Cracks show in New Economy as internet site sales suffer steep drop

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The Independent Online

The new economy took another battering yesterday after it emerged that sales through internet sites and mail order catalogues suffered their steepest drop for five years last month.

The new economy took another battering yesterday after it emerged that sales through internet sites and mail order catalogues suffered their steepest drop for five years last month.

The value of non-store retailing fell by 6.2 per cent over the three months to April, the biggest drop since December 1995. Even adjusting for the timing of Easter, the volume of sales dropped 2.3 per cent to a four-year low.

The figures, which were published by the Office for National Statistics, came the day after, the European sportswear retailers, became the first internet outfit to be forced into liquidation.

But the data contained good news for the general economy. The fall in non-store retailing contributed to a surprise drop in total retail sales in April which was seen as further evidence that interest rates have peaked.

The ONS said it could not break down the separate trends for internet and more traditional catalogue sales and stressed it represented £165m of sales a week out of a total of £3.21bn.

The fall in non-store retailing took analysts by surprise. "Is internet retailing over? No - it has only just begun and will go up and up and up," said Clive Savage of Forrester Research.

He said consumers would increasingly move away from shopping in stores as digital television and WAP mobile technology made it easier for people to shop over the internet. But he said the main barrier to shopping on the internet was the various costs consumers had to pay - internet access, phone calls and hardware - before even getting started.

"This area is driven by consumers and when retailers and service providers don't deliver what the consumers want then you get stagnation.," he said.

Forrester forecasts online shopping will grow from 0.25 per cent of sales last year to 7.5 per cent of £20bn by 2005.

Verdict Research, which predicts the internet will take 3 per cent of the market by 2004, said the figures highlighted the decline of the catalogue and masked the growth of the internet.

Mike Godliman, director of Verdict, said agency catalogues such as GUS, Littlewoods and Freemans were the weakest part of home shopping. "It is not the Internet," he said.

"These figures are reflecting the decline of the agency catalogue. This will be the issue bringing home shopping down as internet sales are starting to increase."

Meanwhile, the 0.3 per cent fall in total sales surprised the City, which had expected a 0.4 per cent rise. This left the annual growth rate at 4.5 per cent, compared with 4.4 per cent in March.

A late Easter, which fell in April, should have boosted sales and economists said the drop was a sign that recent interest rate hikes had already dented confidence.

As well as non-store sales, sales at department stores and household good outlets - typical indicators of a consumer spending boom - were weak in April. There were also signs that the strong downward pressure on prices may be easing.

The ONS said prices were 0.7 per cent lower in April than a year ago, compared with 1.5 per cent in March. Dharshini David, a UK economist at HSBC, said: "There does seem to be a genuine slowdown in the pace of high street spending. The scope for further rate hikes is looking increasingly limited."

The weak data follows a slowdown in the rate of pay growth and the minutes of the latest meeting of the Monetary Policy Committee showing they voted unanimously for rates to be kept on hold.

Sterling fell to a fresh six-year low against the dollar yesterday following a sharp fall on Wednesday. It went as low as $1.4772, a level not seen since April 1994, and also weakened against the euro.