Retail expansion shifts to tier-2 cities
Tier-2 cities have added three times more Grade A retail space than tier-1 cities since 2020, driven by space scarcity and high rents in established markets.
Tier-2 cities have added 5.9 million square feet of Grade A retail space since 2020, compared with about 1.9 million square feet in tier-1 cities. This significant disparity highlights a structural shift in Indian retail expansion, as brands seek growth beyond saturated metropolitan hubs.
Space constraints and high costs push retailers out of established markets
Retailers are turning to tier-2 cities due to scarce prime locations, intense competition, and high rents in metros. The shift reflects growing issues of finding the right space in established markets. High rentals, limited availability of quality space and intense competition for prime locations can make expansion commercially challenging. Devarajan Iyer, CEO of Lifestyle International, noted the pressure in major cities. "The metro market is not only getting saturated, but real-estate prices have gone through the roof now," he said.
Quality infrastructure and consumer demand drive tier-2 appeal
Modern retail infrastructure in tier-2 cities is catching up with consumer aspirations, offering more room for stores. The organised retail base in these cities remains smaller, providing more opportunities for new entrants. A report by Knight Frank and industry body CII details the quality gap in shopping-centre stock.
| Market Tier | Grade A Stock Share | Total Organised Stock (sq ft) |
|---|---|---|
| Tier-2 | 61% | 36 million |
| Tier-1 | 46% | 98 million |
Branded retail was in short supply in tier-2 and tier-3 markets, a supply gap that remains pronounced in high-quality malls. This shortage presents a clear opportunity for expansion where modern infrastructure now exists.
Ecommerce success fuels physical store confidence in smaller cities
The growth of online shopping in tier-2 and tier-3 markets has given brands the confidence to open physical stores there. An estimated 60%-70% of India's 410 million active internet users in 2025 were in these smaller markets. This digital penetration has familiarised consumers with brands and products, reducing the risk for brick-and-mortar investments.
Lifestyle’s metro reliance highlights the broader trend
Despite the push into new cities, established markets continue to dominate revenue for major retailers. More than 80% of Lifestyle's revenue still comes from metros and tier-1 markets. The company expects these established markets to continue growing even as it expands into tier-2 cities. This dual approach shows the report's note that the shift does not signal retailers are moving away from metros entirely. The constraint in established markets is increasingly the retail ecosystem rather than consumer demand.
Consumer behavior is evolving, with a growing number of international brands establishing shops in tier-2 markets. Twenty-four tier-2 markets now host 1,720 international brand stores across 255 brands from 37 countries.
