By Sakshi Singh, Contributory Author
Sep 20, 2024 / 11 MIN READ
As urban India continues its rapid expansion, Tier 2 cities like Raipur, Indore, Bhopal, Surat, and Jabalpur are emerging as critical growth markets, particularly for national and global F&B brands. These cities, often considered secondary to metropolitan areas, are witnessing unprecedented economic growth, urbanisation, and shifts in consumer behaviour, making them ripe for investment. With rising disposable incomes and a growing appetite for branded experiences, these smaller cities are on the cusp of a retail revolution, offering fertile ground for brands looking to capitalise on these trends.
In the last decade, urbanisation has accelerated across India's Tier 2 and Tier 3 cities, leading to the rise of new economic hubs. The retail landscape in these regions has matured significantly, spurred by factors such as better infrastructure, improved connectivity, and the proliferation of e-commerce. Consumers in these cities are increasingly seeking the convenience and prestige associated with branded products and services, especially in the food and beverage sector. Recognizing this shift, several national and international F&B brands have started expanding their presence in these previously overlooked markets.
F&B Brands Capitalising on Evolving Consumer Preferences
The F&B sector, in particular, has been quick to leverage this evolving consumer landscape. The shift towards organised dining, driven by aspirations for a more urban, cosmopolitan lifestyle, is evident across these smaller cities. As disposable incomes rise and the middle class expands, consumers are demanding higher quality, branded food experiences. Brands that can deliver on this front are poised to reap significant rewards, thanks to lower operational costs, less market saturation, and the promise of high returns on investment in these regions.
However, despite the evident potential, the entry of major F&B players into Tier 2 cities has been relatively slow. Cities like Indore have already garnered attention, with brands such as Domino's, McDonald's, and KFC making inroads, but others, like Raipur and Jabalpur, remain underexplored. These cities, despite their significant economic and demographic growth, are still seen as secondary priorities for many large brands. As consumer demand continues to increase, this presents a significant opportunity for early movers who can establish themselves in these untapped markets.
Rising sense of premiumisation
The Covid-19 pandemic has further catalysed changes in consumer behaviour, especially in smaller cities. With international travel restrictions and lockdowns in place, many consumers began seeking new experiences locally, increasing demand for premium services, including organised dining. This post-pandemic retail boom is particularly visible in Tier 2 cities, where consumer aspirations have surged alongside improving infrastructure.
In addition to increased disposable income, consumers in these cities are more willing to spend on premium dining experiences as part of their desire to embrace an urban, modern lifestyle. For national F&B brands, this growing appetite for branded and organised dining options represents a golden opportunity. Brands that establish a presence early in these markets stand to benefit from first-mover advantages, such as brand loyalty and market share, as these cities continue to develop.
India's Expanding Food Services Market: The Role of Tier 2 Cities
India’s food services market is expected to see dramatic growth in the coming years. Currently valued at ₹550,000 crore, it is projected to grow at an annual rate of 10-12%, reaching ₹1,000,000 crore by 2030. A significant portion of this growth is expected to come from Tier 2 cities, where consumer spending on branded food services is increasing rapidly. Despite this, brands like Café Coffee Day and Starbucks have limited store networks in cities with populations between 5 to 10 lakh, underscoring the untapped potential.
This gap presents a unique opportunity for brands willing to invest in these markets. By focusing on Tier 2 cities, where real estate costs are lower and competition is less intense than in metropolitan areas, brands can achieve higher profitability. Café Coffee Day and Starbucks, for example, have established a presence in India's largest cities but could vastly increase their reach and revenues by expanding into smaller urban centres.
Vikesh Shah, founder of 99 Pancakes, highlights the promise of these markets, particularly for Quick Service Restaurant (QSR) chains. “Tier 2 cities are the most promising yet underestimated by the sector. Social media has played a huge role in this shift. Young Indians, even in smaller towns and villages, are now well-versed in global food trends. The operational costs in these cities are much lower than in metros, making them an ideal choice for expansion," Shah noted.
Challenges and Strategic Focus on Tier 2 Cities
While the potential for growth in Tier 2 cities is undeniable, there are challenges that must be addressed. Distribution and logistics, in particular, can be more complex in smaller cities, requiring a strategic approach to ensure timely and efficient supply chain operations. According to Nielsen India, purchasing power in Tier 2 cities has surged by 15% over the past three years, but the infrastructure to support this demand, particularly in terms of transport and logistics, is still developing.
D.P. Jhawar, Managing Director of Proventus Agrocom, emphasises the importance of collaboration with local entities to overcome these challenges. “It is crucial for brands to partner with local suppliers and distributors to streamline logistics and build a strong supply chain. Not only does this improve delivery times, but it also helps establish a local consumer base that is more likely to trust and adopt your products,” Jhawar explained.
The Affluent Consumer Base in Tier 2 Cities
Goldman Sachs Research, in its report "The Rise of Affluent India," projects that by 2027, the number of affluent consumers in India will rise from around 60 million to 100 million. Interestingly, much of this growth is expected to come from Tier 2 and Tier 3 cities, where a growing number of consumers are embracing luxury goods and services. This trend is particularly significant for F&B brands, which can cater to the increasing demand for premium dining experiences.
“Despite the clear opportunity, many brands remain fixated on Tier 1 cities, missing out on the lucrative potential of these emerging markets. However, with the consumer market expected to nearly double by 2030, driven by the growing middle class, the time is ripe for F&B brands to recalibrate their focus toward smaller cities. By doing so, they can tap into a rising affluent class eager to experience branded, high-quality food services that were once exclusive to metropolitan areas,” Ankit Sahni, Founder of Lucknow based cafe THF said, who is poised to open outlets in Varanasi, Agra and Jaipur soon.
Need for Action
The narrative of growth in India’s retail sector is no longer confined to its major metropolitan centres. Tier 2 cities, once overlooked by many brands, now represent some of the most exciting and lucrative opportunities for national and global F&B companies. The combination of rising disposable incomes, urbanisation, and shifting consumer preferences toward organised dining is transforming these cities into retail powerhouses.
For F&B brands, the path forward is clear: those who act swiftly to establish a presence in Tier 2 cities will enjoy the benefits of being early entrants in a rapidly growing market. By addressing logistical challenges, building local partnerships, and delivering high-quality, branded experiences, they can unlock new growth avenues and meet the rising demand for premium food services in these emerging urban centres. The next wave of India’s consumer boom is happening in its smaller cities. It's time for brands to take notice.
As urban India continues its rapid expansion, Tier 2 cities like Raipur, Indore, Bhopal, Surat, and Jabalpur are emerging as critical growth markets, particularly for national and global F&B brands. These cities, often considered secondary to metropolitan areas, are witnessing unprecedented economic growth, urbanisation, and shifts in consumer behaviour, making them ripe for investment. With rising disposable incomes and a growing appetite for branded experiences, these smaller cities are on the cusp of a retail revolution, offering fertile ground for brands looking to capitalise on these trends.
In the last decade, urbanisation has accelerated across India's Tier 2 and Tier 3 cities, leading to the rise of new economic hubs. The retail landscape in these regions has matured significantly, spurred by factors such as better infrastructure, improved connectivity, and the proliferation of e-commerce. Consumers in these cities are increasingly seeking the convenience and prestige associated with branded products and services, especially in the food and beverage sector. Recognizing this shift, several national and international F&B brands have started expanding their presence in these previously overlooked markets.
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