News Analysis: Shoppers put the squeeze on the high street

NEXT, the fashion retailer, appeared to buck the trend of high- street gloom yesterday when it issued an upbeat Christmas trading statement and said its end-of-season sale had been "satisfactory". News that its retail sales in the 21 weeks to 24 December were 13.5 per cent higher than last year from 11 per cent more selling space pushed the shares up 10 per cent.

But most retail analysts still expect the overwhelming majority of major store groups to issue disappointing sales updates in the next few weeks. "We expect Next to be the exception," said Nick Bubb, retail analyst at SG Securities.

What is going on here? Is it really sufficient to blame shrivelling consumer confidence and rising fear of redundancy for the high street's woes? Or are there more fundamental, structural issues at work?

There is no doubt that Britain's retailers are struggling. Although Next's sales rise looks encouraging, it was achieved against weak figures last year followed by a profits warning in March. And elsewhere in the sector yesterday the news was not so good. Allied Carpets ended discussions with potential bidders because offers were too low, while the British Retail Consortium's Shop Price Index for December showed that prices on a range of most commonly bought goods were 0.6 per cent lower than this time last year. It said the second consecutive month of falling prices represented the start of a deflationary trend.

The "feel-bad" factor" is weighing against official figures showing that Britain is relatively well off compared to the start of the last recession. The savings ratio is higher, and weekly disposable income is still comfortably up year-on-year. Sales of certain items show that if the product or service is attractive, consumers will flock to it in droves.

Figures this week from the mobile phone operators showed soaring subscriptions over Christmas. Leading players such as Vodafone, Orange and One-2-One added an astonishing 2.5 million new customers in the final three months of the year, many in the form of Christmas gifts. Other new technology products are also doing well, such as digital cameras and wide screen digital televisions.

But why is the rest of the high street in such a parlous state? As with most crises, a combination of factors is at work. Apart from the obvious - weak consumer confidence - these include: a shift in pricing psychology; a change in buying trends towards services rather than consumer goods; lack of inspiration and innovation on the high street; over-supply; and an increase in competition from other channels such as mail order and the Internet.

Take prices. After decades of shopping with an inflationary mindset, consumers and shop-keepers are having to live with a new concept - that prices will not necessarily go up, and that they might even come down. This has the effect of deferring some purchases, particularly big ticket items such as furniture and carpets.

"No one wants to pay full price anymore," says Mr Bubb of SG Securities. "The media coverage of rip-offs, whether it is right or wrong, has got through to consumers. We have all become much more bargain conscious." Paul Edwards, managing director of the Henley Centre, the forecasting group, agrees. "People aren't stupid. If it is anything big, they buy it in January."

The shift has been underlined by the trend this Christmas to give vouchers as presents so that the spending power goes further in the sales.

Mr Edwards adds that this shift in pricing psychology has moved pricing power from the retailer to the consumer, who now has the whip hand.

A more gradual but fundamental problem for the high street is the shift from consumer goods towards services. Although yesterday's purchasing managers' index showed a dip in activity in the services sector, the annual study of family expenditure undertaken by the Office for National Statistics shows an underlying trend towards higher spending on services.

In 1991 leisure services accounted for 9 per cent of household expenditure. Last year that had risen to 12 per cent. In the same period the proportion spent on clothing and footwear fell from 7 per cent to 6 per cent, while the share of spending on food, alcohol and housing also fell. These figures move with glacial slowness, but there is no denying the trends.

A lack of inspiration on the high street is another problem. According to Nathan Cockrell, retail analyst with BT Alex.Brown, Britain's retailers must do more to inject an element of theatre and glitz into their stores. "Whenever I go to America I am struck by how many more exciting places to shop there are. They deliver service and an experience few match in this country.

"The problem is that when times get tough, companies tend to get more conservative which is going in the wrong direction. If you are going to tempt people to come to your shop rather than spend money in a restaurant or cinema, you have to provide something exciting," says Mr Cockrell.

Over-supply and an increase in competition are other difficulties. Britain is already considered "overshopped", but more retail developments come on stream, soon such as the massive Bluewater Park in Kent, which opens in March.

As if all this were not enough, traditional retailers face the prospect of more competition from mail order and the Internet. Arcadia, the former Burton multiples division, distributed 47 million mini-catalogues last year. And the new M&S home furnishings catalogue landed on doormats yesterday. As Mr Cockrell states: "Life for the bricks and mortar retailers is going to get tougher and tougher."