China's department stores urgently need to adapt to the changing domestic retail market if they are to survive, a report from CBRE China Research showed on Tuesday.

It identifies a number of external challenges facing the department store sector in China, including slower domestic economic and real sales growth; increasing competition from new retail formats; the impact of online retailing on bricks-and-mortar stores; and escalating labor and real estate costs eating up department stores' profit margins.

Internal challenges include limitations on size, which is preventing department stores from adapting to consumers' changing needs; and an over-reliance on concessionary sales, which is capping their operating margins.

"The consumption market in China has huge potential to grow, and a double-digits growth rate is expected for the foreseeable future. Department stores will need to strengthen their core competitiveness if they are to survive in the rapidly changing China retail market. They can do this by: expanding their store network, reform the business model and employing new technologies," said Frank Chen, Executive Director, Head of CBRE Research, China.

Department stores have started to adapt to these challenges by learning from shopping malls and expanding, renovating and repositioning; developing merchandise direct sales; increasing the proportion of self-owned properties to control rental costs; and investing in an online platform, according to the research.

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