Companies look to tap demand in tier II & III cities

With the growth slowing down in tier I cities, consumer facing industries such as branded furniture, ceramic tiles, bath fittings and durables, which are directly impacted by prospects of the housing sector, are chalking out expansion plans in tier II towns which continue to grow at a steady pace.

At a time when sectors like automobiles are cutting down production due to fall in demand, H&R Johnson, Godrej Interio and Sony India are among those investing in enhancing their networks in tier II cities like Jalandhar, Hubli, Bharuch, Rourkela, Rajkot, Kolhapur, Bellary, Warangal, Sambalpur and suburbs of large metros, such as Virar and Dombivali near Mumbai and Faridabad near New Delhi, which are said to be bubbling with activity.

Godrej Interio, the home and office furniture retail business of Godrej & Boyce Manufacturing Co, for instance, has lined up a capital expenditure of around Rs 80 crore on expansion plans this year. H&R Johnson, which is the largest tile maker, has invested around Rs 250 crore in adding capacities, while Sony India is increasing its network of sales channels, including brand shops, national chain stores and distributors from around 10,000 to 12,200 in the current fiscal year.

“There is a downturn, but it is more so in the tier I cities. It’s not so much in the tier II cities. We realized it is time we must not sit back on our expansion plans,” said Anil Mathur, COO, Godrej Interio, which recently opened a franchisee store in Virar, where it believes construction activity is on in full swing.

Godrej Interio has opened 23 suburban stores in the last 6 months and will add approximately 20 more in the coming six to eight months. “Earlier, growth in tier I cities was at 21% and in tier II, it was 17%. Now, the indicator is showing tier I growth coming down to 12%, whereas tier II remains at 17-18%,” said Mathur.

H&R Johnson, which admits that economic slowdown has hurt demand for home purchases in tier I, is having a re-look at its business and marketing strategy to capitalize on the potential growth in tier II cities. The company is set to start marketing operations in 16 new locations to increase penetration in tier II & tier III centres. “The spending power in the customers’ hands in tier II & tier III geographies has also increased over the last 5-6 years which offers a great potential to tap for a large size of their wallet,” said R Kurup, chief marketing officer, H&R Johnson.

Wherever consumers buy new homes, they would also be expected to consider purchase of new consumer durables. “Tier II/III markets can be the future growth drivers for consumer durables given the growing disposable incomes, rising aspirations of people to own quality products and improved infrastructure support that the government is providing with respect to the development of these cities,” said Sunil Nayyar, senior general manager, sales, Sony India. The company gets a higher contribution of 56.50% from tier II and tier III cities compared to 40.80% from tier I cities and the company expects to maintain it at the same level in the near future as well.