Rural demand growth has continued to outpace urban demand, led by higher agricultural wages, favourable monsoons over the past couple of years that boosted crops, and growth in the rural non-farm economy. This has shifted consumption patterns in these regions, with rural consumers becoming increasingly aspirational. While the El Niño forecast later in the year could affect rainfall and temporarily hamper the momentum, analysts expect rural demand to remain strong going forward.

Many consumer brands have acknowledged this shift and made efforts to expand into tier-2 and tier-3 cities, a trend also reflected in their earnings.

Non-metro stores drive growth expansion beyond urban markets

In their earnings announcement on July 11, Avenue Supermarts, which operates the retail chain D-Mart, noted that its stores in non-metro cities performed much better than the older stores in bigger cities in the April-June quarter.

“In large metros, growth in older stores, which have significantly higher revenue per square foot, was flat this quarter. While stores in non-metros continue to grow well,” said Managing Director (MD) and Chief Executive Officer (CEO) Anshul Asawa. These stores played a major part in the company’s 15% revenue growth during the quarter, the management said.

Other retail conglomerates such as Tata Group’s Titan and Reliance Group’s retail ventures have also expanded to the hinterlands, with a large chunk of the new stores added every quarter placed in regional hubs and smaller locations.

The same is true for quick-service restaurant companies like Jubilant Foodworks and Devyani International, which run the Indian outlets for international brands such as Domino’s, KFC, and Pizza Hut. These companies had earlier focused on increasing their store density across urban hubs so that a Domino’s or a Pizza Hut is present in every locality in a big city.

Traditional FMCG players, which earlier focused on specific rural hubs with dense populations, have expanded further into the hinterlands on the back of digitalisation and improving trade channels. After the Covid-19 pandemic, companies such as Hindustan Unilever (HUL) and Nestle India have launched and optimised specialised programmes to aid this.

“If we look at any FMCG company pre-Covid, a large part of the focus was on the urban markets. A lot of the big names such as HUL and Nestle already have almost 100% coverage in the urban market. Thus, penetration into tier-2, tier-3, and rural markets becomes important from an incremental growth perspective,” said Ronak Shah, an analyst tracking the consumer sector at Equirus Securities.

Rural growth push: Project Shakti, quick-commerce pressure

HUL has optimised Project Shakti — a programme running since the 2000s incentivising rural women to sell its products in their villages through the Shikhar app — with AI to optimise sales and restocking. Nestle’s “RUrban” strategy, launched in 2019 with a focus on specific semi-urban hubs, has now expanded to have a footprint across 216,000 villages, providing increased flexibility to cater to hyper-localised demographics in each micro-market.

The shift in focus to smaller and untapped markets has been gradual and was driven by several factors. A major reason behind this shift is companies chasing incremental growth. Another key reason is the high competition provided by new-age quick commerce platforms such as Zepto, Swiggy’s Instamart, and Zomato’s BlinkIt, with most of their sales coming from metropolitan cities.

The dense population of cities also makes it viable for these platforms to efficiently open a vast network of dark stores, improving coverage. A large chunk of the sales of these players in top cities comes by eating into existing retail channels.

Improving infrastructure and companies deepening their trade channels and supply chains also play a crucial role in the shift. “Earlier, things weren’t so easy. We just visited the UP market, and one of the distributors highlighted that it was quite difficult to reach into the remote areas five years back, so they were not even able to cater to those markets. Now, with the van operations, electrification, and improved infrastructure, it is quite easy,” said Shah of Equirus.