BEIJING: The Chinese grocery market offers "a cornucopia of opportunity" for retailers, but major obstacles must be overcome to achieve meaningful growth.

McKinsey, the consultancy, said in a report that the size of China's population - 1.3 billion people -accelerating urbanisation, and the increasing number of skilled workers in the country increased its lure.

Saturation is becoming a key issue, with Tier 1 cities like Beijing and Shanghai witnessing intense competition, a trend that has now extended to Tier 2 cities like Tianjin and Chengdu.

Similarly, chains such as Liqun in Shandong, and Suguo and Times in Jiangsu, have bought up many highly attractive sites in these provinces.

This situation is underpinned by battles between hypermarkets, convenience and appliance stores, while multinational rivals such as Wal-Mart and Tesco mingle with local players like Vanguard and Lianhua.

More positively, the top five grocery retailers in China hold just 6.5% of sales at present, measured against 63% in the UK, 60% in Germany and 59% in France.

"Clearly, there is room for consolidation in China, and the new game for growth is in Tier 2 and eventually in Tier 3 cities," the study said.

"Even in the most developed areas, there are growing suburbs linked by new transit systems and beltways that need the infrastructure of daily life. That's the opportunity."

Tapping into this potential will require more than replicating models used elsewhere, given the diversity in incomes, preferences and levels of development observable in China.

"The Chinese market is a different kind of animal. Consumer perceptions of value; the rising importance of convenience; and seasonal variations drive vast regional differences," McKinsey argued.

"Consumer expectations in Beijing, for instance, are vastly different from those in a Tier 2 city such as Kunming in the southwest, or a Tier 3 city such as Urumqi in the northwest hinterlands near Central Asia."

Challenges include constructing a consolidated supply network, recruiting local talent and creating an advanced and centralised IT infrastructure to effectively leverage customer data.

"Stores end up relying on managers and regional buyers to make judgment calls. One result of this fragmentation is that store banners and brands can look and operate differently across China," McKinsey said.

However, innovation is beginning to assume a prominent status, with Olé, owned by Vanguard, and Marketplace, part of Beijing Hualian Group, moving in to the premium category.

Their "micro-markets" stock fresh produce, high-end goods and foreign brands, and lead the way in segments like prepared and semi-prepared food.

Wanda Plaza has experimented with a distinctive approach, building "multi-format community shopping centres" in 40 cities.

Mergers and acquisitions have exerted a limited impact to date, delivering only ten deals worth 5.9bn yuan ($870m; €674m; £570m) in 2009, and an average value of just 2bn yuan in the last decade.

Although this avenue is fraught with complexity, from regulatory hurdles to actual execution, success could bring advantages from collaboration with suppliers on promotions to rolling out own-label ranges and loyalty cards.

Data sourced from McKinsey; additional content by Warc staff