[Startup Bharat] How consumption in Tier II and III India is moving to ecommerce and online food delivery
Startups and brands are looking to woo consumers from Tier II and III India. But the question remains - are these consumers shopping online and how much of an impact do they actually have on these businesses?
Thursday August 22, 2019,
9 min Read
For over a year now, startups and larger brands have been looking at one market - Tier II and III India.
The reasons for this shift have been discussed enough. With Reliance Jio's low-cost data, the next 500 million consumers are coming online for the first time. And they are consuming a plethora of content in their languages.
While brands and startups are making a beeline towards Tier II and Tier III cities, the question that needs to be asked is are these consumers shopping online and how does it impact the startups and brands?
Content platforms are already fast growing in these regions. The Dailyhunt group boasts of having 252 million monthly total active users. The time spent per daily active user is 24 minutes per day, with over 19 billion pageviews and 2.4 billion video views per month.
But content and videos aren’t the only platforms attracting users from Tier-II and III cities. Analysts believe with the increase in active internet base, users will soon begin to look at different efficiency and conveniences online. These include banking, utility payments, hyperlocal services, and of course shopping.
Aman Kumar, Chief Business Officer of analytical firm Kalagato, says,
“Tier II and III cities are an important focus area for any startup. If you look at taxi, food, or ecommerce, the competitive dynamics of larger players like Swiggy, Zomato, etc., are more established in metros. Smaller cities offer growth opportunities, as they are untapped or under-serviced markets.”
Getting a taste of foodtech
Recently, Zomato, the Gurugram-based foodtech unicorn, announced that it has its delivery presence in over 500 cities across India. While companies are moving towards Bharat, how does it actually impact its revenue and scale?
Mohit Gupta, CEO - Food Delivery, Zomato, explains, “While the growth in the top 15 cities has tripled in the last 12 months, our emerging cities now contribute 40 percent to our business. We are excited to change the paradigm of food as we continue to let every bit of India get a taste of Zomato.”
There are evolving user preferences in these smaller cities. The younger generation and demography are open to experimentation and like the different options that the online world offers them.
“We follow a data-driven strategy to decide potential cities encompassing a measure of the overall population, student population, and restaurants. It is a delight to witness first-day tales from lesser-known cities like Giridih in Jharkhand (population of around 1.5 lakh) clocking over 1,000 orders/day, and all restaurants in Gudivada in Andhra Pradesh (population of over one lakh) running out of food by lunchtime on the very first day,” says Mohit.
Reports suggest that cities like Surat and Jaipur have household incomes that will cross Rs 80,000 crore, and in 26 other Tier II and III cities, it will touch Rs 40,000 crore by 2020. This, in turn, will lead to more people spending online.
Swiggy, too, is present in over 290 cities across India today. From Visakhapatnam and Indore, it has made inroads to many Tier II and III cities, and these areas are contributing strongly to its growth.
Srivats TS, Vice President - Marketing, Swiggy, says, “Both Vizag and Indore have a thriving local population that is keen to experience more convenience and reliability when it comes to food ordering and delivery. We witnessed thousands of app downloads in both the cities even before the launch, which is a testament to the value Swiggy will bring to food lovers in these cities.”
It is believed that online service transactors in Tier II and III cities are currently growing at 2.1X, hyperlocal users are growing at 3X, and online ecommerce users are growing at 3X. And this shift is even seen on-ground.
Sometimes the lack of infrastructure makes it easier for startups to gain the traction that they need.
Rapido, for example, has had significant growth in Tier II cities. The lack of infrastructure in transport opens up the opportunity for bike hailing startups to grow and expand.
It just isn’t Rapido. Uber launched its uberMOTO services in Mohali before expanding across. Even Ola Electric first started its services in Nagpur.
“It also gives an easy ground for startups to look and experiment. The governments are a little more open, and the growing aspirational levels of people also make it easy for startups to get their sample audience,” says another analyst.
What do I shop for?
What urban India was a few years back is what ‘Bharat’ is today. The demographies are shifting and changing. While they prefer platforms to be in their native language, they also want cash-on-delivery as their preferred payment method. They will eventually move to digital wallets.
The consumption expenditure in India is believed to touch $4 trillion by 2025 and is expected to have a 12 percent year-over-year expenditure growth. This mostly stems from increasing affluence, evolving consumer behaviour, and spending patterns.
