A Tesco outlet in Changzhou, Jiangsu province. [Photo/CFP]

In the battle to grow market share in China, Western retailers are on the losing end, prompting them to develop multi-format strategies to retain customers.

Last year was a transformational one for all players in the modern retail trade, which is defined as hypermarkets, supermarkets, mini-markets and convenience stores combined.

They have been going through a tremendous slowdown in consumer demand, a sharp rise in operating costs as well as direct challenges from e-commerce players, according to research findings released by Kantar Worldpanel, which focuses on fast-moving consumer goods.

But international retailers have lost more market share, with a decline from 20 percent in 2013 to 19 percent in 2014.

Local retailers have been able to better adapt to the changing market environment and continue to win market share. The Sun-Art Group remained market leader last year, while Yonghui Group emerged as the fastest-growing player in 2014, achieving a 2.6 percent share.

Wal-Mart Stores Inc saw its market share fall from 6.9 percent to 6.6 percent and that of Carrefour SA dropped to 4.7 percent from 5 percent.

Jason Yu, general manager of Kantar, said international retailers are losing share from first-tier cities to fourth-tier ones, mainly because of their "simple portfolio".

Yet their local competitors have a good mix of formats such as supermarkets, convenience stores and hypermarkets. That mix can meet the demand of a dynamic and complicated mix of consumers in China.

"Western retailers are not as quick to respond to the changes in the market as their local peers," said Yu. "It is very hard for them to become dominant locally."

Local retailers are often based at the provincial or regional level and find it easier and quicker to leverage their logistics and commodity mix to get closer to consumers.

But international retailers last year started to develop a multi-format strategy.

Wal-Mart has been more aggressive with its Sam's Club opening plan and Sun-Art tested its convenience store concept by launching its Cloud supermarket under the banner of C-Store.

Carrefour SA launched its first "Easy Carrefour" branded store in Shanghai to get closer to the community. They are expected to step into the e-commerce business by June this year based on their current physical store network.

Germany's retailer Metro AG's sales division, Metro Cash &Carry, announced last year the opening of its first food service delivery-dedicated platform in China, in Qingdao, Shandong province.

Lower-tier cities will undoubtedly be the key driver for China's growth in 2015 and beyond. Out of the 24 new Wal-Mart stores that opened in 2014, 16 were deployed beyond key and top-tier cities, according to Kantar.