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With the explosive growth of its middle class and the ranks of high-wealth individuals, mainland China is seeing an equal boom in the thirst for luxury goods like watches, handbags and perfume. Now the world's second-largest market for luxury brands, China could unseat Japan for the top spot within a few years. But first foreign brands must build a market from scratch in the second- and third-tier cities where much of the growth is expected to occur.

Consumers in cities like Zhuhai, Shaoxing and Wuxi are estimated to have accounted for more than 60% of the growth in China's luxury buyers in 2008 and 2009, according to a recent Bain & Company study. China boasts at least 120 cities with populations exceeding one million, and consumers in these secondary cities have the buying power of shoppers in China's largest urban centers. But foreign companies hoping to capture this market are running into hurdles trying to match supply with demand.

The first major problem is staffing. Luxury brands sell consumers in part on a certain lifestyle idea, and it's important for sales staff to understand what the customers are aspiring to in buying the product.

One company whose chief executive participated in our survey discovered recently that most of its sales managers outside China's biggest cities had never experienced such niceties as a luxury spa or upscale restaurant. They weren't equipped to understand what it felt like to be served as a luxury customer. So the company began sending its employees to an upscale hotel for two-week stints so they could "experience a life of luxury," according to the chief executive.

Some luxury companies recruit for sales trainees at China's top universities. And to keep employees in smaller cities from abandoning jobs on the sales floor for office work—generally considered more prestigious in China—companies have started offering international rotations as an inducement not to look for jobs elsewhere.

Then there's the need for luxury brands to differentiate themselves in a crowded field. China's high-end market is highly fragmented, with no single brand dominating individual product categories. This is starting to change: In each luxury-goods category, five brands account for around 50% of the market, indicating early signs of concentration. The key here will be brand-building.

Weaker brands already are finding it tough to compete with the likes of Cartier, Louis Vuitton, Hermès or Gucci, which have advertised for years to build name recognition. Companies also have to remember that recognition in one part of the country won't necessarily translate elsewhere. For example, watchmaker Rolex started in the South of the country near Hong Kong and built strong positions there. But when it moved into the Northern provinces, it had to invest heavily in print ads, events and in-store displays to reach its new customer base.

And there's another nagging fact of life in China's luxury market: Chinese consumers make more luxury purchases abroad than at home. In 2008, mainland stores rang up only 40% of all luxury sales made to Chinese consumers. Prices are simply lower abroad, especially given China's stiff duties on luxury imports, and shoppers find a better selection.

So companies have to cultivate customer loyalty both at home and abroad. Some have built databases of VIP shoppers so they can track their best customers even when they're shopping in places like Hong Kong or Singapore, and alert employees to give them top-notch service. Skilled store managers use data about these best customers' preferences to develop personalized relationships, offering everything from personal shoppers to advance notice of off-season sales to perks like free product maintenance.

All that said, there are still also many opportunities to go alongside the challenges. The Internet is a big chance to reach new customers. While fewer than 10% of Chinese consumers do their luxury-goods shopping online, some companies have launched websites to appeal to shoppers who use the Internet to research luxury products before buying-a group of shoppers that has grown 30% since 2006, according to our research. Cosmetics company Lancôme launched an online community, "Lancôme Rose Beauty," in 2006. The e-commerce site now reaches consumers in hundreds of smaller cities in China where Lancôme doesn't have a store, and claims four million subscribers.

Rising prosperity promises to make China a booming market for luxury goods for years to come. But before top-end brands can sell to those consumers they'll need to reach them. That means crafting effective strategies to branch out of the coastal cities into the places where the vast majority of China's people live-and shop.

Mr. Lannes is a partner in Bain & Company's Shanghai office, where he leads the firm's consumer products, luxury and retail practices in greater China. Mr. Han is a Bain partner in Shanghai and a member of the firm's consumer products and retail practices.

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