Canny consumers outsmart the stores as high streets run into hard times

WELCOME TO the bargain zone. Today marks the last weekend of most retailers' January sales and shopkeepers are now desperate to offload seasonal stock, whatever the discount.

Some of Britain's most prominent stores groups have been advertising "best ever" offers all week. House of Fraser is cutting an extra 20 per cent off some menswear, womenswear and household items at its department stores. Laura Ashley is frantically advertising a "Blue Cross" sale with 20 per cent off sale clothing and home furnishings. Even stuffy old Savile Row tailor Gieves & Hawkes has been dragged into the unseemly, last-minute discount business. It is advertising a further 15 per cent off all sales stock with the upper-class reminder: "One knows when time is running out".

You've guessed it - it has been another dire week on the high street. Official figures showed that retail sales in the run-up to Christmas were among the weakest in recent years. And there is grim trading news from a string of stores groups. Struggling M&S tried to garner some positive publicity with the launch of its new spring clothing collection, but found it roundly rubbished by the fashion experts. Laura Ashley reported a slump in sales as did Moss Bros, Alldays, Thorntons, Body Shop and Hamleys. This followed the calamitous profits warning from M&S only last week.

The slump is so severe that many retail experts are at a loss to explain it. The regular refrain from the high street is that sales are weak because of slumping consumer confidence. That seems obvious, but economists point out that employment is growing, real wages are rising and that the savings ratio is far higher now that it was at the start of the last recession, when consumers had built up huge credit card bills.

A survey this week showed that confidence had actually improved since Christmas and that people feel far more upbeat about their personal finances. According to Richard Hyman, head of Verdict, the retail consultancy, a gap has emerged between consumer confidence and their behaviour. People may feel slightly more optimistic, but due to job fears and other insecurities they are squirreling money away "just in case".

Steve Bell, economist at Deutsche Morgan Grenfell, a City investment bank, points to two other factors. He says there has been an absence of one-off benefits such as building society windfalls and energy bill credits, which came from the National Grid stock market flotation in 1997.

He also says the introduction of self-assessment income tax forms by the Inland Revenue could have had an impact. He points out that the new scheme has both widened the net of income tax - forcing more people to pay - and shortened the time lag between earning the income and paying the tax.

In some ways British retailers have contributed to their own problems by a lack of innovation, inefficiency and over-expansion. There have been sectors where new products have caught the public's imagination such as mobile phones, personal computers and digital cameras. But this could be explained, at least in part, by a sharp fall in prices for these products, making them available to a far wider audience. PCs for example, can now be bought for less than pounds 600 compared with pounds 1,200 a year ago.

Elsewhere, in clothing and home furnishings, for example, there has been no discernible trend that has caught the eye and created a "must have" buzz. Even designer retailers such as Paul Smith have been left with racks of unsold suits.

Service in UK retailing is still poor. M&S has admitted recently that it has too few staff on the shop floor. In some other shops it can be hard to find anyone at a till to enable customers to pay.

Consumers have become wary of "rip-off" pricing. They have read the headlines about how much more expensive Britain is than the US and continental Europe. But shopkeepers here are saddled with exorbitant rent demands from greedy landlords whose lease agreements would scare an American retailer witless. "People just don't want to pay full price anymore," says Nick Bubb of SG Securities. "They wait and wait. They shop around. They now hold the whip hand on prices."

Perhaps the last recession is still casting its shadow too. In the 1980s boom, the high street was dominated by some of the most colourful entrepreneurs of recent decades. There was George Davies at Next, Sir Terence Conran at Habitat and Gerald Ratner at the jewellery chain. They created new businesses and generated excitement. The last recession forced those people out of their companies as they over-extended themselves and ran into financial trouble.

Now many retailers groups are run by safe, solid accountants. They may make fewer mistakes but they take fewer risks. The result, some say, is a lack of inspiration - too may shops looking too similar and selling indistinguishable goods at uncompetitive prices.

As Nathan Cockrell, retail analyst at BT Alex.Brown, says: "A little while ago Next was criticised for stocking too many `fashion' items and not enough classics. They have put that right and their share price is rising. But in many ways they were trying to do the right thing last year. Fashion should be about taking risks."

There are longer-term trends at work too. One is the gradual shift towards buying fewer consumer goods and more services instead. The proportion of household expenditure spent on services has risen from 9 per cent to 12 per cent between 1991 and last year. In the same period, spending on clothing and footwear has fallen.

One forecaster says: "To put it crudely, we already own a lot of `things'. So we are finding other ways to spend our money, on things like foreign holidays, trips to the gym or a meal in a restaurant."

A shift in buying psychology is also important. After years of shopping with an inflationary mind-set - "I must buy it now or the price will go up" - consumers are now happy to wait because prices may actually fall. This has been a key reason for the sharp fall in sales of so-called big ticket items such as carpets and furniture as people defer purchases in the hope of a bargain.

In services, the picture is different. Prices of haircuts and restaurant meals are holding up. This is partly because the wage component of services is far higher than in manufacturing where price deflation has become endemic.

When will the doom and gloom end? In the summer, experts say. By then interest rates should have been cut to a level that will kick-start the economy once more. It will be a relief to Britain's shopkeepers, who have lurched through one of the toughest environments they can remember.