On the up and up

CITIES IN emerging markets represent the single biggest commercial growth opportunity in coming decades, and rapid growth in spending power means companies need to look at smaller cities in developing countries for growth in the next few years.

There are 717 cities in emerging markets that currently have populations of more than 500,000 and another 371 urban centres will reach this size by 2030. The rapid growth of a middle class with strong spending power, combined with an urgent need for new infrastructure to support this growth, offers both opportunities and challenges for companies.

“It’s not just ‘megacities’ but ‘many cities’ that represent great growth opportunities. The ‘many cities’ constitute the bulk of urban-market demand across the emerging markets. The consumer opportunity is vast,” said David Michael, a Beijing-based senior partner in Boston Consulting Group, which published a report on the issue at the World Economic Forum in Tianjin earlier this month.

The report looks at Tianjin, Ahmadabad in India, Curitiba in Brazil and Indonesian capital Jakarta as examples of how a new ability to manage complexity and risk is required in the thousands of cities in emerging markets.

Half the world’s population lives in cities and this is expected to reach 70 per cent by 2050, but the trend is for a population rise in a large number of cities.

One-third of the world’s population – 2.6 billion people – live in cities in emerging markets, and by 2030 that number will rise by an additional 1.3 billion. In contrast, in the developed world there are just 240 cities with more than 500,000 inhabitants each and cities in the developed world will add only 100 million new residents in the next 20 years.

The standard of living of city dwellers in the developing world has risen dramatically in recent years, and the middle-class population in urban areas in emerging markets is expected to rise 70 per cent between 2010 and 2015, which will impact on everything from where the individuals live to how they consume, and rising disposable incomes means growing demand for consumer goods that were once completely beyond the reach of most consumers.

The automobile is a classic example of a product that quickly becomes a necessity once an urban resident in a developing economy experiences an upturn in fortunes.

More than 37 per cent of the world’s cars are purchased in cities in emerging markets, including a lot of high-end marques. BMW sold more cars in China than in Britain in the first six months of this year, for example.

In countries like China, the pattern saw consumers moving from bicycles to small cars, said David Jin, one of the report’s authors.

“The consumer environment is very different from the consumer environment in developed markets. For consumer companies there is an urgent need to develop insights into the consumer pattern in these cities.”

Other areas of opportunity for producers include education, healthcare and consumer financial services, while there are major opportunities in infrastructural development, including housing, water and sanitation, transportation and power provision.

The corporate winners in coming decades will be the companies who work out how to exploit these cities, rather than focusing on countries, said Jin. “A lot of local companies will emerge as the new champions in emerging cities,” he said.

The report highlights five imperatives for consumer businesses faced with the rise in cities in emerging markets. Companies will need to move quickly, adapt their business models to reach further and deeper into the markets and any products and services will need to be driven by insights into how city living shapes the needs of targeted consumers.

Companies must shape their go-to-market approaches within the context of the local retail mix, and must understand how new technology, such as digital shopping channels, will impact on their consumers in these urban centres, the report said.