What does the future hold for the UK high street?

It was a distinctly unmerry Christmas for high street retailers such as DSG International and Woolworths. And that's very worrying news for anyone invested in commercial property.

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It was another mixed day for retailers yesterday.

While Christmas hasn't been awful for everyone, the theme of specialist and non-internet retailers suffering has continued.

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DSG International, owner of the Currys and Dixons chains, saw its shares slump 12% as it reported a weak Christmas, with underlying sales at Currys up just 1%, mainly down to post-Christmas discounting.

And it wasn't the only one to have a distinctly un-Merry Christmas...

Electrical retail group DSG had a tough time over Christmas. Gross profit margins fell, and chief executive John Clare, said that Currys had on the one hand, 'lost out to general retailers' in the market for small goods like shavers and digital cameras, while on the other, portable CD and DVD players were hammered as people bought iPods instead, reports The Times. Laptops were popular, but have poor profit margins.

DSG wasn't the only one. Woolworths confirmed it had a hard time too, though no worse than expected after its profit warning in early December. Underlying sales for the six weeks to January 13th were down 4.6% on last year.

Meanwhile, Home Retail Group, which owns Argos and Homebase, said sales at the DIY chain had fallen 2.9% in the 14 weeks to January 6th, although better deals with suppliers and fewer price cuts in store meant profits would actually be better than expected. Argos, meanwhile, saw underlying sales fall 0.2% over the same period.

As we've been saying for a while, it's no surprise that high street chains and specialists like DSG are having trouble. UK shoppers spent a total of £7.6bn online in the ten-week run-up to Christmas, according to internet research group IMRG. That's 54% up on 2005. Sales of electronic goods rose 50%, compared to just 6.9% on the high street.

Argos saw its online sales rise by 37% in the fourth quarter of 2006 - these now account for 19% of sales. Even Woolworths had some success with its internet offering, though inevitably it managed to mess that up by underestimating how much its free delivery service would cost it.

Internet retail is now significant enough that it's reached the point where growth may start to slow this year, according to research group Logan Tod. The aim now, the group says, is for retailers to target 'high-growth market segments', rather than just increasing the volume of people shopping online.

So it shouldn't be any surprise that DSG's chief executive also said yesterday, according to The Times, that Currys is 'likely to move off the high street over the next five years as store leases ran out.'

It does make sense. Why pay for staff to run around costly high street premises when most of your customers would prefer to buy online? But it should be worrying news to anyone invested in commercial property - particularly retail premises. After all, what will take the place of all those Currys stores? And DSG can't be the only one planning to leave the high street - specialist retailers are reaching the point where they will either close their branch networks voluntarily, or simply reach a point where bankruptcy does it for them.

The idea that the big chains will abandon our high streets for the internet, leaving behind lots of space for little French-style boulangeries, tasteful boutiques, and continental cafes is rather appealing - but the trouble is that small businesses can't afford to pay the same kind of rents as the big chains. With yields on commercial property already looking very stretched - in fact, Standard Life has already said that it is cutting back on its commercial property investments, because rental yields have now fallen below the return on gilts - that can't be good news for the people who own those high street premises.

Anne Breen, head of property research at the group, said: "We are reducing our funds' exposure to commercial property. Particularly high street retail, which we won't buy." When a fund group like Standard Life decides it can get more for its money in a safe investment like gilts, it's not a bad idea to sit up and pay attention. We'd suggest any readers thinking about investing in commercial property do the same.

Just on another point, we asked yesterday if you were willing to accept a pay cut this year - it seems many of us already have. In November, average earnings grew by 3.6% - but as The Times points out, retail price inflation rose 3.9% in the same month - so that's an average paycut of 0.3% in real terms. It's the first time that wages have fallen in real terms since 1997.

No wonder retailers are having a hard time.

Turning to the stock markets...

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In London, the FTSE 100 ended yesterday 11 points weaker - but off earlier lows, closing at 6,204. DSG International was the day's biggest faller due to disappointing Christmas sales, whilst brewer SABMiller topped the leaderboard after it released an encouraging trading update. For a full market report, see: London market close

Across the Channel, stocks tracked Wall Street lower. The Paris CAC-40 ended the day 29 points lower, at 5,561. In Frankfurt, the DAX-30 closed at 6,701, a 15-point fall.

Across the Atlantic, strong results from JP Morgan failed to offset weakness in the tech sector. The Dow Jones closed 5 points lower, at 12,577. Poor results from software company Intel weighed on the tech-heavy Nasdaq which closed 18 points lower, at 2,479. The S&P 500, meanwhile, ended the day at 1,430, a one-point fall.

In Asia, the Bank of Japan's decision to keep interest rates on hold gave the Nikkei a boost. The leading average closed 109 points lower, at 17,370.

The price of crude oil had climbed to $52.43 a barrel this morning. In London, Brent spot was trading at $52.78 a barrel.

Spot gold last traded at $633.00 this morning, just off an intra-day high of $633.50, and silver was at $12.83.

And in London this morning, the London Stock Exchange announced a £250m boost to its share buyback scheme in order to persuade shareholders to reject a hostile takeover bid from Nasdaq Stock Market Inc. The LSE also predicted a surge in electronic trading and said that it will cut trading fees in order to counter opposition from other investment banks set to introduce their own electronic trading system.

And our two recommended articles for today...

Exposing the cracks in the financial system

- Marc Faber is positive about the outlook for the global economy, but deeply concerned about global asset markets. For his unique explanation of the dangers of asset inflation and excess liquidity - using the island of the Bushes and the Smartos as an example, read: Exposing the cracks in the financial system

Could you profit from gold coins?

- If you're at all worried about the geopolitical or economic outlook, then you'll want to hold gold. You may already know about buying into gold funds or bullion, but have you ever considered gold coins? To find out the easiest way into one of the best investments for uncertain times, see: Could you profit from gold coins?

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.