Expansion into Tier 2 and 3 cities

I believe Linked-in is actually a wonderful place to see how some people can keep on discussing things without even understanding the basic facts of where the market is headed, and how things are shaping up. In another discussion where some people were trying to put forward their ideas on how Indian retailers are making good of the plunging real estate prices in the country, an idea of looking at Tier 2 and 3 cities when there already is a substantial correction being seen in real estate rentals and commercial variables in the Tier 1 cities, seems to be quite at odds. The current time frame is somehow not specifically best to look at Tier 2 and 3 towns/ cities, when a tremendous amount of Retail real estate supply is already available, and is going to be made available in days to come in the Tier 1 cities.

With most retailers seeing a crunch in their sales in Q4 2008, and markets continuing to follow a similar pattern in Q1 2009 as well, many retailers are currently shutting down their unprofitable stores in prime locations (signed at unbelievably high prices in the past), and are relocating to high-street locations in less known markets in the city. These spaces being vacant, and developers feeling a cash pinch at the same time (owing to them being leveraged in the market, and giving answers to stakeholders becoming more difficult with each passing day), they are bound to offer better and more attractive commercial terms (apart from rents, that have already seen a dip of more than 10-15% in almost every location). These vacant locations can actually be seen as potential opportunities for the late retailers that are looking at entering the market right now (who could not get the right spaces because of high rents, or otherwise in the past). With this in mind, I feel that there is still a lot of scope in the Tier 1 cities of Delhi, Mumbai and Bangalore, before people starting to look at Tier 2 or 3 cities at this point in time.

The High street markets are also not too safe, with most retailers that had signed up in premier locations in the city are finding it difficult to keep up with the promised rentals due to falling sales, and are trying to renegotiate their store rents with their landlords. Also, most retailers are now seen to look forward to 'Revenue Share' arrangements, which helps them pass on a considerable amount of risk across to the landlord. Hence retailers may also be able to get good high street locations (where sale turnover is usually 10-15% higher than that in malls) in this market.

Though most Tier 2 and 3 cities have actually seen a lot of activity owing to reports that have in the past shown them on the bright side, underestimating the Supply side of the game (for Tier 1 cities) has actually landed the Tier 2 cities in trouble. And undergoing a thorough analysis for a Tier 2 city, to understand Affluence and Opulence levels, when there already is an available market in a Tier 1 city ready still to be exploited to a deeper level, would certainly not be a very good idea.

Hence retailers should now concentrate upon finding the right places where competitors are vacating,and should focus on contacting the right people who are there in the market, and know the market pulse, and are able to give them right directions on Where and When to sign a property. This is not a time to waste in discussions, rather making the right moves might actually help a retailer get the Right space at Right price, and within a Right market.

The link is available for public notice at http://www.linkedin.com/groupAnswers?viewQuestionAndAnswers=&gid=108564&discussionID=1932518&commentID=2210758&trk=NUS_DISC_Q_ncuc_mr&goback=.hom#commentID_2210758