By  on July 2, 2007

Mass retailers and grocers swiftly are migrating from large, retail-saturated cities to smaller urban areas for international growth, according to A.T. Kearney's 2007 Global Retail Development Index, an annual report on the most promising markets for retail expansion.

The study, which focuses on mass merchandisers and food retailers, ranks emerging nations according to 25 variables, including economic and political risk, retail market attractiveness, retail saturation levels and the difference between gross domestic product growth and retail growth.

India nabbed the top spot for the third year in a row, thanks largely to a young population with money to spend and loosening government controls on businesses.

"India remains the most exciting retail opportunity out there," said Ram Kuppuswamy, an author of the study. "But…in the next year or two, it's no longer going to be as attractive because competition is going to come."

In countries with saturated big-city retail scenes, companies are spotting opportunity in second-tier cities, where competitive pressure is low and consumers seem ready for Western-style stores.

The trend is visible in China, which jumped two spots to number three from the 2006 GRDI: Carrefour looks to open stores in northern and northwestern China; Wal-Mart entered Weifang, Wuhu and Yueyang, and the Thailand-based Lotus Supercenter has expanded to Huai'an, Kunshan and Jiangmen.

Before, "the trend was more, 'I have a new opportunity if I go to one of these cities,'" Kuppuswamy said. "But it's come to a point this year that…we're starting to find a number of retailers who find it unprofitable to open up another store in some of these cities. Next year and the year after, you're going to start seeing a mass movement into some of these second-tier cities."

Some retailers are skipping the traditional tier-one entry points altogether and introducing themselves first in midsize cities such as China's Jiangmen.

"The competition would already be on in some of these cities," Kuppuswamy said. "They are already well entrenched, they're not going to be able to sustain the money that they pay for these locations. It probably makes sense to go to those cities first, start building a brand and then figure out one of the opportune moments to enter the large cities."

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