Big City Consumer Trends
People Integrated x Rains
In 2011, McKinsey Global Institute (MGI) made predictions on how purchasing power would increase and condensate in big cities with an all time high in 2025. They based their predictions on two factors, a) growth in population and b) rising Gross Domestic Product (GDP) per capita. MGI states that the two factors will contribute to the acceleration of consumption in the world’s “Big cities”.
Big cities have long been the world’s economic dynamos, but the speed and scale of their expansion are unprecedented. For the first time in history, more than half of the world’s population is now living in towns and cities. Underpinning this transformation are the economies of scale that make concentrated urban centers more productive. MGI acknowledges The City 600, which are the top 600 cities by contribution to global GDP growth from 2007 to 2025. In 2007, it was reported that 1.5 billion people live in the top 600 cities, which is a total of 22% of the global population. McKinsey has forecasted that by 2025, 2.0 billion people will live in these cities, making it 25% of the global population.
Expanding populations are not the only, nor the largest driver of urban growth. In most cities, rising GDP per capita is the major factor, fueled by agglomeration benefits in larger cities and their capacity to attract higher investments and talented workers. In a study conducted by MGI, the urban growth will continue to be concentrated in the City 600. It is expected that the combined GDP of these cities will double to $65 trillion by 2025.
This is important knowledge for any company wanting to expand their growth internationally. One way to strategically use the information on City 600 is to implement a cluster-based strategy. This strategy is based on grouping sets of cities together and defining clusters in order to streamline the highly complex urban picture that they face in many emerging economies, make their market entry most efficient, tailor their approach to locations and reflect the different stages of growth of particular locations. One company that has implemented such a strategy is the Danish lifestyle brand, Rains. Therefore, we set out to learn more about their reflections and strategy in a dialogue with Jan Stig Andersen, CEO of Rains since 2017.
“For us at Rains, the aim of implementing a cluster strategy is to achieve critical mass around Rains stores and our e-commerce business on rains.com, as well as strengthen our wholesale partnerships. Unique in the way each operates,each revenue stream supports each other as a whole to provide a strong brand presence. A cluster strategy has the potential to effect competition in different ways. We have benefited in increased productivity and innovation, both drivers of our success in key clusters around the world.
Identifying the largest global growth pockets is critical, but choosing the ones that a company should go after requires assessing the opportunities against the costs of reaching each urban market. One option is building a strategy around selected city cluster, by definition a group of target cities located within a manageable radius that meet the criteria set by the company. For Rains, this entails searching for what they call “Iconic Big Cities”:
Jan Stig Andersen is a Danish executive, currently the CEO of Rains. Jan Stig has an MSc in Economics from Aarhus University and an MBA from San Francisco State University. He has a proven track record as the CEO of internationally renowned consumer brand companies within retail and fashion. His career includes being CEO of ECCO North America, CEO of Danish BTX Group, CEO of the Swiss American shoe-group, MBT Group, and CEO of the Danish jewelry-company, Trollbeads.
“These are cities that possess a special cultural and business significance for consumers and multiplicators. An example could be influencers. It is also important that the city has an innovative platform, which creates an opportunity to establish economies of a certain scale. The result should enterain a tipping point of global awareness, one which a business such as Rains can benefit from. When we scale the cluster models and translate them into a distribution and branding strategy, it is most effective to create a strong presence in Iconic Big Cities that have the biggest multiplier effect. This is in contrast to focusing nationally. As an example, 200 people wearing the same Rains Puffer Jacket in New York City makes it a trend. 200 people across the US probably does not have the same effect.“
Rains is a modern lifestyle brand established in Aarhus, Denmark in 2012. With the original intent to rethink the classic raincoat, the brand has since grown from one poncho in its first season to a definitive leader in defining fashion for the outdoors across multiple categories. Today, collections consist of seasonal outerwear, apparel, and a full line of bags and accessories. With functionality at the forefront of each design, the brand maintains a clean, Scandinavian identity mixed with street wear credibility. It is this unique intersection of line and brand extensions, street credibility and detailed go-to-market execution that sets Rains apart from the rest, catapulting the young brand to recognition. Since 2016 Rains has opened concept stores in carefully chosen big cities around the world, including: Paris, New York, London, and Shanghai.
Research done by the McKinsey Global Institute (MGI) forecasts that by 2025, 136 new cities will enter the top 600, all of them being from the developing world. One way to structure a cluster-based strategy is to keep a close eye on emerging markets whose cities will drive global GDP growth between 2010 and 2025, by using the data from MGI Cityscope. Taking China as an example, only 13 of 858 official and unofficial cities have populations above five million. However, these cities accounted for more than 25% of China’s total GDP in 2007. So why are China’s larger cities more successful than its smaller cities? McKinsey Global Institute has identified critical factors that explain why larger cities such as Shanghai, in general have more advantageous conditions for economic success. Larger cities attract the most talent and investments, and city network stimulates economic growth. The latter is based on the fact that large cities are almost always at the center of a cluster's hub for smaller cities, and network effects spur economic growth and productivity.
