Blood on the shop floor as retailers report sales falling at the fastest rate since records began

The fragile state of consumer spending was underlined yesterday as the CBI's latest survey of the retail sector showed sales volumes falling at their fastest rate in the report's 22-year history.

The survey will worry the Bank of England, which cut interest rates last month and has said it expects consumer spending - which accounts for two-thirds of the economy and has been its main driver for several years - to recover in the second half of the year.

But the CBI survey, which covers about half of the retail sector, showed the gloom is unremitting: 50% of shops said their sales were lower this month than last September, while only 26% said they were up. The resultant balance of -24% is the worst the employers' body has ever released. September was the seventh month in a row of falling sales. The underlying, three-monthly sales balance fell to a record low of -20%.

John Longworth, executive director of Asda and chairman of the CBI's distributive trades panel, said: "There was no let-up ... Despite extended summer sales, this is the fourth month in a row when volumes have fallen well short of last year's levels. Margins are being squeezed further as prices are cut and fuel prices rise."

The downturn is all the more stark because it has followed a 10-year upswing, when confident consumers, buoyed up by rising house prices, spent freely. Now almost every retailer - even Tesco - is peppering trading statements with words such as harsh, challenging and tough.

Kingfisher, which owns the DIY chain B&Q, is cutting jobs, closing stores and planning a revamp to drum up sales, while MFI has issued a severe profit warning. Yesterday HMV, House of Fraser, Topps Tiles and Kesa, which owns Comet, all published gloomy sales figures.

Several retailers have collapsed, including the department store chain Allders, Furnitureland, the fashion chains Pilot and Ciro Citterio and this week Allsports. The CBI said that apart from grocers and specialist food retailers, all sectors were weaker than a year ago.

The worst affected are sectors related to the housing market: furniture, carpets, durable goods and DIYand hardware . "Furniture is the ultimate postponable purchase," said John Coleman, chief executive of House of Fraser. The home furnishings market was down by 25% to 40% over the past year.

According to Sir Stuart Hampson, chairman of John Lewis, which last week announced half-year sales down a mere 1.5% at its 27 department stores, consumers now fear spending. "There's no reason for confidence to be as bad as it is. We have earnings growth and full employment."

Mr Coleman agreed. "Consumers have got money, but they are now using it to pay debt. Something has spooked them."

Economists said the CBI survey made grim reading. Howard Archer, of Global Insight, said: "The survey is disturbingly weak and will heighten concern that the slowdown in consumer spending is firmly entrenched." The survey has raised City expectations of further interest rate cuts.

Consumers have been squeezed by the series of rate rises before last month's cut; rising utility bills; council tax rises, and the housing slowdown. But sliding sales are not the sector's only problem: costs are soaring. House of Fraser's finance director, David Adams, said the chain this year faced a 4% rise in rents; a 6% rates rise, and utility bills more than 5% up on a year ago.

There is also pressure on wages - led by a rise in the minimum national wage next month - and big increases in distribution costs due to higher oil prices. Last week Tesco said steeper oil prices would cost it £60m - and pile further pressure on consumers to curb spending.

When will it end and will shoppers relax the purse strings a little for Christmas? Retailers are unsure, and certainly not planning for an upturn, but they have bought in less stock in the hope that this year they will be pushing less into the January sales at marked down prices.

Comet

The electrical retailer is pinning its hopes on improved customer service after announcing a first-half loss of £3.3m.

The parent company, Kesa Electricals, which is Europe's third-largest electrical retailer and also owns the French chains Darty and BUT, said profits to July 31 fell 27% to £36.6m. Earnings at Comet, which has 250 stores in Britain, saw sales fall 2.2%, putting it in the red at the half-year point for the first time in three years.

Jean-Noël Labroue, chief executive of Kesa Electricals, said: "We face a difficult retail environment in the UK and there are no indications that spending will improve. We are planning for the same trends that we have observed since the beginning of the year, which is more or less flat." He said the white goods market - on which retailers enjoy a higher profit margin than on electronics - was doing especially poorly, falling 4% - 5%. He said: "It's the worst environment I've ever seen. People are holding off from replacing their washing machines and fridges for as long as possible and are not being attracted by new design and technology."

The chain has also been squeezed by supermarkets selling low-end electronic goods and has seen margins eroded as the prices of more expensive items plummet. Plasma-screen televisions, for example, sell for about 30% less than last year.

Simon Fox, Comet's managing director, said the chain had hit back with a £20m advertising and rebranding campaign, which has seen stores move from red and white signage to yellow and black in a bid to differentiate it from DSG International, formerly Dixons. The store was also repositioning itself by training staff better to "improve the quality of the conversations" in stores. "People find technology confusing. Having qualified staff to guide people through the process will set us apart."
Laura Smith

House of Fraser

HoF called trade yesterday "pretty grim" as it announced greater first-half losses and a sharp decline in recent sales. The chain, which recently acquired its smaller regional rivals Jenners and Beatties, said like-for-like sales fell 4.3% in the first half but in the most recent eight weeks, sales were down 6.8% on a year ago. This fall led to a £4.4m loss for the six months to July, up from £2.9m a year ago.

John Coleman, chief executive, said: "We don't expect gangbusters trade over Christmas but it is inconceivable that it will carry on like this. It would be unparalleled for spending over Christmas to be down two years running." The firm would match City profits forecasts so long as like-for-like sales did not fall more than 4%. In recent weeks the group has been up against its toughest comparatives from last year and poorer performances last year will flatter sales figures in the coming months. Its rival Debenhams said this week that sales were up but he said: "I never believe anything private companies say. Public companies, properly audited - that's different".

Gross profit margins fell 0.6 percentage points as it shifted to more concession sales but Mr Coleman said that decline was more than offset by transferring labour, stock and shopfit costs to the concession holder. The shares closed up 2p at 103p.
Julia Finch

HMV

Tough trading conditions, exacerbated by the London bombing in July, were blamed by the music and book retailer for a 9.7% drop in sales in Britain and Ireland in the first 21 weeks of its financial year. The City was surprised by the extent of the fall and its shares fell by 11.9% to 210p.

David Kappler, the chairman, warned the firm's annual meeting that there were "few signs of an improvement". The fall in sales in Britain and Ireland was counteracted by Canada and Asia-Pacific, which reported higher like-for-like sales of 7.7% and 6.6% respectively. The group's overall like-for like sales were down 4.4% in the period. Total sales were flat.

At Waterstone's, its book store chain which has made a £96m bid for Ottakar's, sales fell 6.4%. It said competition in book sales was intensifying, especially from online rivals. Mr Kappler said a takeover of Ottakar's, which is opposed by some publishers, would create a "stronger and more efficient book business".

He said the group was trying to cut costs by 2%-3% and positioning itself for the all-important Christmas period and the release of new albums from Robbie Williams and Franz Ferdinand, DVDs of Star Wars and War of the Worlds, and games for Microsoft's Xbox 360 console. The group is also hoping for good sales of books by authors such as Zadie Smith, Alexander McCall Smith and Jamie Oliver.

Analysts at the stockbroker Seymour Pierce noted that while the group had maintained its profit margins, it was losing market share. Music and DVD market share fell 1% and 2% respectively. Despite the weak trading, HMV aims to open 25 new stores this financial year, having opened 15 so far, including in Harrods.

Alan Giles, chief executive, noted a "pronounced difference" between central London and the rest of Britain, with shoppers still scarce in the capital after the July bombs whereas business had picked up in other city centres.
Jill Treanor