FILE PHOTO: Branding and signage is seen at the John Lewis and Partners retail store in Oxford Street, London, Britain
By Kate Holton and Paul Sandle
LONDON (Reuters) - British retailers suffered their worst Christmas since the depths of the financial crisis a decade ago as cautious customers forced high street stores such as John Lewis and Debenhams to slash prices to shift stock.
With Britain heading for a potentially messy exit from the European Union at the end of March, consumer spending is drying up, exposing the weakness of many major retailers which are having to sacrifice profits in the quest for sales.
The brutal conditions come as the industry struggles to keep pace with consumers moving online, meaning many are weighed down with excess and costly store space as they invest in distribution centres and logistics.
"There's no doubt that there was significantly more promotional activity in the market, a combination of consumer confidence and the travails in the marketplace as a whole," said Paula Nickolds, managing director of John Lewis stores.
Trading updates on Thursday showed those groups doing best such as Tesco <TSCO.> had improved their basic ranges. Investors were also relieved that Marks & Spencer <MKS.L>, the country's most famous retailer, had held its nerve and not cut prices, even though sales fell.
The general message was that the going was tough.
Debenhams <DEB.L> Chief Executive Sergio Bucher said the country's second biggest department store group would have to find 80 million pounds of cost cuts to protect its profits after slashing prices. It is closing 50 stores.
Once selling fabrics, bonnets and gloves during the Victorian era, the 241-year-old group is now fighting for its survival to avoid the fate of collapsed rival BHS and House of Fraser, which was rescued by Sports Direct-owner Mike Ashley.
"The market in general has been very, very competitive," Bucher told reporters. The group, which has lost more than 80 percent of its value in the last year, is seeking fresh funds to bolster its balance sheet.
Halfords, which sells bicycle and car accessories, was one of the worst hit after its customers refused to spend on expensive items, forcing it to lower prices and cut its profit target. Its shares were down 25 percent.
And John Lewis, the employee-owned biggest department store, said on average promotional activity was around 20 to 30 percent higher than last year. Its staff may not receive their cherished annual bonus for the first time since 1953.
Britain's economy slowed after the 2016 Brexit referendum and looks to have lost more momentum in late 2018 as Prime Minister Theresa May struggles to get parliament's support for her plan for a smooth exit from the European Union.
The British Retail Consortium (BRC) said its members reported zero year-on-year total sales growth in December, the worst performance for the month since 2008. The flat figure compared with 1.4 percent growth in December 2017.
On the stock market general retail had its worst year since 2008 in 2018, dropping 27 percent compared with 12 percent for the FTSE 100.
Tesco, Britain biggest retailer, showed its resilience after its own-brand basic ranges combined with premium offerings to fend off rivals at the top and bottom of the market, and keep its tills ringing.
"There is no shortage of gloomy news within the UK retail sector, but there are winners and we believe Tesco is one of them," said Alasdair McKinnon, the lead fund manager of the Scottish Investment Trust, a Tesco investor.
Tesco's performance stood in contrast to rivals Sainsbury's <SBRY.L> and Morrisons <MRW.L> which both missed Christmas sales forecasts this week, hit by competition from German discounters Aldi and Lidl.
"The shopper is behaving as he or she always has," Tesco CEO Dave Lewis said.
"They're savvy, they know what good value is, they appreciate good service and while for sure there's definitely a challenging environment out there, our job is to keep focussed on how we can serve them better whatever the circumstances."
Sophie Lund-Yates, Equity Analyst at Hargreaves Lansdown, said Tesco, with a 28 percent share of the market, held its own, even as competition increased. "These are promising results from Tesco, but time will tell if it has enough puff left to keep outrunning its rivals," she said.
Many of the retailers, including Tesco, said they were also working to prepare their operations in case Britain leaves the world's biggest trading bloc on March 29 without a deal, shattering supply chains and damaging trade.
With so much uncertainty, the tone was bleak.
"What we cannot see at the moment is any positive sentiment," Halfords boss Graham Stapleton said. "And therefore what we are planning for at the moment is the same sentiment running through the entire year."
(Writing by Kate Holton; additional reporting by James Davey, Costas Pitas, Simon Jessop, Josephine Mason and David Milliken in London, and Pushkala Aripaka in Bengaluru; editing by Keith Weir)