What are tier-1, tier-2 and tier-3 cities?
Indian cities are classified as X (tier-1), Y (tier-2) and Z (tier-3) categories by the government, based on the population density. There are eight metropolitan tier-1 cities – Delhi, Mumbai, Bangalore, Chennai, Hyderabad, Kolkata, Ahmedabad and Pune. On the other hand, 104 cities are categorised as tier-2, while the remaining cities fall under the tier-3 category.
Tier-1 cities are densely populated and have higher living expenses. There are major international airports, industries, top multi-specialty hospitals, education, and research institutes in these cities. Urban planners and economists believe that certain cities, officially classified as tier-2, are as good as any tier-1 city. The economic activities and lifestyle in the cities like Gurgaon, Noida, Vellore, Coimbatore, Kochi, Thiruvananthapuram, Patna, Rajkot, Goa, Lucknow and Jaipur could elevate these cities to the next level in the coming years.
Source: MoneyControl
Details of tier-wise classification of centres based on population
Classification of centres (tier-wise)
| Population classification | Population (2001 Census) |
|---|---|
| Tier-1 | 100,000 and above |
| Tier-2 | 50,000 to 99,999 |
| Tier-3 | 20,000 to 49,999 |
| Tier-4 | 10,000 to 19,999 |
| Tier-5 | 5,000 to 9,999 |
| Tier-6 | less than 5000 |
Population-group wise classification of centres
| Population classification | Population (2001 Census) |
|---|---|
| Rural centre | up to 9,999 |
| Semi-urban centre | 10,000 to 99,999 |
| Urban centre | 100,000 to 999,999 |
| Metropolitan centre | 1,000,000 and above |
Impact on Tier 1 Cities due to Covid-19
The last quarter of 2020 saw e-commerce grow by 36 per cent and 30 per cent year-over-year in terms of order volume and GMV (gross merchandise value) respectively, according to a report by Unicommerce and Kearney. The average order value declined by 5 per cent in Q4-2020 as compared to the same period last year.
In 2020, the Covid-19 pandemic affected industries across sectors. E-commerce as an industry saw a significant uptick in demand during these times. Moreover, the last quarter was extremely interesting, as it showed the real reflection of changing consumer behaviour, and highlighted the actual shift to online shopping even after the lockdown was lifted.
“The impact of the pandemic has been widely visible ever since the lockdown was announced in March last year,” said Kapil Makhija, CEO, Unicommerce, India‘s largest e-commerce focused tech platform. “The e-commerce industry has emerged as the backbone of the retail industry and small and big players have realized the immense potential that e-commerce holds.”
About Growth
The e-commerce volume growth continued to accelerate in the last quarter of the pandemic hit year. Last year, the e-commerce industry reported 26 per cent order volume growth in Q4-2019 vis-a-vis Q4-2018. The sharp spike in volume growth of Q4 2020 signifies that the demand for e-commerce has increased significantly in the last year.
The growth accelerated in light of Covid-19 and the effects of lockdown led to a massive change in consumer habits with many new shoppers and sellers coming online. The offline retail continues to have a single-digit growth, whereas the e-commerce sector is growing at a CAGR (compound annual growth rate) of more than 20 per cent.
Personal care, beauty and wellness (PCB&W) as well as FMCG & healthcare (F&H) were the biggest beneficiaries and saw volumes grow by 95 per cent and 46 per cent YOY respectively.
“The personal care, beauty and wellness category is an incredibly interesting area of growth online, as it has seen stupendous volume growth,” said Siddharth Jain, partner, Kearney.
FMCG & healthcare (F&H) is one of the fastest-growing category, with value growth of 94 per cent in Q4-20 compared to the same period last year. The strong value growth is supported by the 46% order volume growth in Q4 2020.
Companies eyeing on Opportunities
Major FMCG companies in India are now looking to ramp up e-commerce efforts with many adopting online-only or online-first for select brands and products.
Electronics segment was buoyed by homebound consumers turning towards high-end products. The category witnessed 12 per cent YoY growth in AOV in addition to 27 per cent YOY growth in volumes and continues to drive the highest share of the e-commerce value.
Fashion and accessories continue to be the largest segment by volume. It reported 37 per cent YOY volume growth but AOV declined by 7 per cent YOY in Q4-2020 as compared to the same period last year. With people still working from home, the growth of the category is supported by the purchase of lower value products such as comfort wear and loungewear.
The lockdowns and reluctance to venture out resulted in many first-time online grocery shoppers. This is making it an important category for mainstream e-commerce players like Flipkart and Amazon to actively focus and promote the grocery business.
As e-commerce companies start focusing on tier 2 and tier 3 cities, their contribution to the overall e-commerce pie continues to increase gradually over the last few years. During the quarter in review, these cities accounted for a whopping 90 per cent YOY incremental volume and value growth.
“Tier 2 and tier 3 markets have shown maximum growth potential, outpacing that of tier 1 cities,” said Jain of Kearney.
As a result, these cities reported significant gains in share of overall e-commerce sales. The volume share grew to 46 per cent from 32 per cent and value share grew to 43 per cent from 26 per cent during the Q4 CY2020 as compared to the same period last year.
The growth in tier 2 and tier 3 is supported by multiple factors. These include the rising adoption of social commerce, faster and timely deliveries, content in vernacular language, and rising adoption of digital payment coupled with greater internet penetration.
Also, brands are adopting direct-to-consumer (D2C) strategy with renewed vigour to develop a strong connect with consumers. The strong volume growth of 94 per cent for brand websites showcases immense potential going forward. The growth of D2C is visible across almost all segments.
- 95% and 46% YOY growth for personal care, beauty and wellness as well as FMCG & healthcare.
- 90% YOY incremental volume and value growth from Tier 2 and Tier 3 cities.
- 94% volume growth in Q4 2020 reported by brand websites compared to the same period last year.
Advantages of Tier 1 Cities
- Better job opportunities
- Multi-specialty hospitals with five-star facilities
- Better international air connectivity
- Good educational institutions
Disadvantages of Tier 1 Cities
- Heavy traffic
- More pollution
- Higher living expense