Emerging markets are poised to quadruple their share of luxury apparel spending over a two-decade span with rapidly growing cities accounting for the largest share of the expansion.
A report from McKinsey & Co.’s apparel, fashion and luxury group, titled “The Glittering Power of Cities for Luxury Growth,” found that the share of spending on luxury women’s ready-to-wear in developing markets, just 8 percent in 2004, more than doubled to 17 percent in 2011 and is likely to nearly double again, to 32 percent, by 2025.
In the more accessible categories of luxury spirits and beauty, the starting points and projected long-term numbers are higher. Emerging markets’ share of high-end beauty products, 14 percent in 2004 and 24 percent in 2011, is seen rising to 47 percent by 2025. Similarly, those markets accounted for 15 percent of luxury spirit consumption in 2004, a figure that rose to 26 percent in 2011 and is headed to 44 percent in the decade ahead.
By contrast, emerging markets are expected to account for more than 55 percent of middle-market apparel purchases in 2025.
The report makes clear that, even with the populations and incomes of shoppers in emerging markets growing rapidly, cities in mature markets — led, in descending order from the top of the list, by Paris, Tokyo, Milan, London and New York — will remain the most important locales for luxury apparel spending in 2025. At number six, Moscow is the highest-ranked city in an emerging market to make the lineup, with Seoul at number 10, Singapore 11, Mexico City 18 and Saint Petersburg, Russia, 20.
Not only is no emerging-market city in the top five, but no city in China qualified for the top 20.
“For many luxury players,” the report noted, “increasing market share in large Western megalopolises should be (at least) as important as riding the wave of growth in emerging countries.”
But the study takes great pains not to understate the strength and size of that wave. What McKinsey termed the “Next 15” countries — the BRIC markets (Brazil, Russia, India and China) and 11 other nations, including South Korea, Indonesia, Iran and Vietnam — are expected to drive 90 percent of emerging-market growth in the fashion and beauty categories.
“Not surprisingly, China alone will drive half of this growth, while the remaining countries in the ‘Next 15’ will comprise one-fifth of the potential luxury consumers in the world by 2025, nearly four times as many as in the U.K.,” McKinsey said.
The report references China for “one of the most significant economic transformations the world has seen,” with urbanization sweeping over the country “on a scale 100 times that seen in 19th-century Britain and at 10 times the speed.”
Within 11 years there will be 60 “megacities” around the globe, more than twice the current number, with GDPs in excess of $250 billion.
“Out of the 25 largest growth-contributing cities, 21 are located in emerging markets, with a significant portion of them being in China,” according to McKinsey. Today, just four of the wealthiest cities are in the developing world.
A second tier of cities — such as Pune, India, and Harbin, China — will be among the markets growing most quickly. A group of about 400 of these second-tier cities will, within 15 years, “generate wealth equivalent to that of the entire United States economy today,” the report said.
McKinsey projected that the top 600 cities will account for 85 percent of growth in luxury apparel in 2025 versus 66 percent for beauty products “and only 40 percent for consumer packaged goods. In fact, the more upscale and less ‘basic’ products consumers desire, the more growth will be concentrated in cities.”
The report also advised the brands act with speed to capitalize on developing market opportunities but be sure to leave their options open. “Winning companies may find it most beneficial to put down stakes right away with a local partner in order to benefit from the partner’s market knowledge, reduce risk and relieve short-term financial constraints,” it pointed out, noting that buy-back options can be built into such arrangements to be used later.
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