India’s gigantic retail market presents a growing range of retail opportunities for both developers and retailers. But a new report warns that the world’s second most populated country also poses unique challenges for companies eying this fast-changing market.

Last Wednesday, Jones Lang LaSalle Meghraj unveiled its inaugural report entitled India Retail Futures. The 24-page report details how retailers and developers are reacting to massive changes in the Indian retail sector, most notably within countries two largest cities: Mumbai and Delhi. The reasons for this are abundantly clear: These two mega-markets are expected to become the world’s second and third most populated cities by 2015.

Even so, growing competition for shoppers and sites also is luring many retailers and developers into third-tier cities such as Amritsar and Goa.

“Making sense of the numerous opportunities across India represents a significant challenge for the property sector,” says Anuj Puri, chairman and head of Jones Lang LaSalle Meghraj in Mumbai.

“New retailers [both national and multinational] are still largely focused on India’s main cities, but expanding domestic retailers and mall developers are now selectively focusing on smaller cities,” adds Puri.

He projects that roughly 25% of all retail spending will be absorbed by tertiary cities by the end of 2008. Mumbai and Delhi will also grow their collective share of retail spending to 40% through the end of next year.

One driving force behind the growth of India’s retail market is demographics. Roughly two-thirds of India’s 1.1 billion population is 35 years old or younger. (India’s median age of 24 years is lower than the Chinese median age of 33). According to the report, this “tidal wave” of young adults is entering the Indian consumer society with an insatiable demand for consumer brands.

They also have buying power. The Indian economy grew by 9% during the first five months of 2007, driven largely by a rapidly expanding IT sector and a growing corporate base. Most economists expect the Indian economy to grow by roughly 8% annually through 2012.

This expected growth should bring added demand for new retail formats such as enclosed malls and downtown stores. One widely quoted statistic holds that 97% of all retail spending in India is absorbed by traditional, mom and pop neighborhood stores. As the report notes, few other large countries in the world still rely on such a fragmented and small-scale retail infrastructure.

“[But] India’s cities are witnessing a paradigm shift from traditional forms of retailing into a modern organized sector requiring international standard retail formats, providing massive opportunities for the property market,” says Puri.

But great rewards often require steep risks. With so many domestic and foreign developers/retailers converging on India, the rush to build new malls will give Indian consumers more choices on where to shop. Puri believes that many of these new malls and retail concepts are destined to fail.

Adds Puri: “A rapidly growing but highly challenging retail environment will inevitably result in many losers as well as winners.”