The next time you stroll through your local town or city centre, with its independent shops, chain stores and coffee shops, take a good look. Some of them might not be around much longer.

According to a wide-ranging study compiled for The Times, the wave of consolidation that has swept through industries such as banking is about to break over Britain's high street.

And in an economy in which retail output is estimated to make up about 20 per cent of national gross domestic product, this matters far more than in the merely cosmetic appearance of familiar shops and stores.

OC&C, the strategy consultancy, has carried out the first sector-wide study of its kind into the profitability and dynamics of the retail industry, culminating in its report State of Retail 2008. It concludes that retailers were travelling in the right direction before the economic headwinds arrived, but adds a chilling caveat.

“The slightly positive picture is that we're entering the downturn having seen profit growth,” Richard McKenzie, a partner at OC&C, said. “We're entering it in as good a shape as we could but that probably isn't good enough.” OC&C examined the effects of ownership, asking several key questions. Do public companies outperform family businesses? Do private equity owners ruthlessly cut costs at the long-term expense of the business? Are foreign owners importing bright ideas to British business?

The researchers took a close look at the effects of the internet on the industry and, with analysts expecting online sales to provide the only growth in the retail landscape in 2009, OC&C's conclusions will be disheartening. The report also poses troubling questions on the overall resilience of the sector with the economy on the brink of a recession. All of the trends are pushing towards an acceleration in company failures and distressed takeovers next year.

According to Mr McKenzie: “Retail is clearly a low-margin game, which means it is almost inevitable in the current environment that there will be consolidation and retailers will go out of business.”

Revenue growth of the top 230 retailers is lagging that of the FTSE 250 by 1.7 percentage points. Even more worrying is the divergence in profit margins: margins on earnings before interest and tax is an average of 5 per cent for retailers. FTSE 250 companies manage 10.7 per cent.

OC&C looked at the accounts of the 233 British retailers with a turnover of more than £35 million. By delving into Companies House filings and studying the disclosed accounts for public companies, they were able to make like-for-like comparisons.

The index demonstrates the extent of consolidation that has already taken place in the retail sector. The 233 companies that comprise the index account for more than three quarters of Britain's total retail spending. The top 20 account for more than 54 per cent of Britain's sales, while the long tail made up of thousands of independents, sole proprietors and small chains claims 24 per cent of the market. The data shows that the market share of the independents is slowly shrinking, yet there are smaller operators who are bucking the trend by posting spectacular profit margins and strong revenue growth — clothes retailers, in particular, have proved adept at finding niches between the mass-market giants.

Overall, the industry's thin profit margins mean that it is not buffered from the worsening economic climate. Mr McKenzie said: “We were surprised by the enormous proportion of retailers that are very low margin. That was the biggest single lesson for me. There's no room for error.”

The report is intended to shed light on the dynamics of the industry. “We wanted to get under the skin of the sector,” Mr McKenzie said.

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