India’s restaurant industry targets growth in Tier-II and Tier-III cities

India’s restaurant industry is poised for a next wave of growth – one that won’t be driven by the nation’s largest cities, but by its Tier-II and Tier-III counterparts. That is according to a report from Grant Thornton Bharat and the National Restaurant Association of India.

The study, based on insights from a nationwide survey of more than 160 restaurant operators across 50+ cities, found that over nine in ten large operators plan to expand into smaller cities. Of these, 41% are focused on deepening their local presence, while another 41% are pursuing a dual strategy – expanding within their current city and into new Tier-II geographies.

While such expansions carry their traditional challenges, nearly 78% of respondents expect to reach breakeven in Tier-II and Tier-III markets within two years – a sharp contrast to the longer payback cycles typical of metro locations.

Naveen Malpani, Partner at Grant Thornton Bharat and lead author of the report, said: “India’s food and beverage growth story is shifting decisively beyond metros. Tier-II and Tier-III cities are emerging as the new horizon, offering lower costs, faster breakeven, and digitally savvy consumers.”

Sagar Daryani, CEO of the National Restaurant Association of India, added: “As metros mature and saturation sets in, the next wave of growth is unfolding in Tier II and Tier III cities – markets that were once considered peripheral but are now emerging as vibrant consumption hubs. The rise of aspirational consumers in smaller cities, coupled with improving infrastructure and digital penetration, is creating fertile ground for growth.”

Navigating challenges

However, the report’s authors include a note of caution: restaurant operators may be viewing expansion ventures somewhat optimistically.

“Despite the growth potential, the restaurant industry remains highly competitive and volatile. Fewer than 20% of restaurants survive beyond the three-year mark, making perseverance a critical trait for success. Operators must pay close attention to detail, understand local consumer preferences, and deliver value in a differentiated manner,” reads the report.

Tier-II and Tier-III markets also present a number of unique challenges. Real estate is one such factor: while leases are significantly cheaper than in metros, prime locations remain scarce. The same applies to ingredient sourcing, which tends to be more inconsistent due to weaker cold-chain infrastructure and seasonal variability – inflating costs and eroding margins.

When it comes to pricing, operators must take a more localised approach than they do in metro markets. While average monthly incomes in Tier-II cities are approaching metro levels, consumers are both brand-aware and price-sensitive – placing greater emphasis on accessible price points.

“Precision in location, format, and pricing is critical – and real estate remains a significant constraint. Prime spaces are limited and leases often inflated. This makes format choice decisive,” noted Malpani.

“Tier-II and Tier-III growth is not a one-sizefits-all opportunity,” Daryani added. “There is a clear need for strategic adaptation whether in format selection, pricing models, or supply chain design, as well as ecosystem development.”