Emerging cities hold promise

02 July 2012

NEW YORK: Brand owners seeking to drive long term growth would benefit from targeting specific cities, including over 400 urban centres based in emerging markets, the McKinsey Global Institute has suggested.

The organisation reported that the top 600 cities worldwide in terms of their contribution to economic growth currently contain just 20% of the global population but deliver $34tr, or over half, of GDP.

By 2025, these metropolitan hubs will yield an additional $30tr in GDP, taking their share of the total to almost 65%. The existing 27 "megacities" boasting populations of at least 10m are pegged to supply 15% of growth.

A much bigger group, the leading "Emerging 440" cities in developing nations, will generate 47% of growth. Some 20 megacities – like Shanghai, Mumbai and Moscow – feature in this cohort. The remainder are "midweight" cities like Bangalore, Doha and Luanda.

Urbanisation will also mean the "consuming class", or people with $10 a day of disposable income in purchasing power parity terms, increases in size from 2.4bn people in 2010 to 4.2bn people in 2025. By this date, 80% of new additions to this demographic are set to be drawn from the "Emerging 440".

Household consumption across all cities should rise by more than $20tr during the period to 2025, of which approximately $14tr will be attributable to large cities in developing economies, and $10tr in the "Emerging 440" alone.

The number of households earning between $7,500 and $20,000 per year will expand by 2.1% per year from 2010 to 2025, hitting 165m. This rate of growth reaches 6.3% for the 234m residences collecting $20,000 to $70,000 at the end of this timeframe.

Similarly, the amount of households with incomes surpassing $70,000 a year will increase by 8% annually, to 62m, whereas those earning less than $7,500 should shrink by 3.1%.

The overall density of households will also grow by 3.1% per year, from 330m to 521m. "This means that the collective capacity to spend across all income segments is expanding at twice the rate that the rising number of people or households would indicate," the study said.

"Second, and more important, higher shares of the populations of many emerging cities are moving into income segments where the consumption of many goods and services accelerates."

Using the example of Beijing, spending on dining out typically starts when annual income rises to $3,000. This benchmark is $6,000 for transport and communications, and $17,600 for wine, chocolate and fruit juice.

Internationally, household penetration of refrigerators began to take off when income reached $2,500, reaching 80% penetration when earnings stood at $6,000. By contrast, for washing machines, the 80% uptake mark came when income levels were $20,000.

Data sourced from McKinsey Global Institute; additional content by Warc staff