Retailers count the cost of worst Christmas sales period in 3 years

The high street has suffered its worst Christmas in three years, with clothing retailers bearing the brunt of the squeeze on consumer spending.

Homeware retailers were among those badly hit as higher interest rates and bills took their toll on households, according to figures from the British Retail Consortium (BRC). But grocers proved more resilient as shoppers continued to splash out on premium products to celebrate the festive period.

Like-for-like sales grew only 0.3 per cent in December compared with growth of 2.5 per cent the previous year, the BRC said.

December's growth was the weakest of any month since March 2006, when sales were hit by Easter falling in April, and the worst Christmas period since 2004.

The data adds yet more gloom to a sector suffering amid general fears of an economic slowdown, and puts pressure on the Bank of England to cut interest rates when it meets this week. The Bank's Monetary Policy Committee cut rates for the first time in two years in December, but retailers believe the drop to 5.5 per cent was not enough to kickstart consumer spending.

Kevin Hawkins, the BRC director-general, said yesterday's figures were "somewhat worse than expected and point to a very challenging first half of 2008".

Last Thursday, a profit warning from Currys' owner DSG and a dismal update from Next sent shares in retailers plummeting across the board. The following day, the sofa retailer Land of Leather saw its market value halved after management warned that annual profits would come in significantly below last year's. More than 4bn was wiped from the value of the retail sector over the week.

And the misery continues. Marks & Spencer and Sainsbury were down 19.5p and 14.5p respectively yesterday as the City nervously awaited Christmas trading updates to be unveiled this week. A majority of analysts believe that M&S will deliver flat like-for-like sales growth or a dip of as much as 2 per cent tomorrow following its worst Christmas in two years. However, there is also speculation that the retailer could be managing expectations and could surprise with growth of 1 per cent.

Sainsbury's is due to post figures on Thursday and analysts are expecting like-for-like sales growth of 3.6 per cent, excluding petrol. It is thought that the supermarket has lagged behind its rivals over the festive period, missing internal targets for sales and profits, and was forced into heavy discounting of unsold produce as competition intensified.

But overall, food retailers fared better than general merchandisers, according to the BRC survey. Helen Dickinson, the head of retail at business advisory firm KPMG, said that grocers had been able to pass inflation on to consumers more easily than non-food retailers, while the trend for trading up to premium products continued over Christmas. Although consumers may forgo new shoes while times are tighter, they tend to spend more on eating higher quality foods at home instead of eating at restaurants.

Clothing retailers have been under the cosh since the summer, when many stores were forced to bring sales forward early in an attempt to clear stock. The terrible weather meant that consumers were less tempted to fork out on the season's ranges.

Among the Big Four supermarkets, Tesco spent the most on its Christmas advertising, splashing out 18.6m in November and December, including on television adverts featuring the Spice Girls, Nielsen Media Research figures revealed yesterday. Morrisons was next with 18.29m. Asda spent 16.54m and Sainsbury's 13.95m, including 4.66m on slots for its Jamie Oliver adverts.

Tesco yesterday upped the stakes in the supermarket price war by pledging to match the value retailers Aldi and Lidl on 2,000 core lines.