have little access to brands, with limited amount of brands among many fields. Many products are not even available there. Consumption habit of customers there is not yet tied with large brands, given low and unattached brand awareness.
With ever popular access to Internet, lives in small towns has seen significant changes. Aided by available devices and mobile Internet, people are connected to the online world. Small towns customers tend to use vernacular languages, while Internet content, appears mostly in English and little in Hindi. Thanks to the rising of Internet companies, as well as development of lower tier users targeted mobile apps, a new world with more diversified online vernacular languages content opens to these next billion customers.
The widely used apps - short videos apps and live video apps, connect people in small towns with the outside world, introduce the concept of fashion and trends, and plant a seed for fashion enthusiasm. Internet content also help cultivate the concept of brand awareness among young people in small towns, who begin to pursue better brand experience. Users in T2 and T3 cities and towns have limited brand options in physical stores, the rise of e-commerce satisfy their increasing needs.
However, their spending power is limited by income. Fashion products priced between 300-1,000 rupees can be more easily accepted by people in smaller markets. So, low-priced products should be selected or customized by brands for these markets.
Targeting Lower Tier Markets, How to do local marketing?
Focus on aspiration of young people in small towns: E-commerce platform Myntra puts on a series of advertisements - Unforgettable, telling stories of consumers in small places. There is one girl growing up in a rural place. She lacks of confidence because of her plain-looking. Then she changes from outside to inside after having access to fashion clothes on Mymtra. The marketing campaign centers on young people in small towns, capturing their longings and aspiration for a fresh life. The resonance of targeted customers to the landmarks and life experience is reflected in comments on YouTube.
Focus on digital marketing channels: As new users on mobile Internet, their major source of information is mobile internet. Therefore, marketing campaigns on mobile media should be given more attention. Digital social and content platforms enable brands reach and communicate with customers at a larger scale. UC Browser, as a vernacular-content-based platform, is one of the touch points to these customers.
Localized Marketing Strategies. As the culture vary a lot among different destinations, down-to-earth marketing campaigns are much needed to engage local customers. For example, Consumers in small towns have their own languages, and they would search and select products in vernaculars instead of English. Therefore, vernacular marketing contents, or local influencers who speak their own languages, could help achieve a more engaging branding effect.
In addition to vernacular content-based marketing campaigns, product information and description should be also given in local languages. Now, the production of vernacular content on Internet is still at a preliminary stage, let alone vernacular-based brand information which are difficult to be found on Internet. Catering to the needs of users using Hindi and to lead the competition, Amazon launched its website in Hindi last year, which allows users to pull down the list and check on products information in Hindi. This move brought a significant increase in traffic. Having squeezed the last drops from the country's English speakers, e-commerce outfits in India now pay more attention to Indian language users who will provide the bulk of the boom that is yet to come.
With a focus on word-of-mouth, entertaining and interactive marketing contents receive more attention. In smaller markets, word-of-mouth, can produce more effect. Friends and relatives' reviews about and interactions with brand products can exert a tremendous influence among social circles of acquaintances. Advertisements should focus on building word-of-mouth on social networks and other acquaintance circles. Besides, we found that users in T2 and T3 cities spent more time on entertainment content, especially on videos. It may be a good idea to create next Billion through entertainment content.
UC Ads, is an innovative mobile marketing platform under Alibaba UC. Leveraging 130 million MAU on UC Browser and 200 million global MAU on 9 Apps, UC Ads connects advertisers with their right audience at the right time. For more information, please visit ucads.ucweb.com or contact via UC-Ads@service.alibaba.com
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