With total consumer spending increasing by nearly 15% annually over the past few years, China's domestic market is in the midst of a boom. As the country's middle class expands, companies that sell consumer goods are poised to serve consumers with a broader array of high-quality products.

Richard Ho, a partner at Bain & Company in Shanghai, identifies ten trends that will define the country's emerging domestic market.
 
1. More middle-class shoppers in smaller cities

As incomes rise, consumers in lower-tier cities will continue to join the party and make classic middle-class purchases, beginning with electronics and durable goods and then better quality, fast-moving consumer goods (FMCGs) as the decade unfolds.

2. More top-tier cities

By 2020, the number of top cities will surge from three—Beijing, Shanghai and Guangzhou—to more than 20.
 
Some will be on the scale of Shanghai and Beijing.

Others will be half the size, but these huge urban centers will have an increasingly sophisticated consumer population.

Shopper preferences will be similar across many segments and they will be attracted more by brand names than in-store promotions.

As trends like health and wellness and convenience take off, merchants will cater to those preferences.

3. Diversified retail formats

Even by 2020, China will be more like Europe than the U.S., a mix of income levels, regional tastes and shopper behaviors.

As a result, there will be a range of modern and traditional formats, including hypermarkets, department stores, specialty and mom-and-pop shops, wholesale markets and the internet.

Consumers will seek out specific formats for different types of purchases and shop more online. In some categories like shampoo, modern retailing now accounts for 50% of business in the top 200 cities. In many smaller cities, traditional outlets will still be key players and will dominate several product categories.

4. Increased retail competition

China is increasingly important to multinationals and they will continue to gain market share on their turf—modern formats like hypermarkets, supermarkets and convenience stores. Some Chinese retailers, meanwhile, will learn to compete well on the basis of good locations, strong local relationships and differentiated local offerings like fresh produce.

5. Consolidated distribution networks

In China's top cities, large manufacturers already distribute directly to retailers. In the country's 300 to 500 rapidly growing lower tier cities (tier-two, tier-three and tier-four markets), they will selectively develop larger distributors that can grow with their needs and provide broad coverage and in-store support.

Over time, these large distributors will dominate in a single province, because the ability to serve multiple provinces will take longer to develop. Wholesalers will refocus on traditional trade in lower tier cities and some will try to provide additional services to better support manufacturers.

6. Multinationals will move ahead in the top cities

Unlike in China's retail market, at least one multinational brand will capture the number-one or number-two market share position in many of the major food, beverage and personal-care categories within China's top 200 cities.

This already is the case in sectors like snacks, beer, sportswear and shampoo.

As consumers become more brand conscious, multinationals will have a significant edge over local competitors that have yet to develop strong brand equity.

7. Local companies will maintain leads in smaller cities

Outside the top 200 to 300 cities, domestic companies will continue to have a competitive advantage in consumer products for the foreseeable future, as multinationals work to win a foothold.

8. New management strategies

In the decade ahead, multinationals need to hire more locals among their top management. The frequent rotation of foreign managers, usually once every three years, often leads to sub-optimal decision-making. Local companies, meanwhile, will start moving from the old top-down decision-making style and hiring professional managers from multinationals to deepen the organizational expertise needed to run much larger businesses.

9. Better product quality and safety

In the wake of highly publicized global and domestic product recalls, China will overcome the worst of its quality control issues over the next decade. The lessons China has learned from these incidents will result in new safeguards like stiffer enforcement of regulations, improved shipping and storage conditions and manufacturers differentiating themselves based on quality. Also, consumers will be willing to pay more for better quality and safer products.

10. No global Chinese FMCG brand by 2020

Despite regional and global growth, it's unlikely that a Chinese FMCG brand will become a global leader by 2020. Domestic firms still are learning how to use consumer insights to develop their brands and gain the cultural understanding needed to successfully manage distributors and company employees in overseas markets.

As the new decade begins, domestic companies have a unique opportunity to win against multinationals in the biggest battleground on the planet: China's booming domestic economy. It will take a strategic approach to customers, costs, channels and competition. If they succeed, the next ten years will be heralded as the decade when China makes major strides-moving halfway towards reinventing its own brand.

Richard Ho is a partner in Bain & Company's Shanghai office, focusing on consumer products and retailing.