The decline of the physical market for books and music caused by digital could hinder U.K. entertainment retailer HMV Group's ability to prosper, a retail think tank has claimed.

The KPMG/Synovate's Retail Think Tank expressed a gloomy outlook for non-food retailers generally this year. However, it singled out the next 12 months as being particularly "important" for HMV and videogame specialist Game, which also sold music CDs during the Christmas trading period.

The report said: "The stock market has decided that the structural decline of the physical market for games, books and music caused by digital downloading will very quickly overwhelm the efforts of both companies to adapt and prosper.

"The severe derating of Game and HMV seems harsh, but the stock market tends to get these things right, so both companies will have to work very hard to get both consumers and investors more on their side this year."

HMV Group's share price has almost halved during the past 12 months from £1.37 ($2.18) at the beginning of February 2009 to 76.75 pence ($1.22) on Jan. 28.

The think tank concluded that higher interest rates, another fall in house prices, more unemployment and tax rises could hit the country this year, ending recent resilience in retail spending.

Helen Dickinson of KPMG said: "Because retail is so heavily dependent on consumer sentiment and individual consumers' personal financial situations, which, in turn, rely on the economy, the sector is affected very quickly by economic events. Unfortunately the current situation is more of a bumping along the bottom of the recession cycle than real recovery from it and the delicate confidence that has recently returned could very easily be shattered."