2014-08-04 10:38:51

Second Tier Cities in Emerging Countries: An Unexploited Opportunity?

2014-08-04 10:38:51

 

By Kasparas Adomaitis, senior city analyst, Euromonitor

Traditionally, multinational corporations focus on sales in the key cities of emerging economies.

For example, within BRIC countries, key markets for entry were Sao Paulo and Rio de Janeiro in Brazil, coastal megacities in China, or Delhi, Mumbai and Bengaluru in India.

However, it is increasingly recognized that second tier cities in

The author, Kasparas Adomaitis.

emerging markets are an unexploited opportunity, often missed previously.

Are you paying attention to the key cities in emerging economies - or only the usual markets?

The rising interest in second tier cities is well grounded. For years, first tier cities in emerging economies had much higher disposable income per capita, and boasted faster economic growth.

But over the last decade to 2013, growth has shifted to second tier cities.

In China and Brazil, there are already a number of smaller cities that enjoy as high income per capita as any first tier city. The number of second tier cities is also rising rapidly in developing countries. For example, there are nearly 50 cities in China and 17 cities in Brazil that are major consumer markets with an annual disposable household income of at least US$10 billion.

Key Multinationals Take Lead in Expanding to Second Tier Cities

Second tier cities are still in doubt for their appeal to producers of high value consumer durable goods, yet fast moving consumer goods - beauty and personal care products, for example - are in high demand.

Recognizing this appeal, some multinationals have already turned from analysis to action. For example, L'Oréal China aims to venture into 600 lower tier cities in China, and to bring more premium products to these cities by 2017. Over 2012-2013, Brazil’s top four leading companies in beauty and personal care – Natura Cosméticos, Unilever Brasil, Procter & Gamble and Botica (O Boticário) – all expanded their geographic presence in the country.

Second Tier Cities Outperform Megacities

L"Oréal China aims to venture into 600 lower tier cities in China, and to bring more premium products to these cities by 2017.

Second tier cities in emerging economies, often previously neglected due to their comparatively low income and size, now stand out as rapidly growing markets, benefiting from urbanization and economic development.

In BRIC countries, the potential of second tier cities is increasingly recognized by governmental authorities, too. Relevant policies include Brazil’s National Growth Acceleration Programme 2, India’s constructions of “urban corridors” from Delhi to Mumbai, and then potentially to Bengaluru, and also China’s ongoing construction of airports, railways, or inland highways.

While second tier cities represent growth opportunities, business conditions in major first tier cities are often deteriorating, exacerbated by ascending rents and labor costs, and intensifying competition with local players.

In addition, there is mounting evidence that megacities in emerging countries are approaching their growth limits: there are already an increasing number of cases where smaller cities are growing much faster in terms of population. For example, between 2005 and 2013, population growth in Mumbai was surpassed by over 30 smaller Indian cities, while growth in Sao Paulo was exceeded by more than 20 smaller Brazilian cities, and Mexico City by another 10 faster-developing cities.

A Short-Term Opportunity

The rise of second tier cities is not likely to be a long-term phenomenon, and investors need to capitalize on this opportunity. Based on the experience of developed economies, as smaller cities will catch-up to mega cities in terms of average household income, their growth will slow down. First-movers into the second tier cities will reap most of the benefits of fast growth of second tier cities in emerging countries.
 

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