The Untapped Potential of Tier-2 and Smaller Towns in India: A New Growth Frontier for E-Commerce

The E-commerce in India has dramatically changed over the last decade-from being only a metro and Tier-1 city story to contributing small towns and even villages, where over 65% of the population reside. No wonder, therefore, that Tier-2 and Tier-3 towns are fast becoming growth engines for digital commerce. This trend is fully evidenced in the recent festival sales conducted by Amazon and Flipkart between 26 September 2024 and 2nd October 2024, where the two grossed above Rs 54,500 crore. Most of these sales along with comparatively large categories such as mobile phones, electronics, and consumer durables were driven by consumers at the Tier-2 level and smaller towns.

This change is coming in the background of metro and Tier-1 city saturation, where these bigger markets are now matured, and big e-commerce houses are now looking for growth in previously unexplored areas. This article covers the vast potential of e-commerce in Tier-2 and smaller towns in India, and why this space is going to be the next wave in digital commerce.

Key Insights and Market Dynamics: Tier-2 and Smaller Towns vs. Tier-1 Cities

Why Tier-2 and Smaller Towns Hold Immense Potential

1. Increasing Access to Smartphones and the Internet

Cheap smartphones and low-cost data have brought internet access to every pocket, especially rural towns in India. According to a report by IAMAI, by 2023 India had an internet user base of more than 700 million; new additions came mainly from Tier-2 and Tier-3 cities. Reports point to over 60% penetration of the internet in rural areas by mid 2024. This boom connectivity has created an ocean of digital shoppers, which has been contributing to sharp growth in e-commerce sales.

Source: Internet and Mobile Association of India (IAMAI), 2023-2024 Data

2. Disposable Income and Aspirational Purchases

The uptick is especially strong for disposable incomes in the tier-2 and tier-3 towns. Estimated to have gone up by 35%-40% in the last couple of years, this is where the demand for consumer durables, mobiles, and electronics will come from-the bastions always owned by metro cities. Aspirational consumers in these towns are increasingly going for premium brands, adding that much more sales impetus during festival times.

Source: Nielsen India Consumer Study, 2024

3. E-Commerce Penetration and New-to-ecommerce Consumers

At an economic level, e-commerce has become saturated in Tier 1 cities. Hence, most new to ecommerce customers are now coming from the small towns. As a matter of fact, 70% of all new-to-commerce shoppers during the 2024 festival season came from Tier 2 and Tier 3 towns in comparison with just 30% from metro and Tier 1 cities. This helps the e commerce giants to maintain longterm growth through increasing user base.

Source: RedSeer Consulting Report, Festival Season Insights, 2024

4. Increased apparel, grocery and consumer durables category demand

The luxury goods and high-end fashion still see a predominance in metros and Tier-1 cities, but small towns are witnessing a tremendous upsurge in demand for mobiles, electronics, and consumer durables. Notably, online grocery shopping is going up in Tier-2 towns also signifying a shift in buying behavior and digital trust, as is evidenced from 60%-65% of the total festival sales by Flipkart and Amazon.

Source: Amazon and Flipkart Press Releases, Festival Season Sales Data, 2024.

Challenges in Metro and Tier-1 Cities: Market Saturation

1. High Market Penetration and Slowing Growth

Mumbai, Delhi, and Bangalore have been the core of India's e-commerce market for a long time, but they're reaching their limit. These cities now have over 75% of people using smartphones and 85% using the internet so the number of new users isn't growing much anymore. As a result, e-commerce in these places isn't expanding as fast as before, with some reports showing it's growing by 20%-30% each year.

Source: IAMAI Internet Penetration Report, 2023

2. Rising Consumer Expectations and Brand Fatigue

E-commerce companies in big cities are struggling to keep up with what customers want. People now expect things to be delivered faster, to get special deals, and to receive top-notch service. As the market gets older, it's harder to impress customers, and they're getting tired of seeing so many ads. This has pushed e-commerce companies to look for new places to do business where there aren't as many competitors and it's easier to get new customers.

Source: Boston Consulting Group (BCG) Report on Indian E-commerce Trends 2023

Untapped Opportunities in Tier-2 and Smaller Towns: Strategic Imperatives

1. Localization of Marketing Strategies

E-commerce companies like Amazon and Flipkart are becoming increasingly localized in their marketing approach for those regions. Localization through regional languages, local deals, addressing specific regional needs has made it possible to tap small towns at a deeper level. For example, advertisement in regional languages, use of cultural nuances from the region enhances the engagement and sales conversion.

Source: WARC India, 2023-2024 Digital Marketing Report

2. Logistics and Delivery Expansion

With increasing demands in Tier-2 and smaller cities, companies are increasing their logistics infra to cater to the need. Faster delivery is a critical component of the overall customer satisfaction; the development of more delivery hubs in Tier-2 and smaller cities is an area of focus for Amazon as well as Flipkart. Such measures ensure that these smaller cities will also see next-day delivery and upgrade the online shopping experience.

Source: Economic Times Logistics Insights, 2024

3. Digital Literacy and Financial Inclusion

Furthermore, to increase digital literacy and facilitate financial inclusion among the masses, other initiatives by the Indian government have further streamlined the development of e-commerce in the smaller town regions. Increased UPI payments and digital wallets have made it possible for consumers in these regions to approach e-commerce platforms with much ease, thus accelerating the growth of online transactions in these regions. As per the data of NPCI, transactions through UPI crossed 10 billion in September 2024, mainly coming from rural and semi-urban areas.

Source: NPCI UPI Report, September 2024

The Road Ahead for E-Commerce in India’s Tier-2 and Smaller Towns

This represents a huge opportunity for e-commerce players, considering saturation in metro and Tier-1 cities. These regions have witnessed considerable growth through smartphone penetration and internet connectivity as well as increased spending power, making fertile ground for the growth of e-commerce. Companies that can localize their offerings, expand their logistics networks, and capitalize on growing digital trust in these towns will be perfectly poised to capture the next billion consumers.

Sales figures from the festival season of 2024 go a long way in affirming this. Aggregate sales of Rs 54,500 crore with more than a 50 percent coming from Tier-2 and smaller towns signify an entire shift in the map of new digital commerce in India. As the rural and semi-urban populations increasingly accommodate online shopping, we should see that higher growth will be witnessed in these markets in the years ahead.