Although emerging cities will be home to a growing number of households in the consuming and global categories, it is still important to note that developed country megacities will remain prominent in the world economy. In a report from 2013, McKinsey underlines the importance of identifying the most promising cluster; allowing a company to improve its targeting of segments most relevant to its business and lowering the average cost of reaching each customer. This allows companies to tailor their marketing and branding to cluster-specific characteristics. Focusing marketing spend can ensure that it achieves sufficient scale and product awareness, as well as reaching a “tipping point” that detonates growth. Success requires ensuring that the company’s organization gears itself to planning, driving, and executing detailed growth strategies. This is also one of the key aspects of the strategy at Rains, where they have implemented a 360-degree approach, which enables them to increase brand awareness, optimize sales, ensure optimal presentation and increase sell-throughs in the clusters. Jan Stig says:
“In the future, the clusters must combine the sales channels in one platform, putting the consumer experience first. This means breaking down the walls between sales channels and leveraging a common commerce platform. We have learned that consumers do not care about the particular sales channel they meet the brand. Rather, consumers today want a seamless and convenient shopping experience, regardless of whether they engage with us online or in a physical store”.
As this article shows, there are different ways to implement a cluster-based strategy in a company. For Rains, they had the following considerations:
“We decided to focus solely on clusters and develop from there. We stopped focusing on regions, markets, or countries. You can, of course, but that is a completely different approach. Instead, we look for the cities with major portions of the country’s economic activity – or cities with a strong and well-connected infrastructure. A cluster strategy allows you to create an operating model for joint synergies between Retail, E-commerce and Wholesale. That has truly been a game changer for us”.
No matter how a company implements a cluster-based strategy, there are many considerations going into how to establish and identify the important dynamics in the varying markets. Even those companies that arm themselves with the detailed city-level knowledge to identify the most promising markets for their products need to allocate resources efficiently and master the art of execution. Especially when entering diverse and rapidly evolving emerging markets. These emerging markets are what the McKinsey Global Institute categorizes as the middleweights. These middleweights are part of the Emerging 440, which also includes megacities such as Shanghai and Istanbul. The middleweights all share the fact that they are not big players on the market now, but it is predicted that they will grow rapidly and contribute with $17 trillion in GDP growth by 2025. McKinsey states two main reasons for companies to look into these middleweights: first, the household incomes are rising fast and second, higher shares of the populations of large emerging economies are moving into income segments where the consumption of many goods are services.
Regardless of the size of the world’s most dynamic cities, the more businesses understand about cities’ demographic evolution, household trends, and incomes, the better their chances of successfully targeting the most promising prospects in their industries. To capture the significant opportunity that urbanization offers, companies need to take a scientific approach to locating the most promising markets for their businesses. Looking at cities rather than countries as a whole can be eye opening, yet disappointingly, most companies are still not looking at cities as they calibrate their strategy. For companies whose ultimate customers are consumers, the capacity to understand specific urban markets enables more effective decisions on pricing, channel strategy, and marketing. It will leverage the ability to identify the right talent and relationships but also raise demand for new organisational setups and key talent. As consumer behaviour changes due to this urbanisation it will redefine demands for inspiration and convenience. Not only triggered by the differentiating factors from city to city, but also with the increasing digital transformation we find ourselves in the middle of.
Dobbs, R., Reemes, J., Manyika, J., Roxburg, C., Smit, S., and Schaer, F. (2012). Urban World: Cities and the Rise of the Consuming Class. McKinsey Journal. Retrieved from: https://mck.co/37HZeT1
Dobbs, R., Reemes, J., Smit, S., Manyika, J., Woetzel, J., and Agyenim-Boateng, Y. (2013). Urban World: The shifting Global Business Landscape. McKinsey Journal. Retrieved from: https://mck.co/3dUZuiw
Dobbs, R., Smit, S., Reemes, J., Manyika, J., Roxburg, C., and Restrepo, A. (2011). Urban World: Mapping the Economic Power of Cities. McKinsey Journal. Retrived from: https://mck.co/3jidzrm
This article sets out to contribute to a collective understanding of evolution of the global economy and the evolving patterns in global urban landscape. We are aware that predicting the economic and demographic evolution of cities from 2007 to 2025 is subject to multiple sources of uncertainty and it is important to note that companies need to test the robustness of their business decisions against a broader set of plausible scenarios. The projections for population and GDP per capita should be seen as reflecting MGI’s best estimates of the likely outcomes based on long-term data from the MGI Cityscope 1.0 and 2.0.