Hard times on the high street

Retail spending: Hard times on the high street - at Moneyweek.co.uk - the best of the week's international financial media.

The festive outlook is pretty bleak for most traditional shops, with many forced to launch cut-price sales before Christmas. What's wrong with the retailers? asks Jack Dyson.

Isn't Christmas a bumper time for shops?

Traditionally, yes: for most high-street retailers, the run-up to Christmas is still the most important time of the year. Sales tend to be 35% higher in December than average, thanks to the orgy of present and food buying. But this year many shops have had a worryingly slow start. The British Retail Consortium reported the worst performance in November since 1988, with like-for-like sales falling 0.2%. That's the first reported drop since December 2003, which was itself a relatively weak month.

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Why are we spending less?

Worries over excessive debt and declining house prices are discouraging people from splashing out. According to Mintel, one in ten of us plans to spend "a lot less than last year". By holding back, shoppers are forcing shops to drop prices - and they are getting more adept at this kind of brinkmanship. A survey from KPMG and YouGov shows that some 44% of shoppers do not intend to finish their present buying until the week before Christmas.

What about the internet?

Things are looking pretty rosy for online retailers. For the first time, the amount of money spent on Christmas shopping over the internet is forecast to top £1bn. Figures from Retail Decisions, a retail services firm, show online credit-card use between 1 November and 7 November is 61.6% higher than the previous year. More and more consumers are turning their backs on the crowded high street and shopping centres in favour of buying from home. Price comparisons are made easy online, and the likes of Amazon and Ocado are going from strength to strength with their hassle-free home delivery. Traditional retailers are increasingly feeling the squeeze both from this and, of course, from the supermarkets, which are increasingly moving into non-food items - at very low prices.

Is internet shopping trouble-free?

Not always, no. Tesco and Sainsbury's are both being investigated by the Office of Fair Trading over claims that they have ripped off online shoppers. They have been accused of charging more online than in store, charging for a premium product and then delivering a standard one, and using websites to get rid of food that is close to its sell-by date. A recent survey of 1,500 online shoppers by Which? magazine found that the supermarket sites sometimes failed to say if food was out of stock and instead issued an alternative item, usually cheaper than the one ordered. Over 40% of customers said these items were of a lower quality, and in some cases they were not even refunded the difference.

What if things go wrong?

It's almost a British tradition for there to be unwanted or broken gifts under the Christmas tree. While it may not help your debt burden, the best thing you can do, especially for big-ticket purchases, is to use a credit card. Credit-card companies are generally liable if something goes wrong, and will cover UK-bought goods and services between £100 and £30,000. If your item is faulty or broken, shops are obliged to give you a refund, so long as you've still got proof of purchase.

How are the shops responding to the internet threat?

By piling goods high and trying hard to sell them cheap. While in the long term stores hope to compete by offering a better shopping experience, for the foreseeable future at least, price is king - and internet retailers are winning. Marks & Spencer, Allders and House of Fraser have already held flash sales' - one-day spectaculars where everything is discounted. Boots and Woolworths have three-for-two sales across a range of lines, while other stores have advertised limited-period sales. Flash sales may stimulate volumes and get shoppers into stores, but they can also hit margins, and remind consumers that they don't need to pay full price for everything - they can just wait for another sale.

So should I get rid of my retail shares?

In a word, yes. More people might be going shopping, but they are spending less, especially on more expensive items. Deflation means that sales values are falling, and retailers' margins are also under pressure from the price war produced by hot competition and increasingly savvy shoppers. There are winners and losers every year, and retailers who are already discounting prices will not be in pole position. Even strong performers, such as Next (NXT, 1,607.0p), are having to face the fact that underlying sales growth is lower this year, and they may have to follow the lead of others and discount ahead of Christmas. Tesco (TSCO, 310.4p) will probably do all right, but there isn't much upside left in the shares.