Deep discounting tempted cash-strapped Britons to spend over Christmas, squeezing profit margins at retailers who see little sign of business improving as disposable incomes are pressured and the country teeters close to recession.

Bellwether store group Marks & Spencer said on Tuesday it eked out a 0.5 percent rise in underlying sales in the 13 weeks ended December 31, as customers treated themselves to its upmarket foods.

Sales of clothing and homewares fell, however, and the 128-year-old group said it was having to find extra cost savings to offset the impact on profit margins from discounting.

The picture was broadly similar elsewhere, with department stores group Debenhams reporting flat underlying sales over the 18 weeks to January 7.

Industry group the British Retail Consortium said December retail sales rose a stronger-than-expected 2.2 percent, but added the figures were flattered by weak business a year earlier and warned discounting could hit store profits.

Sadly no-one expects this level of demand to be indicative of the year ahead. said Helen Dickinson, head of retail at accountants KPMG.

Britain's retailers are mostly struggling as disposable incomes are squeezed by rising prices, muted wages growth and austerity measures, and as shoppers worry about a weak housing market, rising unemployment and the euro zone debt crisis.

Clothing retailers have been at the forefront of discounting as mild weather combined with weak demand to leave them with piles of unsold winter garments.


Marks & Spencer (M&S), which serves 21 million Britons a week from around 700 stores and has over 350 mainly franchised outlets overseas, said food sales at British stores open over a year rose 3 percent in its fiscal third quarter as shoppers decided to treat themselves despite the economic gloom.

That was also apparent from Majestic Wine, which reported a 4 percent rise in underlying Christmas sales.

But M&S said underlying sales of general merchandise goods fell 1.8 percent, despite its discounting.

A mixed bag, said independent retail analyst Nick Bubb, although he was relieved the firm had managed to find enough cost savings to remain on track to meet full-year profit expectations.

At 0815 GMT M&S shares, which have lagged the STOXX 600 European retail index by 11 percent over the past year, were up 2.3 percent at 315.7 pence.

Retailers are hoping that falling inflation and events like the Olympic Games in London and the Queen's Diamond Jubilee will boost demand in the months ahead.

We expect to see some benefit from lower input prices in the second half of the year, said Debenhams chief executive Michael Sharp.

However, the industry is mindful that strong demand around a royal wedding in 2011 did not provide a lasting boost. Grocer Wm Morrison and home shopping group Shop Direct both forecast a tougher 2012 on Monday.

In light of the ongoing macro-economic uncertainty, we expect trading conditions to remain challenging, M&S said.

Homewares group Dunelm reported a rise in Christmas sales, but said this was largely due to a weak performance the year before when heavy snowfalls prevented shoppers from getting to its mostly out-of-town stores.

Flooring specialist Topps Tiles, in contrast, said its underlying sales fell.

(Additional reporting by Kate Holton; Editing by Helen Massy-Beresford)