Verdict says the supermarkets have taken sales from multiple retailers such as Woolworths, WH Smith and John Menzies as the grocers continue to target fast-moving chart titles at competitive prices.
Specialist megastores such as Virgin-Our Price and HMV have not suffered, as they offer wide ranges and a "destination" appeal, particularly to fashion-conscious teenagers.
Verdict's Clive Vaughan says there is even more scope for these operators to add extra dimensions to their stores: "They could open Sega centres or cyber-cafes, for example," he says.
Verdict's report shows that the growth of the UK music and video market slowed to 4 per cent last year, half the rate of 1995. The market was worth pounds 2.85bn, with growth held back by the greater availability of budget CDs and cassettes.
Pricing remains a key factor in retail success and the report shows that consumer fears over high prices are misplaced. It says that if the price of a CD had risen in line with inflation an album priced at pounds 11.99 in 1983 would now be pounds 21.55, instead of the typical price of pounds 14.49 today.
Music retailers will have to make more attempt to target the "baby boomer" market if it is to improve sales, the report says. It says this growing section of lapsed music buyers could be tempted back into music buying if retailers opened large out-of-town stores.
Another potential threat to the market is the Internet and digital television, which could make it possible to download music direct on to a disc or a hard drive. Verdict says record labels such as EMI and Sony could choose to sell CDs direct to the public, cutting out the retailer altogether, or offer the chance of downloading music through cyberspace.
"In general we are sceptical about the prospects of online retailing but this is one area where it could make huge inroads," says Mr Vaughan.
Music and video
Market share 1996 %
Virgin Our Price 18.4
WH Smith 7.4
John Menzies 2.1