First movers in the second tier

Yuxi, Weifan and Nanchang are three of the smaller cities of China. Each has a population of less than 2 million, as against a Shanghai or a Beijing, which top 20 million and 15 million, respectively. Yet, these small cities are amongst China’s fastest growing.

They’re also on the radar of some of the world’s biggest corporations. For instance, in December 2005, Wal-Mart chose to open its first store in the middle kingdom in Yuxi, a city in Southwest China’s Yunan province, adjacent to Tibet and Burma. Weifan, a port city in East China that’s home to Chinese kite-making, and Nanchang, which was recently connected to neighbouring Shanghai via a high-speed rail network, have also attracted Wal-Mart and UK retailer Tesco.

It’s not just in China that global retailers are flagging off operations with forays into tier II and tier III cities instead of focussing on the big metros. In Russia, French retail giant Carrefour has announced its plan to enter the country via tier II cities by early 2008. Back home, a clutch of companies— both foreign and Indian, and not just retailers—is using smalltown India as a launch pad for their products and services. These include players in financial services, broadcasting, and retail to name just three sectors.

Vishal Retail has over 50 stores in 18 states under the brand Vishal Retail Mega Mart. The cities where Vishal Retail has a presence include tier II and tier III outposts like Surat, Raipur and Siliguri. Then there’s Prozone Enterprises, a retail infrastructure services provider that’s a subsidiary of ready-made garments maker Provogue. Prozone has executed projects worth Rs 1,100 crore in tier II and tier III cities.

Beyond retail, Bajaj Allianz Life Insurance Co., the largest life insurer in the private sector, kicked off its India operations with a sharp focus on rural and semi-urban India with a popular unit-linked ‘unit gain’ product. That may be the reason for Bajaj Allianz being only the second player in the private sector to come out of the red. There’s also Mahindra & Mahindra Financial Services, which began life by providing finance to buyers of tractors. That essentially meant the company had to have a rural and semi-urban focus. Today, M&M Financial has gone on to offer the entire gamut of financial services, right from twowheeler financing to investment advisory.

It’s still focussed only on the non-metros. Consider finally dishTV India, an early bird in the directto-home (DTH) entertainment market, that leveraged its first-mover advantage by offering services in far-flung areas, essentially regions that haven’t been touched by the onslaught of cable television. If companies prefer to kick off operations in the smaller cities, much of that strategy is guided by the saturation levels that prevail in bigger cities.

In the metros, demand in many product categories has peaked out. Coupled with abnormally high set-up costs, courtesy high real estate and wage bills, flagging off operations in a big city can prove to be risky gambit, with the break-even milestone at the end of a very long road. Starting up in a non-metro, on the other hand, provides marketers with virgin, hitherto untapped audiences, whose purchasing power and aspirations are rapidly rising. At the same time, costs can also be kept under check.

“Smaller cities and towns in India have their own strengths. For instance, a lot of smaller towns in Maharashtra are more developed than many bigger cities in middle India,” says Nikhil Chaturvedi, Managing Director, Prozone Enterprises. “There are about 50 cities on our radar that have a population of over a million,” he adds. At first blush, Chaturvedi’s game plan appears surprising, considering he owns Provogue, an upmarket brand in the apparel space.

But what seduced him is the fastchanging lifestyle of people in smaller cities, and the superior standards of infrastructure in cities like Surat and Ludhiana. In the next two years, Prozone-developed large-size malls are expected to come up in Aurangabad, Indore, Jaipur and Nagpur.

If Prozone is developing malls in the hinterlands, Vishal Retail is busy spreading its reach upcountry. Indeed, Ram Chandra Agarwal, Chairman, Vishal Retail, spotted the big opportunity in retail in small cities way back in 2001. “Retail is all about experience. In smaller cities, pushing a trolley or a cart in an air-conditioned atmosphere gives consumers a big high.” Agarwal reveals many people were surprised when he decided to set up a store in Haldwani in Uttaranchal—many around him hadn’t even heard of the town.

