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John Lewis is to relocate its Liverpool store to a gleaming four-floor site in the Paradise Street development – a new £750 million shopping centre in the city – in the spring.

Oh damn. We got just what we wished for

Foreigners complained that America was presiding over an era of too-easy credit. Complain no more

Background

• Economist says US could plunge into recession

• City faces tough times as recession threat grows and era of easy money comes to an end

• Middle America will continue to feel the pinch

• Wall Street braces itself for more sub-prime misery

• Squeeze on Middle America worst since 1950s

Rocked by an event that nobody foresaw

David Smith reviews the economic year and looks at how the sub-prime crisis changed everything in the financial markets

Like other retailers due to take up a total 10 million sq ft of new selling space across the UK this year, the department store group could be forgiven for wishing the opening date could be delayed.

Consumer spending is projected to grow by just 2 per cent this year, the lowest rate since 2005 when the high street was struggling through one of the toughest slowdowns in recent memory. Industry experts now fear that 2008 could be even worse, triggering cost cuts, job losses, store closures and a wave of insolvencies.

Tony Shiret, retail analyst at Credit Suisse, yesterday said he believed that DSG International may close 200 of its 700 stores under a potential restructuring later this year.

The memory of shoppers queueing up to fight it out for postChristmas bargains is fading fast. One retail executive said yesterday: “Footfall has already fallen off.”

Kevin Hawkins, director-general of the British Retail Consortium, said the number of store chains calling in administrators in the first quarter could easily surpass the nine seen at the start of last year. Music Zone and the Greeting Card Group were among those to call in administrators 12 months ago.

Helen Dickinson, UK head of retail at KPMG, said there was every chance a bigger name would fall this time round. Speculation has so far centred on the clothing, footwear and “big ticket” furniture retailers.

Dolcis, the shoe chain, is already in talks over emergency funding while Stead & Simpson, the 350-store shoe rival, has been put up for sale by its owners. Courts, the furniture retailer, was one of the last major household names to collapse, at the end of 2004.

Ms Dickinson said: “Of the spending growth we saw last year, a lot of it went on to food and a large proportion on to the internet. That’s not good news at all for the rest of the high street and spending growth will be even lower this year.

“There will be those retailers that can weather the storm because there are always those that outperform. But it is quite likely that a big name, one people recognise, collapses.”

As well as the repercussions from the global credit crunch, experts believe that the effects of five interest rate increases between 2006 and 2007 are still to hit consumers fully. With the housing bubble finally beginning to burst, consumer sentiment is tumbling just as rising petrol costs and energy bills put ever more pressure on people’s budgets.

This pinch comes as the internet continues to take more sales from the high street and new shopping centres such as Paradise Street come on line. Westfield, the property developer, is due to open the 1.6 million sq ft White City centre just north of Shepherd’s Bush in London in time for Christmas 2008.

The total 10 million sq ft of new sales space predicted to open across the UK this year by the CBI is equivalent to almost 80 per cent of Marks & Spencer’s current store estate.

Greg Lawless, retail analyst at Blue Oar Securities, said: “Something’s got to give.”

Howard Archer, chief UK and European economist at Global Insight, said that the postChristmas rush was likely to prove little more than a “last hurrah” before consumers “batten down the hatches” amid the uncertainty.

He said: “Indeed we suspect that the strong early showing in the sales is a consequence of increasingly pressurised and price-conscious shoppers being very keen to take advantage of genuine bargains and treat themselves while they can.

“With the pressures on consumers mounting it appears that many retailers believe that they have to step up their offers to entice them to part with their money.

“This is good news for the Bank of England in the battle against inflation, but bad news for retailers’ margins and profits.”

The Bank of England’s rate-setting Monetary Policy Committee is widely tipped to cut interest rates for the second time after December’s cut to 5.5 per cent, and maybe as early as next week. However, analysts said that continued uncertainty over demand and a possible reluctance on the part of banks to pass on lower lending rates to homeowners was likely to hold back any recovery in retailers’ share prices.

The retail sector was one of the worst performing in the FTSE last year, falling by 33 per cent with Debenhams down by nearly 60 per cent.

In his note yesterday, Credit Suisse’s Mr Shiret said that he expected share prices to continue to drift in the first quarter as profit forecasts come down not only for 2008 but also 2009.

He added that as well as corporate restructuring, most likely at Kingfisher and DSG International, dividend cuts were “highly likely” in a number of other cases, including Debenhams and Woolworths.

However, he expects the lower valuations eventually to trigger merger and acquisition activity between rivals, particularly as tighter debt markets could restrict competition from the private equity sector for the first time in “five to six years”.

Mr Shiret added that such merger and acquisition activity would bring investors back, but that a rally was unlikely to take place until the summer. “This suggests six months of underperformance at least,” he said.

Separately, Morgan Stanley said it believed like-for-like growth across the high street rose by just 1 per cent in December.

Supermarkets are likely to be among the groups coping best with the slowdown and experts said that they could take further market share away from nonfood rivals unable to compete as fiercely on price. Tesco is expected to plough yet more investment behind Tesco Direct, its nonfood catalogue business.

However, the British Retail Consortium’s Mr Hawkins said he believed that even “one or two” of the big grocers could come under some sales pressure. “There is speculation that Sainsbury’s is behind the pack and that is a possibility.”

He added: “The real problem we have had is the five interest rate increases we’ve seen, as in 2005. We don’t know how long that will take to really work its way through and then for the Bank to unbundle it all. On top of that you get the housing market and the credit crunch.

“Everyone’s expecting a slowdown of some sort and I think it could be pretty grim.”

Under the spotlight

Executives looking for the right answers in 2008

John Browett
DSG Int.
— The former rising star at Tesco faces a daunting challenge in kick-starting a recovery at the Currys-to-PC World group. PC World faces increasing competition, UniEuro continues to struggle in Italy and the group’s dividend payout may be cut

Justin King
J Sainsbury
— After a rollercoaster 2007 when Sainsbury’s faced two takeover bids, Mr King has to show that the grocer has the mettle to close the gap on Tesco while seeing off a growing threat from Morrisons at one end of the market and Waitrose at the other

Rob Templeman
Debenhams
— Shares in Debenhams collapsed by nearly 60% last year, its first full year back on the stock market. Rumours of a possible offer from Baugur abound and the recent appointment of Angela Spindler has sparked speculation about whether Mr Templeman wants to stick around

Ian Cheshire
Kingfisher
— It could be Ian Cheshire, currently head of Kingfisher’s B&Q chain, but whoever eventually takes the top job will do so as the home improvement market steels itself for another tough year. Home Depot, the group's US rival, could mount a bid

Tim Mason
Fresh & Easy
— The chief executive leading Tesco’s ambitious expansion in the US gave all the right soundbites when the supermarket launched Fresh & Easy last November. Analysts and rivals are impressed. This year will see if the American shoppers have been won over

Mike Ashley
Sports Direct
— Institutional investors have lost a packet from the Sports World float but the billionaire kept the business pages in print last year. Analysts were called “cry babies” and the tycoon attacked the bank that led the IPO. Now Mr Ashley gets the chance to prove his retailing ability

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