Retail appetite robust in China's smaller cities

Some retailers closed under-performing stores or engaged in mergers and acquisitions to counter this. In 2013, US-based retailer Wal-Mart Stores Inc closed 14 stores across China while UK retailer Tesco Plc shut down three and CP Lotus Corp shuttered two.

Department stores are struggling, too. Store totals dropped by more than 4 percent, and total revenue growth was minimal, the report said.

"Stores need to boost public functions in order to attract more consumers, such as parking services, payment services, and wireless Internet connections," said Zhen Shiqi, director of retail services at property services firm DTZ China.

Chinese consumers are more drawn to shopping malls because they offer several functions within one destination. Food, entertainment, exhibitions, and event spaces are attracting more people than pure shoppers. Mall restaurants have also expanded, the report said.

China will see fast growth of shopping malls in the next few years, with mall construction area set to go up by 20 percent. Most of the malls under constructions are expected to start operations in the next few years, mostly in smaller cities and towns.

According to data provided by CBRE, a property services provider, about half of the global area under mall construction is in China, around 200 million square meters as of April.

Industry sources said China's shopping malls need to have their own character to provide consumers a wider range of choices and to avoid head-to-head competition.

Top 10 world's biggest retailers	Walmart closes store in Chongqing