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NEW YORK -- China and India are gaining ground in retail revenues in the Asia-Pacific region though Japan continues to lead in overall sales and retail sales per capita, according to a KPMG consumer markets analysis of key retail markets in the region.

India’s Financial Express reported that Japanese retail market grew at one of the slowest rates of around 1 percent in 2004. While China’s retail industry has grown at 10 percent per annum in the last decade, India is growing at 5 percent. This trend is widely expected to continue and the interest in entering these markets is at an all-time high, projects KPMG.

"Retailers face some tough challenges to effectively capitalize on and expand in the dynamic and often turbulent retail markets of Asia," according to KPMG Consumer Markets Practice’s Asia Pacific chairman Nick Debnam. Among the three, China is the second largest market by revenues after Japan. MNC retailers are strengthening market share in China while domestic players are declining.

A highly fragmented market, with large disparities in wealth and contrasting consumer characteristics, China's retail market has grown around 10 percent each year since 1994, according to the report. The total consumer expenditure surged 64.16 percent between 1997 and 2003. About 41.2 percent of consumer expenditure went to food products and services -- down from 47.9 percent in 1997, reported the Financial Express .

International retailers have already developed their presence in many first and second-tier cities. Only a handful of second-tier cities remain free from international competition. The majority of grocery outlets are supermarkets run by domestic retailers, but hypermarkets, convenience stores and specialty stores are emerging rapidly in primary cities and are expected to remain the key growth areas in China for the next two to three years. The Indian retail industry too is highly fragmented with more than 12 million outlets but it is projected to grow at 8 percent up to 2008. It contributes to 10 percent of India’s GDP and 6 percent of employment, according to the Financial Express report.

The retail industry in India is estimated to be worth around $286 billion. However, organized retailing is very small, accounting for around 2 percent of total retail sales. Metro Cash and Carry, Shoprite, Dairy Farm, Medicine Shoppe and Marks & Spencer are some of the major international retailers who have presence in India today, according to the report.