The Glittering “Power of Cities” for “Luxury Growth” | McKinsey

The global economy is experiencing an unprecedented shift toward emerging-market cities. Here’s a road map of where luxury-goods companies should compete in the next decade…!!

An Economic Re-Balancing of Great Scale & Speed is occurring from the West to the 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 TEN 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..

One of the most dramatic aspects of this emerging-market economic revolution is the growing power of cities and the extreme growth concentration in a limited number of megacities. The world’s top 600 cities (measured by absolute GDP) are expected to drive nearly two-thirds of 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—more than double the current number of urban behemoths—where GDP will exceed $250 billion, accounting for a full one-quarter of global GDP…

Out of the 25 largest growth-contributing cities, 21 are located in emerging markets, with a significant number of them 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. Yet economic growth does not automatically mean consumption development—or luxury-market growth…Market growth in these cities is indeed conditioned by specific factors that differ 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. To prioritize their efforts, companies will need to identify the biggest and fastest-growing cities with regard to their particular products and services..

Where Luxury Growth will come from? :

Using the McKinsey Global Institute’s Cityscope—which draws upon broad sets of economic and socio-demographic data for more than 2,600 cities around the world and combines these with deep market understanding to forecast growth at the level of individual cities—we have developed a unique road map for how luxury companies should understand and approach global-growth opportunities. Our LuxuryScope “city guide” of luxury markets organizes granular data and statistical forecasting across luxury categories. For example, several critical, market-level insights emerged from our analysis:

  • Growth is increasingly shifting toward emerging markets across all Luxury Categories

  • Luxury growth is highly concentrated in cities. The world’s top 600 cities will account for 85 percent of growth in the luxury-apparel market 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 that consumers desire, the more growth will be concentrated in cities.
  • Mature cities remain critical given their absolute size
  • 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 Milan, New York, and Paris; 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…But within each of these categories, the attractiveness of any single brand will also vary depending upon its fit with local taste..
  • Emerging countries will drive growth, with China taking the lead.

This extreme growth concentration is great news for #LuxuryBrands and #Retailers…It will allow companies to more easily and completely focus their efforts on higher-growth areas. Analyses conducted on growth concentration by city reveal that extensive growth opportunities still exist in Europe and the United States, even in cities as large as London, Los Angeles, and Paris…The city approach to growth can also serve as a compass for companies seeking to navigate the vast sea of emerging markets, helping players to prioritize cities and focus their resources on targeted market-entry plans, whether in Belo Horizonte, Brazil, or Wuhan, China..

What Companies must do? :

Taking the city-by-city approach can help luxury companies revamp their growth strategies and gain new insights that can be used to adjust their business-development models, resource allocations, and organizational structures. How can these new business insights into potential on the city level be used to accelerate companies’ growth ?

The Right Plan:

It is well understood that having the right strategic plan is the essential starting point for any growth journey. Building this plan requires clear answers about where to go and when. Luxury-goods companies must identify growth opportunities at the city level, generating insights on where to concentrate resources to achieve the greatest impact. In addition, this approach also encourages the development of forward-looking market intelligence, a key enabler for ensuring that strategic decisions will allow companies to stay one step ahead of the competition. The city “attack plan” might look quite different from the traditional market-expansion road map. For instance, rather than discussing Asia or Europe as alternative locations—or even Spain versus France—decision makers may ask, “In what ten key cities should we establish a stronger presence? ”

Outstanding Execution to Achieve Impact:

When companies begin looking at fast-growing emerging-market cities, five key issues need to be tackled to help ensure success:

    1. Identifying the right go-to-market model for each location.
    2. Determining if there is a need for local-offer customization.
    3. Ensuring global customer service.
    4. Gauging a need for organizational changes in the longer term.
    5. Choosing how to deploy or redeploy resources.

The global paradigm shift driven by emerging-market cities is posing similar questions for Western companies for many different industries. For luxury players, cities probably matter more than for any other product category, and as retailers, most have the “luxury” of choosing, at a very granular level, where and when to open or expand a store…

In this context, Luxury Players are uniquely positioned to pioneer this new approach to accelerate their growth…!!

