The potential liberalisation of the FDI policy presents retailers with an unprecedented opportunity to expand into tier II and III cities in the country. The entry of large retailers into non-metro towns would catalyse more demand from consumers, thereby boosting demand for retail real estate development in the process. These cities with their untapped clusters have very high potential for retail demand that international brands can exploit. Indeed, this can prove to be a game-changer for the Indian retail sector by making it more competitive and organised in the long run.
The opening of stores by international retailers would have a spiralling effect on consumption in tier II cities by generating employment and income opportunities, attracting migrants, increasing demand for real estate spaces and fostering a cosmopolitan culture.
What is equally important is the fact that the advent of international retail giants will force-feed the support infrastructure that these cities need. This would take the form of warehousing, cold storage and logistics - factors which will open the field for national retailers as well. Apart from that, this infrastructure will boost demand for commercial and residential real estate in these cities, as well.
International retailers such as WalMart and Metro are already operating in the country, and the cash-and-carry segment is entrenched in smaller cities such as Raipur and Ludhiana. There is no doubt that with opening up of FDI, retailers will seek to expand their businesses there and gain the early-mover advantage. That said, we will see a steady line-up of retailers in these cities over the next couple of years, but new brands and players will certainly not make mass entries.
Boom likely in retail real estate
International hypermarket chains such as WalMart, Tesco and Carrefour - apart from national chains such as Big Bazaar and More - will absorb the highest amount of retail real estate in tier II and III cities. Their first push will be into cities with population bases of one million or more. Though the spread will happen in all regions, it will not be wholesale expansion but rather take place in clusters. The speed of the spread will be decided by how fast the required retail logistics and infrastructure can be put in.
In terms of retail real estate, the increased demand brought about by the opening up of new business avenues by increased FDI in Indian retail will lead to higher absorption of shopping malls and standalone large format stores in tier II and III cities. The impact on the demand for and therefore prices of retail real estate in these cities will be positive; demand will be higher for well-managed and quality retail spaces. The crux will remain the augmentation of infrastructure and development of more quality supply. Also, rise in real estate values will ultimately be proportional to consumer demand generated by these spaces. The impact on real estate prices would also depend on the scale and speed of investment in these cities.
Retail rental rates
The consumer demographics and socio-economic profile of some of the tier II and III cities is quite encouraging. Many of them are seeing an increasing proportion of young, income-generating population and growing per capita household incomes. In fact, today consumers are the driving force for change in shopping places all over the country. Therefore, the key to success in the retail industry today lies in influencing consumers’ choices of shopping destinations by providing a more market-focussed and unique shopping experience. International retailers responding to the FDI bait will have to customise their stores according to the specific local consumer tastes and needs in the smaller cities.
In some cities, such as Guwahati, growth in organised shopping spaces has taken place only over the last couple of years. Today, more and more retail brands are entering in these cities, with Big Bazaar, Pantaloon, Westside and Levi’s having paved the way. With the opening up of FDI, more international brands are going to make a beeline for such non-metros.
Finally, growth will happen in phases. All tier II and III cities are not at par in terms of demand and growth drivers, and there exists a great deal of variation in the purchasing power and affluence level of these markets. Nevertheless, we are now looking at a new age in Indian retail, where enormous opportunities in smaller towns will open up. Overall, we are going to see augmented investment in back-end retail infrastructure such as warehousing and logistics, leading to vastly improved operational efficiencies.
The study was prepared by Pankaj Renjhen, managing director (Retail Services) at Jones Lang LaSalle India, a leading property advisory firm