Mumbai: Indian retail is buzzing not only in big cities and state capitals, such as Chandigarh, Lucknow and Jaipur, but also in small towns such as Visakhapatnam, Mysore, Agra, Mangalore Allahabad and Kanpur, that might contribute to nearly half of retailers’ income by the early part of the next decade.

If the bigger cities are getting 15-20 malls in the space of the next five years, then the small towns are expected to see around six to ten malls coming up in the same period.

“One reason that retailers are moving to smaller cities is that operating costs in these cities and towns are much lower than metros, giving them an extra 3-4% margin," says Gibson Vedamani, the chief executive officer of Retailers Association of India, the industry lobby.

With the information technology and related service “generating enough employment for the youth, this section of the population is becoming the primary target for retailers," Vedamani said.

Going places: A Big Bazaar store in Bangalore. Lower operating costs are what make tier II and tier III cities attractive to organized retailers. This can give chains an additional 3-4% margin.

The other driver for the retail rush to these small towns is the rapid growth of the residential segments, says Anuj Puri, chairman of Jones Lang Lasalle Meghraj, a real estate consultant firm. “It is the rising demand for housing in these cities that is fuelling growth—with housing comes the demand for commercial (office) and retail destinations."

Puri’s firm recently released a report on the retail industry in the country that named seven cities—Chandigarh, Ludhiana, Jaipur, Lucknow, Kochi, Surat and Vadodra—as high growth destinations for retail. It identified 16 others as emerging destinations—Amritsar, Indore, Jalandhar, Mangalore, Nashik, Bhubaneshwar, Agra, Visakhapatnam, Coimbatore, Goa, Mysore, Jamshedpur, Thiruvananthapuram, Allahabad and Kanpur.

According to the report, high level of exposure to international brands in cities such as Amritsar due to the influence of a large non-resident Indian population or because they are tourist centres, combined with a scarcity of branded stores and rising income levels, make them attractive to retailers and mall developers.

Kishore Biyani’s Future Group for instance, is planning to take nearly all its formats—lifestyle and budget stores—to cities such as Indore and Nashik. The group owns brands such as Big Bazaar, Pantaloons and Central. “There is a demand, though it is limited as of now. Only 20% of the population in these towns would actually shop in a mall. But we have to be present there to tap the market in the coming years," says Biyani. Both Biyani and Puri say that over the next 5-7 years, retailers will see up to 50% of their incomes coming from these towns.

There are 500 malls coming up all over India, according to estimates by Parklane Properties Pvt. Ltd, a Mumbai-based property advisory firm. Cities with as small a population as 2.5 million have 6-10 malls coming up, according to Parklane managing director Akshay Kumar. While larger tier III cities such as Chandigarh will get 15-18 malls, smaller towns such as Aurangabad and Nashik will get six to ten malls, while Chhattisgarh’s capital Raipur will get at least four.

Kshitij Investment Advisory Co., the mall development fund from the Future Group, is setting up 11 malls in tier II, or smaller, cities.

West Pioneer Properties is developing large malls in small cities, as is Prozone, a subsidiary of men’s clothing manufacturer, Provogue.

Westside, the department store chain of Trent Ltd, set up its first franchised stores to enter smaller markets such as Mysore and Raipur.

“Bigger markets are slightly more saturated than smaller markets," said R. Subramanian, managing director of Subhiksha Trading Services Ltd, which runs more than 670 convenience stores. At Subhiksha, 40% revenues and 40% space come from cities that are not state capitals. At Vishal Megamart, the discount store chain of Vishal Retail Ltd, 80% of revenues come from tier II and III cities—which is also where they are mostly based.

Prozone is planning to develop malls in cities such as Aurangabad, Surat, Rajkot, Mysore and Indore.

Mumbai’s K. Raheja Group, which owns brands such as Shoppers’ Stop, is planning to invest in 250 convenience stores, most of which will be in smaller cities, while Reliance Retail is planning around 1,600 stores in rural areas.

International mall developer Plaza Centres is another developer who is looking closely at tier II and III towns. “While there isn’t huge number of consumers in these towns, the conversion rate is much higher than those in cities," says Vedamani, noting that around 70-75% of visitors end up buying from retail outlets in smaller places, whereas, in large cities, it is around 50-55%.