View from City Road: Argos can cope with pressure on margins

It is perhaps just as well that a rather anaemic retail sales survey from the Confederation of British Industry backed up Argos's claim that the rate of growth had tailed off since May; Argos trotted out such a list of possible reasons for the decline that the City could have been left with the suspicion it was the only chain that was suffering.

Taken together, Argos and the CBI confirm what any shopkeeper will tell you: this will be a slow-burn recovery, not a get-rich-quick one. Getting consumers to part with their cash is clearly hard work, even without tax increases and prepayment of fuel bills.

Argos calculates that its commitment to offering the lowest prices knocked 1.6 per cent off the average spend of its customers in the first half - rising to 2.7 per cent in May and June - on top of general price deflation of 0.3 per cent.

That removed 0.2 percentage points from its gross margin in the first half, and the damage is likely to be greater for the year as a whole. While the innate pessimism of Mike Smith, chief executive, should never be underestimated, his warning that margin pressure is here to stay looks realistic.

Argos is well-equipped to cope. Years of paring away at its cost base - and the pay-off from the latest systems upgrade has yet to fall through to the bottom line - has made it one of the most efficient retailers; its market share allows it to generate sufficient volume to limit the impact of margin erosion; it still has scope to expand the chain - and more than enough money to do so.

That sets the company apart from those - Burtons and Sears are the classic examples - who spent the late 1980s desperately trying to win the space race, only to spend the 1990s wondering why so little of it is profitable. They may work it out, eventually, but in the meantime it is worth paying the extra for Argos.