Big Western retailers are snapping up prime real estate across China's major cities in an unprecedented shopping spree. Wal-Mart, Carrefour and other giants are crowding into large cities such as Beijing, Shanghai and Guangzhou—seeking to preempt U.S. retail rivals such as Costco and Kmart, and European players such as Auchan and Tesco, who have been slower off the mark.

China deregulated retailing last December, as part of its agreement to enter the World Trade Organization. It now allows foreign retailers to set up shop on their own, rather than insist they partner with locals. Investment requirements and geographic restrictions have eased as well.

Seizing this opportunity, multinational superstores are piling into prime locations. Retailers in do-it-yourself (DIY) and homewares, two of the fastest growing retail categories, expect the country's top 23 cities to account for more than 90% of China revenues by 2007, according to a new study by Bain & Company. Those cities, which claimed only 80 superstores in 2003, are expected to triple their count in two years.

Will this narrow focus on expensive real estate in big cities pay off? Didn't Wal-Mart conquer the U.S. by first attacking unsaturated and inexpensive rural areas, building profitability through dominant local market share, generating economies of scale in distribution, marketing, and so on, before moving on to adjacent or nearby areas and building still more outlets?

Yes, but Chinese retail isn't so simple. Right now, only a small percentage of the population can afford to shop in Western-style retail stores. These consumers are mostly located in the largest cities, which house most of China's middle-class households today. This segment is projected to contribute $500 billion in spending by 2010 and account for more than half of the country's retail sales. So concentrated is China's retail economy that by 2007, Bain projects that the top three cities for DIY goods will register sales almost more than five times larger than the next 20 cities combined. (By comparison, the top three U.S. cities, New York, Los Angeles and Chicago, account for less than half the retail sales of the next 20 largest cities combined.)

The high market share at stake in China's most affluent cities has led to tight clustering to preempt opportunities for new entrants. In Shanghai, there are already 28 foreign hypermarket outlets—and counting. But locking up such a vast consumer landscape will take time. Despite Carrefour's rollout of 68 hypermarkets in over 25 major cities across the nation and plans to open more in coming months, it still has only eight in a top tier city like Shanghai versus 43 hypermarkets and 141 supermarkets and smaller formats around its home base of Paris, a consumer capital of comparable size. Wal-Mart, which previously focused on Southern China, and the Tier 2 cities that have fewer than 10 million residents, has 10 stores in Shenzhen, or a little over one per 1 million inhabitants. This compares with a 2003 U.S. benchmark of one store for every 125,000 inhabitants.

Clustering in big cities also allows retailers to establish good relationships with local officials (who manage the approval processes) and with suppliers. Inevitably, as superstore grocers such as Paris-based Carrefour and Dusseldorf-based Metro cluster within shopping distance of the densest population cores, they are attracting local and multinational retailers in other categories. In Shanghai, for instance, the local and multinational DIY home furnishing and furniture hyperstores have located close to the superstore grocers or to each other, looking to tap into the same price-minded customer base. The biggest challenge to growth, says a strategy development manager at one multinational retailer, is to "get the best location and property. They are increasingly being taken up."

However the land grab plays out, retailers need to take a thoughtful approach to breaking ground in China:

— Pick the right cities. Where, specifically, will consumers reach relevant income levels over the next 10 years? Wal-Mart is now betting on both Tier I and Tier II cities, such as Yantai, Mianyang and and Yuxi, seeding a presence for the future, while Carrefour continues its Tier I focus. Companies need to decide where, and how aggressively to open new stores before prospective customers move in.

— Tie up the best spots. Build to scale once you decide where to plant roots. Make it unprofitable for others to enter with one or two stores.

— Pick areas to penetrate based on demographics rather than proximity. China's cities aren't always close together. Stores will have to expand into targeted cities, then invest in infrastructure within the city—knowing that it will take time to fill in the spaces between cities or that others may get there first.

Today's land grab in China is only the first step in the reshaping of the global retail economy. There will be more—and success will go to those retailers who not only stake out the best turf, but who also build the right regional strategies.

Ms. Chen, based in Hong Kong, is a partner with Bain & Company and leads the Greater China Retail Practice. Mr. Rigby, a partner in Boston, directs Bain's Global Retail Practice.