BEIJING: Mobile brands need to address a highly fragmented retail sector and the rise of ecommerce to succeed in China over the long term, McKinsey has suggested.

According to the consultancy, operator stores should contribute 18–22% of handset sales by 2014, versus the 14–18% logged in 2010.

Elsewhere, consumer electronics stores are set to generate between 18% and 22% of purchases in 2014, an increase of approximately five percentage points from the beginning of the decade.

Independent or small stores face the most challenging outlook, as their proportion of the market shrinks from 34–38% to 22–26%. Large chains should see a slide from 24–28% to 20–24%.

Online, in the form of business-to-consumer and peer-to-peer sites, will take somewhere in the region of 14–18% of handset sales, from a starting point of roughly 7% in 2010.

McKinsey further reported that China's electronics chains lag the share of 55% of mobile sales held by their counterparts in the US and 72% in Japan. One reason for this is the small share, 6%, they hold in third and fourth tier cities.

However, Gome and Suning, the two major electronics retailers, have improved supply chains, rolled out new formats and opened 60% of their new stores in these areas in the last two years, showing the situation is changing fast.

These firms already take 30% of the mobile market, and should have 5,000 stores by 2014, double the current total. Mobile phones, computers and similar items also only make up 28% of their portfolios today, compared with 40% for Best Buy in the US.

"Operators, consumer electronics stores and e-commerce ... are likely to grow to as much as two-thirds of total handset retail sales by 2014," McKinsey said. "And that is in the context of a growing and still-fragmented market."

One positive trend at work in China is improving profit margins, which have grown from 7.5% to 10% in the last ten years. Computers, mobile and other such gadgets are also due to deliver 60% of all consumer electronics growth going forward.

Ecommerce may enjoy an equally central role. Online retail sales are due to rise from RMB400bn to RMB1.2tr from 2010 to 2014, and some 15% of mobile sales should come from this route.

"Phone-makers will simply have to deal with e-commerce," McKinsey said. "To do so, many have set up a dedicated online team to design strategy and policy."

Data sourced from McKinsey; additional content by Warc staff