China's department stores are trying to reverse a sales slowdown by using more technology.

SHANGHAI — China’s department stores reached a tipping point in 2016, according to a new report.

With the country’s e-commerce industry continuing to grow at a rapid rate — already the world’s largest e-commerce market, online sales in China last year grew 26.2 percent year-over-year to reach 5.2 trillion yuan, or $750 billion at current exchange, according to figures from China’s National Bureau of Statistics — department stores are exploring new ways of doing business to stem their slowing sales, with online-to-offline retailing leading the way.

The “China Department Stores Report 2016,” which analyzes data from 85 department stores across the country to gauge the sector’s performance, was jointly released Thursday by Fung Business Intelligence and the China Commerce Association for General Merchandise.

Overall, the department store sector continued to see sales slow in 2016, but bright spots included growing net profits and lower operating costs as underperforming players are weeded out, leaving stronger ones to grow and innovate.

According to the survey, total 2016 sales of the sampled department stores grew 5.5 percent year-over-year to more than 650 billion yuan, or $94.3 billion, but core operating profits fell 0.7 percent to 15.4 billion yuan, or $2.2 billion. Total expenses and operating expenses dropped 3.1 percent and 5.7 percent, respectively.

The report describes a “New Retail” regime in China, in which department stores utilize new technologies to digitally connect brick-and-mortar with online and logistics services. Though “transformation” is a buzzword that has been employed liberally by the sector over recent years, 2016 saw the players remaining in the game putting it into action.

“Many operators have demonstrated growing sophistication with regard to O2O adoptions, with digitization of retail outlets, launching O2O platforms, creating lifestyle scenes and introducing entertainment elements at physical stores being the key strategies,” the report said, pointing to link-ups such as that between Intime Retail and Alibaba Group Ltd. as the way of the future.

Also key to “New Retail” is unique positioning and differentiated products leading many department store operators to introduce new brands, increase the proportion of merchandise in direct sales and develop private labels.

Regional differentiation continued to be a trend, with a rebound seen in sales growth for first-tier city and Eastern region department stores, while third-tier cities malingered with low single-digit growth.

“In lower-tier cities, people’s purchasing power is rising gradually; yet, with oversupply of commercial properties, flourishing e-commerce and the weak consumer sentiment in high-end consumption, department store operators in the lower-tier cities are facing heavier pressure and stronger competition,” the report said.

In spite of the inherent challenges, some foreign department store operators remain optimistic about China with Macy’s China, U.K.-based department store House of Fraser, Galeries Lafayette and Hong Kong-based I.T. Fashion Group, as well as Hong Kong-based Lane Crawford Department Store all expanding on the Mainland.

On Wednesday, William Fung, group chairman of Li & Fung, revealed at a press conference in Hong Kong that its long-awaited department store joint venture with Wangfujing Department Store and Bailian Group will go ahead this year.

First unveiled in 2015, the project would see a chain of as many as 300 stores rolled out across China.

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