If you want to combine bargain hunting with altruism, the obvious place to go is a charity shop. Finding one shouldn't be difficult. It is estimated that, following rapid growth over the past few years, there are now more than 5,000 charity shops in the UK.

But few shoppers really know how much of the money they spend benefits charities. In fact, while the shops are a very useful source of income for charities, purchases are an inefficient way of donating your money. On average, 73p of every pounds 1 you spend is soaked up in the expenses of running the shops, according to a survey published last year by the magazine NGO Finance.

Charity shops have become big business. The annual income of the largest five chains of shops alone is now in the order of pounds 150m. At the same time, a number of shops have started selling new, as well as donated, goods and most of the big chains are using paid staff to work alongside the volunteers.

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This is transforming the way outlets are run. "Chains which employ professional staff have revamped themselves from fund-raising opportunities to professional charity retail operations," says Chris Gallagher, head of retail at Barnado's.

The new approach has upset some local shops, which have complained of unfair competition since charity shops enjoy 80 per cent relief on business rates and may even, at the discretion of the local authority, not pay rates at all.

Stephen Alambritis, of the Federation of Small Businesses, says: "The system's unfair. Charity shops are going for prime sites, pushing new goods. We don't mind them doing commercial trading if there's a level [business rates] playing field."

The growth of charity shops, as well as threatening their privileged tax status, could also put pressure on some of the smaller charity outlets. "The growth is coming from the big chains, which are going for it as professional retailers," says Colin Sandford, chief executive of the British Heart Foundation's shops division. "There are also some tremendously professional, well-supported local charity shops, such those connected to hospices. It's the ones in between that will tend to get squeezed."

Charities' rivalry is over the volunteers and donated goods. Sarah Shekleton, of Oxfam, says: "There's no shortage of customers. Where it's becoming tough is getting donated goods. We're trying to make it more convenient for people to bring things to the shops via clothing banks or house-to-house collections."

Oxfam, with about 24,000 volunteers working in its shops, is one of the few big chains still principally staffed by volunteers. This helps contain costs. While the wage bill of most other chains accounts for 20 to 30 per cent of turnover, Oxfam's pay packets soak up only 8 per cent of the shops' turnover.

But this saving doesn't necessarily translate into proportionately more money for the charity. Charities that use paid staff say this factor helps each shop generate a higher income to offset other fixed costs such as rent and electricity; so they make a higher net profit.

Certainly, profits vary a lot between chains. The profits of the top 20 chains range from 42 per cent of income for the Salvation Army Trading Company to just 16 per cent for NCH for Children, according to the NGO Finance survey. One chain, run by the disability charity Capability Scotland, even made a net loss in the last financial year. "The loss is due to a vigorous acquisition policy. We're investing in new shops for the future," explains a spokeswoman.

While such short-term losses are the exception, it's clear that, in general, the profits made from the shops aren't that high. Even added to other trading activities, like direct mail, these profits account for less than 3 per cent of the total income of the leading 100 charities, according to the Barclays/NGO Finance Charity 100 index.

Charities, however, say that making the public more aware of shops' costs is not the answer. "We've nothing to hide," says John Tough, head of retail at British Red Cross. "It has to be understood that charity shops are not the most productive means of raising money. Paying for rent and so forth erodes our profits. The costs are very high, compared to, say, the 1 per cent administrative costs on a legacy.

"None the less, charity shops make roughly pounds 100m a year net profit for the charities sector as a whole."

The costs of charity shops also need to be seen in the light of the other retailers' take from charity-related goods. An amendment to the 1992 Charities Act means that retailers must now say how much money from each pack of charity Christmas cards goes to the stated charities. Last Christmas, the average donation was just 10p in the pound - and that was twice as good as the year before. The profit charities made from cards sold in their own shops was far higher.

The charities say there are also a number of other benefits to their shops. Howard Stirrup, head of shops for Help the Aged, says: "They're environmentally sound because they help recycle a lot of goods; they provide affordable second-hand items for people who may not be able to afford new goods. They offer helpers, who are often elderly, a way of making a positive contribution to society through their volunteer work. And they can provide useful work experience and training for people."

Shops in the high street can also help charities' campaigning work by maintaining their public profile. In the case of Oxfam, the shops are an outlet for its fair trade initiative, which supports overseas producers in poor countries by setting fair, agreed prices for goods, as well as providing training and other support.

CHARITY SHOPS

Number Annual Annual Annual

of shops income costs profit

Oxfam 844 43.3m* 28.0m 15.2m

Imperial Cancer Research 474 26.0m 21.0m 5.0m

British Heart Foundation 300 24.6m 18.8m 5.8m

SCOPE 276 22.7m 17.5m 6.2m

Barnado's 315 18.0m 13.2m 4.8m

Help the Aged 322 16.5m 12.0m 4.5m

Cancer Res Campaign 227 14.5m 11.7m 2.8m

Age Concern England 400 9.6m 7.3m 2.2m

British Red Cross 355 8.9m 5.7m 3.2m

Save the Children Fund 158 6.6m 4.4m 2.2m

*Oxfam shops had an additional pounds 12.7m income from the sale of Oxfam Trading goods. The table shows the largest 10 charity shop chains, measured in terms of the total income generated. The information given is correct as at the date of the charities' last annual reports and accounts.

Source: NGO Finance, Oxfam, Cancer Research Campaign.