How corporate expansion strategies can target emerging-growth powerhouses

Forget about emerging countries. Expansion-minded companies – particularly those in the consumer products industry – might want to take a deeper dive and focus on emerging cities.

That’s the gist of recent research by the McKinsey Global Institute. McKinsey collected data on 2,657 cities worldwide. From that group, it identified 600 cities that it considers the top GDP contributors, a body of localities projected to generate $30 trillion, or 65%, of global GDP growth between 2010 and 2025.

Many among that group of 600 are established cities such as New York and London. But the global-growth powerhouses are in emerging countries.

McKinsey estimates that 440 of the top 600 cities will contribute $23 trillion, or 47%, of global GDP growth between 2010 and 2025. All of those 440 cities are in emerging countries. The research suggests a 70% rise by 2025 in the number of people living in cities with enough income after basic necessities to spend on consumer goods and services, according to McKinsey. More than 600 million of them will live in the 440 emerging cities.
 
“To capture the significant opportunity that urbanisation offers them, companies need to take a scientific approach to locating the most promising markets for their businesses,” the report says.

To allocate resources to the most attractive opportunities, companies need to prioritise and sequence their entries, the report says.

Among the emerging 440 cities are 20 megacities – such as Shanghai, China; São Paulo, Brazil; Istanbul,  Turkey; or Lagos, Nigeria – and 420 middleweights, metro areas with populations from 200,000 to 10 million.

McKinsey’s research projects annual compound growth rates of 7.6% and 8%, respectively, for the emerging megacities and middleweights – about double the growth rate expected for the global economy by 2025.
 
Middleweights include cities such as Bangalore, India; Luanda, Angola; and Doha, Qatar.

The list of 440 cities in emerging countries also offers an explanation why China is the top investment destination worldwide: It’s the country where 242 of them are located. Brazil is home to 30 of the cities, while Mexico boasts 10.

To fine-tune their expansion strategies, the McKinsey report says, companies selling consumer products or services should take the specifics of the targeted city market into account as they try to:

• Understand specific growth drivers such as climate, demographics and culture.

• Predict the evolution of a city market. Among the first products a rising middle class demands tend to be snack foods and refrigerators and, eventually, beauty products and luxury items such as wine, chocolates and fruit juices. Demand for consumer products tends to precede demand for services such as travel and retail banking.

• Assess resources and compare them to the potential growth of a target city market to prevent inefficiencies.

—Sabine Vollmer (svollmer@aicpa.org) is a CGMA Magazine senior editor.