British Retail: Hurt on the High Street

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Government Intervention

So far, government efforts to help the retail sector haven't made much difference. To spur spending, the government trimmed Britain's value-added tax (VAT) before Christmas as part of an overall stimulus package. Most analysts say the modest cut was too little, too late. Likewise, the Jan. 8 decision by the Bank of England to chop interest rates to a record low of 1.5% may not do much to ease credit or kick-start consumer spending. Prime Minister Gordon Brown is now rumored to be mulling a new round of tax cuts to goose the economy.

Until stimulus sets in, retailers are left scrambling to save themselves. Over the Christmas holidays, some offered discounts of up to 90% to woo shoppers. That brought short-term relief for a few: Upmarket department store Selfridges, for instance, recorded the most profitable hour in its 100-year history on Dec. 26 as customers snatched up luxury brands like Louis Vuitton (LVMH.PA) and Burberry (BRBY.L) for knocked-down prices.

More Carnage to Come

But slashing prices cuts both ways. "All the discounting has done is squeezed margins," says Tarlok Teji, head of British retail at consultancy Deloitte. He reckons that sales promotions will help keep like-for-like sales broadly flat over the first half of this year, but cautions that discounting will hit profits. Margins will likely fall 30% to 40% in 2009, and demand for big-budget items such as flat-screen televisions and home furnishings will remain weak even despite price cuts.

"More retailers will enter administration in February and March," Teji says. "Companies will have to batten down the hatches until the economy starts to recover."

Scott is a reporter in BusinessWeek's London bureau .