Aman adds, “Consumers in Tier II and III cities have similar aspirations and needs as those in metros. They also want more dining options, quicker delivery from ecommerce companies, and better mobility solutions.”
The growth isn’t just in terms of online food delivery. Consumers are also looking closely at ecommerce in general. Shopclues, the Gurugram-based ecommerce startup, is focussed on Tier II and III cities. In an earlier conversation with YourStory, Radhika Ghai, Co-founder and Chief Business Officer, explained that there are specific categories that work in these areas.
“We consciously walked away from categories that weren’t core to us - like branded smartphones, branded fashion, and large appliances,” said Radhika. For Shopclues, these differentiators provided to be women’s ethnic fashion, kitchenware, artificial jewellery, and mobile and laptop accessories.
Launching products just for Tier II and III markets
It just isn’t Shopclues. Flipkart launched 2GUD last August as a platform for selling refurbished goods. 2GUD has served close to a million customers from over 3,000 towns, with about 60-65 percent of the orders coming from Tier II and III markets.
In a press statement, 2GUD Head Chanakya Gupta said, "We are changing our positioning from refurbished-only platform to a completely value-conscious platform. We realised that there is a large gap in the fashion and home products market, and it is a fragmented market. So, by the end of this month, we will start catering to affordable fashion, accessories, beauty, toys, stationery, home, and electronics such as audio and feature phones (new), among others.”
He believes the new business will also drive more customers, many of whom are coming online for the first time. Flipkart is committed to bringing the next 200 million customers online and it sees this development playing an important role in that.
Amazon isn’t far behind either. The ecommerce giant stated that close to 60-65 percent of their total orders come from Tier II and III cities. It just isn’t the shoppers - even retailers are getting savvier. Amazon says more than 80 percent of global sellers on its platform belong to Tier II and III cities, with many coming from manufacturing zones like Surat, Ludhiana, and Lucknow.
Amit Agarwal, SVP and Country Head, Amazon India, reportedly said, “The Great Indian Festival 2018 was our biggest celebration ever with more than half of online Indian shoppers choosing to buy on Amazon.in, making it the most visited and transacted marketplace in India. With 99.3 percent of pincodes placing at least one order, 89 percent of new customers came from smaller towns, and almost 70,000 small and medium businesses got at least one order.”
Giving new financing options
This growth in online shopping has also seen an increase in a growth in fintech opportunity like digital EMIs.
“Popular offline no-cost EMI players such as Bajaj Finserv and Capital First already have a huge customer base in smaller cities and towns. Onboarding these players has allowed online retailers access to this huge customer base, and allowed them to gain customer confidence in smaller cities,” says Ujjwal Chaudhry, Analyst at RedSeer Consulting.
This indicates an aspirational shift. Companies riding the digital EMI wave include Bajaj Finserv, Capital First, ZestMoney Snapmint, Kissht, and PayU Monedo. Apart from this, there are players like MoneyTap, which offers an app-based credit line, and PaySense, which focusses on short-term personal loans. Meanwhile, Amazon has introduced its own digital EMI scheme.
Vinod Murali, Managing Partner, Alteria Capital, believes that in a broader scheme of things, Tier II and III cities are where most startups are headed. But in order to succeed in these markets, they need to pace themselves.
“The cost of operations starts getting higher because the density at the moment is lower. So, what would work in these areas is following a hub-and-spoke model, where each hub caters to a particular micro-market,” he says.
Vinod also explains that when you start looking at the next 50 to 100 cities, people onground become extremely important. “You need feet-on-the street who understand the market and local audience to help you grow your business. This, in turn, will help lower your customer acquisition costs, and help you reach out to the right audiences,” he adds.
But what about startups that are in the similar space as a Zomato or Swiggy? Do they work as a good acquihire or acquisition opportunity? It depends on the product and the people, says Vinod.
He explains that while acquisitions and acquihires is a route startups can take to get an easier reach into a market, it would work on a case-to-case basis.
“It depends on the product they are building, the people and their understanding of the space, and also clientele they have. And most importantly, will they be a right fit?” says Vinod.
Thus, while there still is a long way to go, consumers from Tier II and III cities are, without a doubt, beginning to contribute significantly into larger revenue streams and making a dent.