But Agarwal’s decision to launch in Haldwani was backed by hard-nosed research. And the decision has paid off well. “Volumes grew manifold within days of launch,” says Agarwal. Investors, too, are impressed by Agarwal’s strategy—Vishal Retail, which showed profits of Rs 25 crore on sales of Rs 600 crore for the year ended March 2007, recently made an initial public offering (IPO). The issue was oversubscribed by some 80 times, and investors have earned a 150 per cent return just two months after listing.

Along with the more obvious triggers like increasing disposable incomes and rising aspirations in small-town India, there are also a few more subtle factors influencing marketers to focus on nonmetros. Stability of consumer behaviour, for example, matters a lot, and can make a world of a difference.

Six years back Bajaj Allianz, which was up against the biggies like ICICI and HDFC in the underpenetrated life insurance business, decided to move to smaller cities precisely for this reason. “They (customers in tier II and tier III cities) trust you completely,” says Sam Ghosh, CEO, Bajaj Allianz, who makes frequent visits to the small cities and towns where most of Bajaj Allianz’s branches are located. “Churning is an unknown phenomenon in these regions, unlike in the metros where investors rush to book profits only to return the next day through a new scheme,” says an insurance agent.

Bajaj Allianz’s non-metro strategy is indeed proving to be its competitive advantage. It is one of just two life insurers in the private sector out of a total of 15 players that is profitable today (the other is SBI Life). “Our distribution network is by far the deepest and our set-up costs are by far the lowest in the industry,” adds Ghosh, who will now oversee Allianz’s Middle-East operations. However, eyeing the small cities isn’t necessarily a low-cost strategy across sectors. It can be capitalintensive too, as in the case of dishTV, the DTH venture from Subhash Chandra’s Essel group.

dishTV today incurs a loss of Rs 1,700-1,800 on every new subscriber, but that may be a small price to pay in the long run. The company has a head-start, with rivals like Tata Sky joining the fray only recently, and the likes of Reliance ADAG, Bharti and Sun TV still to launch operations. That may explain why dishTV is willing to take the hit—it wants to build a huge subscriber base before the competition gets its act together. Today, the company boasts more than 2 million subscribers, with 35,000 dealers covering 72 cities.

“We segmented our markets into three main pockets: cable-dry, cable-frustrated and cablerich. We then started tapping smaller towns, cities and remote areas with our enhanced bouquet of channels,” says Jawahar Goel, Managing Director, dishTV India. The company’s dishes can be seen in remote areas like Kargil, the Siachen glacier, the Nathula border and, for good measure, on Kingfisher Airlines’ planes. “We have not left any place on earth,” says Goel, who expects the company to be EBIDTApositive (earnings before interest, depreciation, taxes and amortisation) by March 2009.

If there’s one company that’s sitting pretty on a rich knowledge base of semi-urban and rural India, it’s M&M Financial, now more commonly known as Mahindra Finance. The non-metro focus was inevitable given that its business model was built around financing the tractors made by its parent company.

However, over the years, Mahindra Finance has diversified into financing non-M&M vehicles (including two-wheelers, commercial vehicles and used vehicles), distributing products like mutual funds and insurance, offering advisory services and even personal loans—all in smalltown India. A non-banking finance company with a net profit of Rs 132 crore on sales of Rs 844 crore, M&M Finance recently opened five branches in Pathankot (Jammu & Kashmir), Barasat (West Bengal), Srikakulam (Andhra Pradesh), Kaithal (Haryana), Radhanpur (Gujarat) and Koonjar (Orissa). “I’ll do every possible financial product to address the needs of customers beyond metros. That’s going to be our growth story,” says Ramesh G. Iyer, Managing Director, Mahindra Finance.

His confidence stems from the company’s 410 branches, 4,700 people and 6.30 lakh customers. “We could look for a credit card,” reveals Iyer, along with the secret of succeeding in small-town India. “Unless you are emotionally connected with the customers, it’s difficult to do business in smaller cities and towns.”