Independent retailers are selling more, but profit margins have slipped, according to this year's poll of the Top 50 Independent Retailers.

Fierce competition from the multiples, soaring energy costs and a 6% hike in the minimum wage last October, meant that although turnover rose 6%, pre-tax profits couldn't keep up, rising 2% in 2006 for stores in our Top 50 list, as profit margins dropped from 1.8% to 1.7%. This is well below Tesco's margin of 6%, but a fraction higher than the 1.5% revealed earlier this month in our Big 30 poll of the UK's biggest wholesalers.

It's all change at the top this year, with CTN chain Martin McColl going straight in at number one - following a first full-year trading as a management-owned retailer and raking in sales of £680m in the latest year.

Martin McColl's trading director Tony Start is delighted the business tops our survey for the first time and, despite the independents' low profit margins, is enthusiastic about the general health of the sector. "I am confident there is a strong future for the independent and convenience market," he says. "There is plenty of competition, but if you get it right, you can build a strong business."

Last year's number one, Farmfoods, has dropped to number two with sales of £414.8m after a disappointing year, while third-placed TJ Morris, the company behind discount chain Home Bargains, with 117 stores across the North of England and The Midlands, is one of the fastest-growing independents, with sales up 23% to £273m.

It has been a tough year for the Top 50. As many as 14 independents saw sales fall, while 19 took a profit hit. Three companies reported a loss - GT News, Stokes and Winemark - and lack of information means it is unclear whether Jeroboams has returned to profit after last year's loss of £1.3m. Profit margins were down among half our retailers.

To protect margins the independents are playing the multiples at their own game - making greater inroads into non-food and cashing in on the healthy eating trend by emphasising fresh produce ranges.

"We are very strong on non-food because this attracts higher margins," says Brian Godfrey, MD of Roys, which has a profit margin of 2.4%. "But you have to get the mix right. In 2006 we also increased our fresh food offer because it has better margins than ambient. All our fresh food is sourced locally, but Tesco and the multiples have jumped on this bandwagon, so we must emphasise our heritage in local produce. Our marketing now reflects this."

Non-food has paid particular dividends for TJ Morris. Last year its profits were up a creditable 32% to £20.3m - more than the turnover of the bottom 13 companies in our Top 50 list, and its margins, at 7.4%, are second only to the much smaller Chalfont Foodhalls. Grocery still accounts for 70% of the company's offer, however, according to operations director Joe Morris, who puts the company's success down to selling branded goods at the lowest price.

Opening 15 outlets last year, taking its portfolio to 117, has helped but it plans more. "We aim to open 20-25 stores a year," says Morris. "Our cover is from Newcastle to Northampton, but our goal is to cover the UK with 400-500 stores within the next eight to nine years."

Increasing store numbers was a popular strategy in 2006, with 18 retailers adding to their portfolios. Park Garage Group more than doubled its portfolio from 28 to 71 stores, boosting sales by 224% and pre-tax profit by 349% in the process, while B&M Retail opened a further 16 stores. Both cite store expansion as one of the main reasons for their healthy profit margins of 5.2% and 3.1% respectively.

Other independents weren't so lucky. Earlier this month, Anglian Convenience Stores dropped out of the Top 50 following its acquisition by the East of England Co-operative Society for an undisclosed sum. Joint MD Bob Surridge said the chain had been unable to expand because the multiples were paying prices for property it simply could not match.

Tony Wright, MD of CTN retailer Maynews, is having similar problems: "I am finding it very difficult to buy suitable stores," he says. "I have the money available to open four new stores this year, but I can't find the sites."

Both RNS Holdings and Stars News Shops also left the Top 50 in the past year and, like Anglian, were bought by the Co-op movement. RNS Holdings went to Southern Co-operative Retailers in August, while Stars News Shops went to Midcounties Co-operative last month. Anglian won't be the last because, according to property experts Christie & Co, leading foreign retailers are eyeing regional c-store groups in the Top 50.

Spiralling costs are also hitting retailers. In October, the minimum wage rose 6% to £5.35 while electricity, gas and petrol costs have also increased. "Over the past five years our wages have exceeded £1m a year," says Geoff Hallam, MD of Tates, which is ranked fourth this year with sales of £216m. "The question is how do you absorb these costs but improve profit?"

Iain Landsburgh, MD of AM Landsburgh, adds: "We were aware costs could spiral so we looked at the development of our people. Our current staff turnover is 28%. This is not what we want, but is better than many.

Hugh Kennedy, MD of Curley's adds: "We have looked at reducing our energy bills by installing heat recovery systems with the help of a local energy provider."

Although competition from the multiples is one of the biggest issues this year, independents believe their trump card is the ability to position themselves locally and provide the 'personal touch'.

"We have a trusted brand locally and our customers know they can buy most commodities in our stores," says Paul Delves, MD of Harry Tuffin. "Independents need to think local and support local events, suppliers and charities," he adds. Hallam agrees: "Independents need to meet local demand and get involved in their community."

The Competition Commission's inquiry into the grocery market is much anticipated. "Competition is good for consumers, but the government needs to decide if it wants the independent sector to survive or not - if they do, they need to act soon," says Delves.

Shane Brennan, from the ACS adds: "Trading times are tough and retailers need to be allowed to maintain their place in the grocery market."