Consumer goods companies desperately want to reach China’s millions of emerging customers. To do so, they will need multiple strategies.

Since the days of Jack and the Beanstalk, the road to market has been fraught with risks and opportunities. If the giant in your story is China, that road can be long, convoluted and thorny. China’s retail channels are highly fragmented, and despite the rapid rise of national and international retail chains, likely to remain so for the near future. In 2008, almost three-quarters of consumer packaged goods sales in China reached customers through independent stores or traditional retail formats like open-air markets.

By 2013, chain stores are expected to have gained only a further 10 percent share of a market that will have grown by  60 percent in five years. Even in the fast-changing world of consumer electronics (CE), national retail chains accounted for only 17 percent of sales in 2008, with small regional chains and independents dominating the market and will still account for less than a quarter of sales in 2013 (see Exhibit 1 in PDF).

This fragmented retail environment makes market access and distribution management difficult for consumer goods companies, since they can’t rely on the standardized processes and infrastructure they are accustomed to using in the US, Europe or Japan. Moreover, many distributors are small and not particularly capable. Wholesalers are mostly “box movers,” adding little value in terms of either developing efficient networks or enhancing retailer performance.

Then there is the growing importance of customers in smaller cities, with which foreign retailers are much less familiar. In 2010, the 40 largest and most prosperous cities—known as Tier 1 and Tier 2—accounted for 44 percent and 47 percent of sales of fast-moving consumer goods (FMCG) and consumer electronics respectively. The remaining 840 cities (Tier 3 and Tier 4) are now growing faster, however, both in terms of size and disposable income, making them the likely source of two-fifths of growth in consumer electronics and four-fifths of growth in FMCG over the next three years.

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