Christmas trading will be tough, says Safeway

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THERE WAS fresh evidence of the slowdown in consumer spending yesterday when official retail sales figures for October showed a steeper fall than expected and Safeway warned that it was anticipating "the toughest Christmas for several years".

UK retail sales fell by 0.4 per cent in October, according to the Office for National Statistics, taking the annual growth rate to just 1 per cent, its lowest level since January 1996. The drop in sales came despite heavy price-cutting by retailers, with prices declining in clothing and footwear.

Neil Parker, economist at the Royal Bank of Scotland, said: "It's a disappointing picture. The price cuts have not had the desired effect and it doesn't look particularly good for Christmas".

Safeway said that although there was no evidence that consumers are "trading down", shoppers were becoming more cautious. Hinting at a price war as the major supermarket battle for customers, Safeway said it was already seeing rivals cut the price of commodity items such as bread, milk and canned goods. Colin Smith, Safeway's chief executive, predicted that if Christmas did turn out to be disappointing, prices would fall further.

This view was backed up by New Look, the women's fashion retailer, which yesterday reported a 21 per cent rise in first half profits but weaker sales in October and November. Jim Hodkinson, New Look's chief executive, said: "We are definitely seeing more discounting on the high street and we expect that to continue." He added that consumers were behaving erratically, making it difficult for shops to plan. "We are not seeing any trends. One week it's good, the next it's bad and it is not always clear why."

Safeway claimed it was making good progress after its profits warning last year. Though pre-tax profits fell by 17 per cent to pounds 190m in the six months to October, sales growth was more encouraging. Same store sales were up by 4.7 per cent in the period and 4.9 per cent in the last five weeks.

Sales growth has been achieved by lowering the margin, improving product availability and introducing high profile promotions. Mr Smith said Safeway s was "no longer trying to be all things to all people." Instead it is hoping to target specific groups such as families with young children and encourage more of its customers to do their whole shop at its stores rather than just top up with upmarket items.

Safeway plans to open 100 new fish and meat counters, 40 creches and 30 pharmacies to its stores over the next two years. The company has also repeated its three-year target of generating pounds 1bn of additional sales while delivering pounds 60m of cost savings and returning pounds 600m to shareholders. Safeway shares rose 14.5p to 290.5p on the news though some analysts remained unimpressed. "All the management has done is give itself a stay of execution," one analyst said. "It has bought the sales growth with lower margins and only managed it because last year's comparisons were so poor. It will be different in May."