Currently, while the top metros growing at 35-40% are the biggest contributors to total sales, retailers say the format in the smaller cities is more profitable, owing to lower investments in land and manpower. In fact, the entry of several retailers in smaller cities has sent real estate prices zooming. Retailers say consumers in smaller cities are making more aspirational purchases in clothes, jewellery, accessories and footwear, among other things.

"The growth rates in the smaller markets show great promise. But it cannot be this or that. Urban markets continue to be crucial and there's no question of saturation at all. In terms of sustainability, it is clear that consumers keep coming back, even after the initial novelty wears off. The entry of several retailers, including Indian corporates, means that real capital is coming into the business" said a top official in Big Bazaar.

Harminder P Sahni, chief operating officer of KSA Technopak, said that retailers are trying to tap growth in the smaller markets when the bigger cities are not really saturated. "It's not unusual for consumers in the smaller markets to get aspirational or seek choices. Most retailers are trying to pan out faster in the smaller markets, worried that they may miss some great opportunities. While the smaller markets will offer the scale, retailers need to consolidate their presence in one area before moving out into the next," he said.

When a big retailer opens outlets in a smaller city, that city is immediately on the map for other retailers, said Devangshu Dutta, chief executive of Third Eyesight. "These markets are growing faster than the industry on a whole, but this will stabilise over the next seven to ten years," he said.

"Clothing is seeing a 5-10% growth in Tier-II cities, but the base is very small. There is an increase in employment and the number of working women is also going up. As a result, leading retailers are looking at these markets more seriously," he added.

The driving growth factors are discontinuity in terms of lifestyle, coupled with a growing young population. Personal care, which is growing at 10-15%, is another segment which is gaining popularity in the smaller cities. As a result, grooming has also been seeing steady growth since the past five years.

"Retailers will have to cut prices for there to be an upsurge in the market. There is a lot of buying during end-of-season sales, so consumers do have a price point which they follow, which retailers will have to address," said Dutta.