Most investors acknowledge China’s potential as an important retail market in the twenty-first century. Yet few have been prepared to invest there, deterred by their belief that it is still a market for only the most basic consumer goods. They are also intimidated by restrictive regulations, chaotic distribution, and fragmented retail channels.

They would do well to reconsider, for although the market presents difficulties, it is evolving faster than most people realize and already offers a broad range of opportunities with attractive returns. With 40 cities open to foreign investment and many more ready to join them, the time is right to stake a claim. And as with other investment opportunities in China, first movers are likely to garner the richest rewards.

Market scope

The value of China’s retail market rose from $170 billion in 1991 to $250 billion in 1995—a compound annual growth rate of 11 percent. The country is already Asia’s largest retail market outside Japan, and is set for yet more explosive growth. With gross domestic product projected to expand by 10 percent a year, by 2005 China will have 230 million middle-income consumers earning more than $1,000 a year and a retail market potentially worth...