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Why City Specific Insights Matter for Business Strategy

May 31st, 2017

Cities are the engines of economic growth, cultural melting pots and innovation hubs. Urban living is at its highest point ever and is set to increase as 60% of the global population will reside in cities by 2030. Cities are often referred to as metropolitan areas, a term which encompasses locations where people live, work and spend their leisure time; essentially a distinct consumer market. By gauging a consumer market, cities are a valuable asset for businesses who seek to learn specific insights about consumers and households in a target market—something country-level analysis does not quite offer.

Cities are diverse in nature and come in a variety of shapes and sizes. For instance, take the bustling megacity of Tokyo and the small and compact Ljubljana: one’s population was 37 million in 2016, whilst the other barely reaches the half a million mark. Population size is just one difference which makes cities unique. Factors such as urban mobility, demography and economic growth not only vary between cities, but also between cities and their respective countries. As cities pose unique consumer and household differences, the strategies employed by businesses should be tailored to meet the characteristics of their target market. Using three examples, this article showcases the importance of identifying key differences between cities and how businesses can incorporate these strategies strategy to achieve more lucrative returns.

Secondary city development in China well ahead of other developing Asia-Pacific markets

Major cities such as Beijing, Shanghai, Guangzhou and Shenzhen are synonymous with high growth, wealth and affluence and serve as principal locations for retailers. However, the increasing demand for space creates high prices for prime real estate which is a problem for small sized businesses. Nevertheless, the scope for investment is by no means exclusive to only Beijing, Shanghai, Guangzhou or Shenzhen; China’s secondary cities prove that their sizable consumer markets, growing middle class and attractive growth rates make them ideal alternatives for retailing. For example Changsha households are more affluent than households in Shenzhen, Tianjin and Wuhan, whilst at the same time, disposable income growth is far greater than in the country as a whole.

Household disposable income in 2016 and real disposable income growth over 2011-2016 across Chinese cities

Source: Euromonitor International from national statistics

Note: Primary city- total disposable income >USD50 billion in 2016; Secondary city- total disposable income USD10-50 billion in 2016; Tertiary city- total disposable income <USD10 billion in 2016

Nonetheless, the scope for secondary city development is a phenomenon that seems to be more predisposed in China as opposed to any other developing country in Asia-Pacific. Cities in countries such as Indonesia, Thailand, Malaysia and the Philippines have a disproportionately large share of wealthy households concentrated in their capital cities. In 2016, the consumer disposable income was more than 13 times the size of the next largest in the country, Pattaya-Chonburi, making the former still the primary avenue for growing retail.

When entering a new city, taking a uniform business approach can lead to erroneous assumptions. Even though China was identified as the most viable market for secondary city development in emerging Asia-Pacific, stark variations between cities do exist. For instance, Tangshan and Xuxhou may be secondary cities by definition but they display low disposable income growth and households are generally rather poor by country standards.  This proves the point that some cities are more suitable to this phenomenon than others, depending on consumer market size, growth and purchasing power.

Ageing across Canadian cities shows considerable variations

Population ageing has been a hot topic over the last couple of decades, escalating many debates about public policy actions and the opportunities and challenges it poses for businesses. Population ageing is a phenomenon associated with developed countries, with such markets being generally home to the largest shares of people aged over 65 years of age. However, the ageing process varies city-to-city and for businesses, understanding such disparities can provide a more comprehensive perspective on the state of the target consumer market. For instance, a private healthcare company entering the Canadian market would find Quebec a more viable option in comparison to Calgary, given its significantly larger share of the over 65’s. Calgary has a much younger population, despite both cities being home to similar population sets. Again, this example reiterates the wide discrepancies present in cities which are not easily identified in country level analysis. Country level analysis assesses all cities as homogenous characters, leading to misleading assumptions about the state of consumers and households in a market.

Share of over 65’s in 2016 and forecast growth over 2016-2030 across Canada’s Cities

Source: Euromonitor International from national statistics/ UK

Identifying the best cities in Eastern Europe for luxury market development

Business expansion is a risky affair without proper assessment of market size. A market size looks at the number of potential buyers and sellers of a product and offers businesses a rough idea of the sort of revenues that can be generated in a given market. The luxury goods market is niche and requires a completely different approach to marketing compared to mass market products. Besides brand loyalty and delivering unique customer experiences, an essential parameter for the success of luxury goods brand is that the target market has a large pool of wealthy households. If a luxury clothing and apparel retailer seeks to expand into the eastern European market, how can they segment their target market of wealthy households, earning upwards of USD150,000  per annum? Euromonitor International’s Cities Income Distribution Model offers comprehensive view of which households earned annual incomes in excess of USD150,000 in 2016. Prague, Warsaw, Budapest, Katowice and Bucharest appear to be the most viable options, being home to the largest number of high income households.

Considering that Eastern European households are less affluent compared to their Western European counterparts, incorporating market size analysis can mean the difference between success and failure. In countries such as the Germany or the Netherlands, there is a far lower risk of failure given their much higher standards of living and larger incomes. For example, in the case of the Netherlands, an investor could choose Amsterdam, Rotterdam or even The Hague and still reap reasonably good rewards. The same cannot be said about Eastern European cities where generally capital cities serve as ideal markets for luxury goods investment and even then, only a handful are worthy of attention.

Number of households earning disposable incomes of more than USD150,000 p.a. in 2016

Source: Cities Income Distribution Model from Euromonitor International

Note: Russian cities have been omitted from analysis since their large size distorts analysis of other cities in the region.

Conclusion

Incorporating careful due-diligence in business decisions and identifying city specific insights are just some of the key prerequisites for executing a successful business strategy.  Identifying city-level trends helps businesses avoid risk through simple but meaningful analysis. It is important to understand the differences in cities and each city should be analysed on a case by case basis. While entering a city serves as a challenge, it also serves as an opportunity to devise strategies which complement the nature of households and consumers. However, other forces that influence business decision making such as political stability, competition, cost and the business environment should also be considered.

For more information about how city specific insights can help your business strategy, download the full briefing here.

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Fransua Vytautas Razvadauskas

Focusing upon the key economic and demographic trends of the world's major cities, Fransua Vytautas Razvadauskas is a City Analyst at Euromonitor International. With a Masters Degree in Development Economics and Policy from the University of Manchester, Fransua has a proven academic background in the area of economic analysis and research writing.

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