“Lack of Dedicated Luxury Retail spaces” at High-street & Malls is “Restricting Presence of Luxury Brands in India” | Retail in Asia

” The lack of dedicated Luxury Retail spaces, the High-street and Premium Malls is restricting the presence of luxury brands in India, a new study reveals”…

The study entitled, “Challenges highlighted by luxury retailers in India”, was jointly conducted by The Associated Chambers of Commerce and Industry of India (ASSOCHAM) and KPMG.

One of the key findings of the study is that setting up stores in high streets affects luxury retailers’ profitability due to sky-rocketing rental costs. High streets are also very cluttered, crowded and are unsuitable due to the absence of the exclusive ambience that luxury retail demands.

The report noted that the Indian luxury market grew at a healthy rate of 30 % to reach USD 8.5 billion in 2013 and is likely to continue growing at a healthy pace of about 20 % reach USD 14 billion by 2016.

This is due to rising number of wealthy people, growing middle class, affluent young consumers and other related factors. However, India currently enjoys just 1 to 2 % share in the global luxury market though it is the fifth most attractive market for international retailers.

Fragmented and diversified consumer base in India is also another significant challenge being faced by luxury retailers in India as High net-worth individual (HNI) consumers are not easy to reach.

The ASSOCHAM-KPMG recommends luxury brands to strategically design their growth plans to tap demand across three categories of HNIs, namely – the inheritors (traditionally wealthy) who are habitual spenders; the professional elite who are discerning spenders; a large segment of business giants (entrepreneurs, owners of small and medium enterprises) who have the money but lack appreciation for fine luxury goods because of no prior exposure to such products.

“ There is a need for luxury brands to focus on expansion in the type and nature of products being offered and increasingly adopt innovative marketing plans to tap rapidly evolving consumer behavioral trends,” said D.S. Rawat, secretary general of ASSOCHAM in a statement during the official release of the study.

“Luxury is no longer a ‘status symbol’ but is now a lifestyle and the global brands need to fast evolve and learn ways to adapt within the local environment so that they can get accustomed to nuances of the market by understanding the cultural identity of Indian consumers,” he added.

Other challenges in luxury retail in the country include :

1. Lack of policy support for luxury brands – the study found that despite strong demand momentum, Indian luxury market has not been viewed as policies and regulations friendly for the luxury retailers. Import duties (20–150 percent), for one, are relatively higher and this is considered as a key apprehension factor among the international players, who may resist them to frame aggressive growth plans for India.

2. Clauses such as — 100 percent foreign direct investment (FDI) – in both single and multi-brand retail requires 30 percent of local sourcing, announced in the liberalized FDI policy in luxury retail in November 2013 could be difficult for the international luxury players to comply with,” the study noted.

Rawat said the duties are manifold, ranging from customs’ duty, counter veiling duty (CVD), special additional tax, and adding to the overall cost…

3. Lack of trained staff – the study cited that the shortage of skilled labour for the industry is a major cause of concern as it is difficult to make the local workforce understand the heritage and legacy of the brand along with the specific finishes involved in the manufacturing process.

“ In the absence of these requisite skill sets, brands have no option but to manufacture in their country of origin; lack of skilled workers can also be attributed to the sales function where presentation and interpersonal skills form an integral element for the business,” Rawat explained.

4. Growing prevalence of counterfeit luxury goods and a grey market – most of these products belong to segments such as apparel, perfumes and accessories, which are usually lower ticket items and can be easily placed in grey channels.

The study emphasized a collective, industry wide effort is likely to have a far-reaching impact in dealing with the issue – as seen in other industries such as films and music…

“ Corrective measures need to be taken to banish the growth of grey luxury goods’ market in India which results in sizeable revenue losses for firms,” said Rawat.

“A strong legal structure combined with effective framework of intellectual property protection would help prevent dilution of brand image and reduced consumer trust”…!!