No thaw for stores: as shoppers stay home, hopes of a retail revival perish on Britain's frozen high streets

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The Independent Online

Even before Boots' shock profits warning, the signs that something was up on the high street were all there. You just needed to know where to look - such as outside your window.

Even before Boots' shock profits warning, the signs that something was up on the high street were all there. You just needed to know where to look - such as outside your window.

As the shortest month, February is rarely going to produce the year's highest retail trade figures. But this February, the country was hit by blizzards, and even the most ardent shoppers will struggle to get to the shops when there's snow falling outside.

Meanwhile, prices at Marks & Spencer, a giant on the high street, were falling. M&S claims it is simply repositioning them closer to those of its rivals. But jittery City analysts have taken the discounts as a sign of weak trading. Then there were John Lewis's weekly figures, which made for gloomy reading, and Boots' announcement last week. The chemist chain said profits could be down as much as 12 per cent due to weaker consumer spending and competition from supermarkets.

The final proof should come on Tuesday, when the British Retail Consortium (BRC) publishes its monthly sales monitor. It is likely to show a decline of up to 2 per cent, and the City is bracing itself for a rash of downbeat trading updates in the coming weeks.

Seymour Pierce, retail analyst Rhys Williams, is among the pessimists: "Tough trading has been compounded by the snow," he says, "and if you don't have a big pick-up in winter, you're straight into spring." He is even cautious about traditional stalwarts and has pencilled in flat sales for the fashion chain Next, which updates on trading later this month.

This downbeat trend, however, has been a long while coming. The spending boom of recent years ensured good times for retailers and boosted the economy during a global slump. But demand eased last year as interest-rate rises began to bite. Come Christmas, it was evident just how far things were slipping. The festive shopping season usually starts in November, but this time round, consumers held off until the last minute or even the January sales.

January is always unpredictable: sales may be up, but that is largely due to discounting. And the worse the Christmas, the bigger and longer the sales - and the bigger the hit to margin. February ought to herald a return to normality - so this year's dismal performance does not bode well for the rest of 2005.

"It's going to be a pretty flat year," says Tim Denison, director of knowledge management at SPSL, which measures footfall in shops. "The figures we're seeing now are what we're going to see probably throughout the whole of 2005. There will be some that will manage to turn it around, but it's going to be the toughest year for probably six or seven years."

The BRC is sufficiently concerned to be calling for a rate cut when the Bank of England's Monetary Policy Committee (MPC) meets this week. Kevin Hawkins, director-general at the BRC, says: "I'm not saying for one moment that a quarter per cent off would see people rush back to the shops. It's not going to trigger a consumer boom. But it would make a significant impact on a depressed psychology. The more talk there is of another interest-rate rise, the more cautious the consumer is going to be. That really is critical."

The reality, however, is that the economic picture is not so clear-cut. Consumer spending is evidently down, and interest rates have, of course, risen. But the housing market appears for the time being to have stabilised, consumer confidence is improving and unemployment remains at record lows - all key influences on spending.

So why aren't we hitting the shops? David Page, an economist at the investment bank Investec, says there is little fresh impetus to encourage spending, especially against a background of high personal debt. "The outlook for housing may have improved, but it's not much of a fresh drive. There's also been a retail boom over the past few years - just how many videos do you actually need, how many iPods?"

The MPC is concerned about deteriorating conditions on the high street. But despite this, many still believe it will err on the side of caution and leave rates on hold, with some arguing there will be no further movement this year.

Which leaves little room for error by retailers. With no help from the Bank, and given stiff competition and price deflation, the battle for your pound will be fierce. The losers are likely to be stores in the luxury sector; the winners, the supermarkets. After all, even if you don't fancy a spending splurge, you will still have to do the weekly shop.

There is also likely to be the odd fillip, all things being equal. Most retailers, for example, will now be hoping that, following a prudent February, the Easter shopping period will be buoyant. Not everyone is suffering, either. The day after Boots' announcement, the out-of-town discounter Matalan issued a far more reassuring update, suggesting some sectors and some locations will fare better than others.

Overall, though, no one is arguing that things aren't getting tougher for retailers. For a start, while consumer demand is slipping, costs continue to rise. Mr Hawkins, for example, claims increases in the national minimum wage will have added 27 per cent to salary bills by October 2006. But ultimately, the health of the high street is dependent on us. Retailers need shoppers. And when they stop spending, that is when the real problems start.

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