Next largest retail market: Take a wild guess

A Chinese customer rests as he stands in a store in a shopping district on January 20, 2015 in central Beijing, China.
Kevin Frayer | Stringer | Getty Images

China will surpass the United States as the world's largest retail market within the next three years, according to new research.

Retail sales volume growth will hit 7.9 percent by 2018, compared with 2.6 percent for North America and the global average of 3.4 percent, PwC and the Economist Intelligence Unit (EIU) said in a joint report on Thursday.

A look at China's trajectory reveals a dwindling pace of growth over the years, yet its figures remain well above global peers.

"Despite its slower growth, China remains irresistible to global retail chains. Although annual retail volume has fallen from 15.6 percent in 2009, China is still expected to average growth of 8.7 percent in the next two years," the report said.

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Home to 19 percent of the world's population, the rise of the Chinese consumer became increasingly important over past decade thanks to higher wages, booming urbanization and improved standards of living. By 2022, McKinsey estimates that 75 percent of the mainland's residents will be classified as middle class, compared with just 4 percent in 2012.

Businesses worldwide have taken notice. Foreign direct investment into China hit $128 billion in 2014, overtaking the U.S. for the first time in nearly a decade, the United Nations Conference of Trade and Development said last month.

What slowdown?

International markets are fearful about a protracted slowdown in the mainland after 2014 gross domestic product (GDP) came in at 7.4 percent, the slowest pace since 1990. However, PwC and the EIU believe that such concerns are overhyped.

"Yes, China is slowing down, but compared to the West, its GDP growth is enviable," Jon Copestake, chief retail and consumer goods analyst at Economist Intelligence Unit, said in the report.

U.S. real GDP increased 2.4 percent last year.

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"Having said that getting the basics right is crucial [for retailers.] That means engaging with local partners and developing products to cater to local tastes," he added.

Still, healthy growth won't be enough for retailers operating in China, the report warned.

"Retailers are having to rethink their strategies - with most brick and mortar players increasingly moving towards fast moving e-commerce channels," it said, noting Chinese consumers are among the world's most active users of mobile technology and social media.

An Asia-wide boom

It's not just China that retailers should bet on. Asian sales volumes are projected to hit $10.3 trillion in 2018, double the $5 trillion projected for North America, according to the report.

After China, growth is the highest in India with sales volumes expected to hit 6.6 percent in 2018, followed by Vietnam and the Philippines.

India's chances at catching up with China remain slim however, the report warned: "A lack of reform and the government's unwillingness to open up its multi-brand retail market to foreign investments mean that global retailers are losing out in a market that is expected to pass the $1 trillion mark in 2015."