The glittering power of cities for luxury growth

An economic rebalancing of great scale and speed is occurring from West to East and South. In fact, we are observing one of the most significant economic transformations the world has seen: 21st-century China is urbanizing on a scale 100 times that seen in 19th-century Britain and at 10 times the speed. This means that the shift currently making Asia – once again – the world’s economic center of gravity is 1,000 times larger than was witnessed during the Industrial Revolution.

The magnitude of this shift is indeed impressive: emerging countries now account for just over one-third of the global economy and will represent 55 percent of the world’s GDP by 2025, driving more than 75 percent of the global wealth creation. In particular, the so called “Next 15”, including the BRIC as well as the 11 fastest-growing countries, will drive 80 percent of emerging-market growth. While these countries account for only 25 percent of global GDP, they are home to 60 percent of the world’s population. Given their size and rapid growth, they present an attractive opportunity for new-market expansion.

Cities as the nexus of growth
One of the most dramatic aspects of the emerging-market economic revolution that is getting more and more attention is the growing economic power of cities and the extreme growth concentration within a limited number of megacities. The world’s top 600 cities (in terms of absolute GDP) are expected to drive nearly two-thirds of the global economic growth by 2025. Massive urbanization will continue across emerging markets, which will envelope three-quarters of these large cities. It is projected that by 2025, there will be 60 megacities – over double the current number of urban behemoths– where GDP will exceed USD 250 billion, accounting for a full one-quarter of global GDP.

Cities with names unfamiliar to many – Pune, Harbin, Luanda, Puebla, and many others – will be among the 100 most-growing cities.
Out of the 25 largest growth-contributing cities, 21 are located in emerging markets, with a significant portion of them being in China. This represents a great leap from today’s status quo, in which only 4 of the 25 wealthiest cities are found in the developing world. Despite the scale of megacities such as Shanghai, São Paulo, and Moscow, we should not miss pointing out the importance of the many cities that, while not as large, are still significant. More than 400 of these “middle-weight” cities populate emerging-market countries and are expected to account for half of global GDP growth by 2025. Cities with names unfamiliar to many – Pune, Harbin, Luanda, Puebla, and many others – will be among the 100 most-growing cities. Together, these approximately 400 “second-tier” cities will, within 15 years, generate wealth equivalent to that of the entire United States economy today.

Of course, economic growth does not automatically mean consumption development– nor luxury market growth. Market growth in these cities is indeed conditioned by very specific factors that vary from city to city. Variables such as birth rate, wealth distribution, and share of working women correspondingly affect growth in categories such as baby food, beauty products, luxury goods, and women’s fashion. In order to prioritize their efforts, companies will need to identify the biggest and fastest-growing cities with regard to their particular products and services. Using a proprietary methodology called CityScope – which draws upon broad sets of economic and socio-demographic data for more than 2,600 cities around the world and combines it with deep market understanding to forecast growth at the individual city level –McKinsey has developed a unique roadmap for how luxury companies should understand and approach global growth opportunities.

LuxuryScope: Analyzing growth in luxury markets at a city level
Our LuxuryScope “city guide” of luxury markets organizes granular data and statistical forecasting across luxury categories. Here are some critical, market-level insights from our analysis.

Growth is increasingly shifting toward emerging markets across all luxury categories: In luxury women’s ready-to-wear (RTW), the weight of emerging countries will grow from less than 10 percent a decade ago to 32 percent in 2025. In luxury spirits and high-end cosmetics, the share of emerging markets will double in the next decade to represent 44 and 47 percent, respectively. Within this timeframe, these markets will have grown three times faster than mature markets. However, the rebalancing toward emerging economies is less advanced for luxury items than for mass-market ones – in mid-market apparel, for instance, emerging countries will account for more than 55 percent of the total in 2025. However, it is worth noting that for countries such as China, Brazil, and Russia, the local number may not truly reflect the importance of Chinese, Brazilian, and Russian consumers, since much of their shopping is done while traveling abroad.

For many luxury players, increasing market share in large Western megalopolises should be (at least) as important as riding the wave of growth in emerging countries.
Luxury growth is highly concentrated in cities: The top 600 cities will account for 85 percent of luxury apparel market growth in 2025 versus 66 percent for luxury beauty products and only around 40 percent for consumer packaged goods. In fact, the more upscale and less “basic” products consumers desire, the more growth will be concentrated in cities.

Mature cities remain critical in terms of absolute size: Naturally, there will be changes over the next decade, with seven new cities landing on the top luxury cities list, including Beijing, Hong Kong, Tianjin, Rio de Janeiro, Guangzhou, Chongqing, and Shenzhen. But the fast growth of the emerging cities does not mean that mature markets are becoming irrelevant – far from it, in fact. When taking a closer look at the 20 largest luxury women’s RTW city markets in 2025, they are mostly mature market cities, with not one Chinese city on the list and no emerging-market cities in the top 5. For many luxury players, increasing market share in large Western megalopolises should be (at least) as important as riding the wave of growth in emerging countries.

Growth is granular and varies by category, price point, and style: Driven by cultural fit with a brand’s value proposition and underlying growth factors by category and price point, the attractiveness of particular cities can differ significantly among luxury players. For instance, luxury women’s apparel is dominated by the traditional fashion capitals, such as Paris, Milan, and New York; spirits are strong in the Americas, while skin care growth is concentrated in Asia. Mexico City, for instance, ranks 18th in fashion, 8th in spirits, and does not even appear in the top 20 for beauty (Exhibit 4). But within each of these categories, the attractiveness for any single brand will also vary depending upon its fit with local taste.

The emerging countries will drive growth, with China taking the lead: Of the top 20 luxury apparel growth cities, 7 are found in the “Next 15” countries (i.e., 15 top growing emerging countries), which will account for 90 percent of global luxury growth across beauty and luxury women’s RTW. Not surprisingly, China alone will drive half of this growth, while the remaining countries in the “Next 15” will comprise one-fifth of the potential luxury consumers in the world by 2025, nearly four times as many as in the UK.