Growing competition from online e-commerce firms is prompting China's top brick-and-mortar retailers to expand their online presence rapidly, even as smaller format retailers continued to gain strength, notwithstanding their digital challenges and rising costs, a new survey said.

According to the 2017 China top 100 chain stores survey released by the China Chain Store& Franchise Association, integration of brick-and-mortar stores and online platforms was the most outstanding feature of the retail industry in 2017.

In 2017, the country's top 100 retail chains attained revenue of 2.2 trillion yuan ($346.7 billion), up 8 percent year-on year. The top 100 retail chains had more than 109,800 stores, an annual growth of 9.1 percent. Convenience stores outpaced other retail formats in terms of growth rate, up 16.9 percent in sales and 18.1 percent in the number of stores.

In comparison with the slow growth of the physical retailers, online retail has surged rapidly. According to the National Bureau of Statistics, online retail revenue grew 32.2 percent in 2017 from the level in 2016. The growth rate is 6 percentage points higher than that in 2016. JD, with revenue of 363.3 billion yuan, has become the largest retailer in the country.

Established brick-and-mortar retailers have expanded their online reach and have grown into omnichannel retailers. For example, online sales of Suning.com, Kidswant, and Freshhema account for 52.1 percent, 30 percent and 50 percent of the total respectively.

In 2017, the top 100 chain store retailers saw online sales grow by 78.9 percent, a sharp increase compared to 69 percent in the prior year. The number is higher than the 32.2 percent growth of general online retail, and 8 percent increase of offline sales from top 100 chain store retailers.

However, apart from home appliance stores, online retail has not become the driving force for the sustainable development of the brick-and-mortar stores. Fast-moving consumer goods companies have found it hard to make profits from their online operations.

The survey shows that physical stores have challenges in their limited investment in digital operations. For example, investment in information and digital transformation among the top 100 supermarket companies only takes up 0.9 percent of the total sales.

Shortage in the number of professionals in online operations and weakness in supply chains have also been the bottlenecks for brick-and-mortar stores in the country.

Retailers' operational costs have also risen, with electricity costs rising by 4.6 percent, labor by 8 percent and rents by 5.6 percent.

Therefore, an increasing number of physical stores have collaborated with multiple online giants to develop multiple channel distributions.

The report found that consumer preferences in smaller stores have had an impact on the market. The number of new department stores and shopping centers has drastically reduced. Small-sized retail stores have grown by 7.7 percent year-on-year.