Tier II and III Cities: Emerging Hotspots for Hospitality Growth in India

India's hospitality sector is undergoing a remarkable transformation, with Tier II and III cities emerging as the new growth engines. These smaller cities, often overlooked in favor of metro hubs, are now driving significant expansion in the industry. Backed by increasing domestic travel, infrastructure development, and evolving consumer preferences, these cities are becoming critical to the future of hospitality in India.

The Numbers Speak: Rapid Expansion in Smaller Cities

The growth in Tier II and III cities is evident from the data. In 2024, 75% of hotel signings—comprising 9,710 rooms—were concentrated in these cities. This marked a significant increase from previous years, with branded hotel openings reaching 2,316 keys in Q1 2024 alone. Cities like Ayodhya, Jaipur, Indore, Surat, and Khopoli have emerged as key players in this transformation.

Key Examples:

• Radisson Group signed hotels in Khopoli (Maharashtra) and Saputara (Gujarat).

• Holiday Inn launched a 144-key property in Ujjain.

• Novotel opened a 165-key resort in Guruvayur.

What’s Driving This Growth?

1. Booming Domestic Travel

Domestic tourism is at an all-time high, driven by leisure travel to offbeat destinations and religious tourism. For instance, Ayodhya has seen a surge in visitors due to its cultural significance. Similarly, Jaipur and Indore are emerging as hubs for both leisure and business travelers.

2. Improved Infrastructure

Government initiatives like the UDAN scheme have significantly improved air connectivity to smaller towns. Enhanced road networks have also made these destinations more accessible, encouraging both leisure and corporate travel.

3. Lifestyle Aspirations and Events

Rising disposable incomes have led to higher spending on weddings, social events, and premium hospitality services. Tier II and III cities are becoming preferred destinations for grand celebrations, further boosting demand for upscale accommodations.

4. Religious Tourism

Cities with religious significance like Ayodhya and Guruvayur are witnessing unprecedented growth in footfall. This has spurred the development of branded hotels to cater to pilgrims seeking quality stays.

Challenges to Overcome

Despite the promising growth, challenges remain:

Infrastructure Gaps: Some smaller cities lack sufficient tourism infrastructure to support large-scale operations.

Occupancy Rates: While improving, occupancy rates are still slightly below pre-pandemic levels at around 63-65%.

Market Saturation: The rapid entry of multiple brands into these markets could lead to increased competition.

The Road Ahead: A Promising Future

The momentum in Tier II and III cities is set to continue as government policies focus on regional tourism development. With an expected annual growth rate of 10.5% over the next three years, India’s hospitality sector is poised for robust expansion.

Key Takeaways:

Business travel and MICE (Meetings, Incentives, Conferences, Exhibitions) events will drive demand for hotels in smaller cities.

Leisure travel during holidays will further boost occupancy rates across these markets.

Conclusion

Tier II and III cities are no longer just emerging markets—they are becoming the backbone of India’s hospitality sector. With their untapped potential and growing demand for quality accommodations, they offer exciting opportunities for hotel operators and investors alike. As these cities continue to evolve into vibrant hubs for travel and business, they are set to redefine the future of hospitality in India.