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The rise of China's consumer may be one of the country's most important trends over the last decade, but the mainland's retailers aren't the way to play on it, Pimco said.
"A weakened macro environment, coupled with curbs on spending by government bureaucrats, has hit a range of consumer businesses and, in some cases, forced a reassessment of expansion plans," said Richard Flax, an emerging market equity analyst at Pimco, in a note. "Mass retailers, which face oversupply and low pricing power, are likely to continue to struggle," he said.
He noted China's economic growth has fallen from 9.8 percent in the fourth quarter of 2010, to around 7.8 percent in this year's third quarter, denting consumer confidence and weighing on urban household income growth, which has fallen three percentage points over the past 12 months to just over 9 percent.
"Compounding the impact of slowing income growth, the government has moved to curb spending by bureaucrats by restricting dining, travel and gift-buying," he said, noting spirits prices are falling and department store operators are seeing declines in same-store sales.
While the valuations of Chinese retailers have contracted since mid-2010, Flax expects the sector to continue underperforming.
"What is compounding problems for retailers is that the slowdown in spending has been exacerbated by an increase in supply. This perhaps echoes some of the oversupply issues we've seen elsewhere in the Chinese economy, where easy money has fueled an investment boom," Flax said.
"In many markets in China, the expansion in physical retail stores is the root of the problem," he said. "While rates of department store density in emerging market countries remain well below those of the U.S. and U.K., China is comfortably ahead of most of Asia, including richer nations such as South Korea and Japan. This supports our view that Chinese retailers have focused on capacity expansion over the last decade without sufficient regard for operating expenses and capital efficiency."
(Read more: Are China bank stocks cheap or just crummy?)
He doesn't expect the oversupply to change anytime soon, with retailers likely to continue to face declining profitability and eroding returns on capital.
However, Flax isn't writing off China's consumer entirely.
"Companies with strong business models in sectors where supply may be constrained, such as casinos, or where powerful brands act as competitive moats, such as luxury goods, are likely to maintain high operating margins and returns on capital," he said.
(Read more: Place your bets: China or Japan?)
China is expected to account for about 20 percent of global luxury sales in 2015, according to McKinsey Global Institute research. With Beijing's efforts to restructure its economy away from exports and investment and toward domestic demand essentially making conspicuous consumption an official policy, the wealthy and mid-range consumers are snapping up luxury brands.
It's a theme that may have a way to go. While consumption was the largest overall contributor to China's economic growth in 2012, accounting for 51.8 percent, as a proportion of gross domestic product (GDP), it is much lower than other major economies such as the U.S. where it accounts for about 70 percent of GDP or regional neighbor India where it makes up roughly 60 percent.
Others are also looking to play China's consumer sector, but they're looking at China's efforts to urbanize its population.
(Read more: Time to get picky on China stocks: HSBC)
"Domestic demand is the real play next year," said Sam Le Cornu, senior portfolio manager for Asia listed equities at Macquarie. "We're looking for those structural plays – that might be in consumer stocks, it might be in healthcare stocks -- those that will benefit from the wave of urbanization," he told CNBC.
Still, some believe the best way to play China's urbanization plans is by following where the government leads, and that isn't to the consumer.
"You really need to go where the authorities are telling you to go," said Simon Grose-Hodge, head of investment advisory at LGT Bank. "They want to do things in infrastructure and that means things like the railway companies should do very well. They've definitely got a big amount of concern on environmental issues," he told CNBC, adding water- and waste-treatment plays will be seeing funds.
—By CNBC.Com's Leslie Shaffer; Follow her on Twitter