John Lewis feels the pinch as profits fall by a third

London's biggest department store chain said today its profits fell by more than a third to just £40 million as the credit crunch hit household budgets.

But the drive to make family finances stretch further has boosted supermarket chain Wm Morrison, which is attracting an extra 500,000 shoppers a week.

Today's financial results revealed how the high street's big winners are the "value" retailers offering the cheapest deals, while more upmarket chains are struggling.

John Lewis said Peter Jones has suffered particularly badly because of the effect of the credit crunch on City jobs and bonuses in its "backyard" of Chelsea and Kensington. Sales at the Sloane Square store slumped 10 per cent in the first six months of the year.

The poor figures from John Lewis, usually regarded as one of the strongest names on the high street, will further alarm an already nervous City.

The usually resilient retailer Argos also said that its sales were dropping fast. John Lewis chairman Charlie Mayfield-said he could see no sign of improvement this year or next. Retailers are bracing themselves for the worst Christmas in a quarter of a century.

He said: "After the initial shock of the credit crunch last summer, the economic climate has become progressively more dif ficult, consumer confidence has hit a record low and the retail market has slowed markedly."

In the first half of the year sales at the 25 John Lewis department stores were almost unchanged at £1.24 billion. But like-for-like sales fell one per cent and operating profits slumped 34 per cent.

The worst performing departments were furnishings and other homeware, with a five per cent fall that "reflects the decline in the housing sector". The only glimmer of good news was that sales in the first few weeks of the second half of the year are up on 2007. But Mr Mayfield warned that conditions will remain "challenging with ongoing pressures on consumer spend".

John Lewis has four major stores in London: its flagship branch in Oxford Street, which performed well after a major refurbishment, Peter Jones on Sloane Square, and branches at Kingston and Brent Cross.

John Lewis's sister business, Waitrose, also saw profits fall, but only by eight per cent to £103 million. Overall, interim pre-tax profits at the John Lewis partnership were 27 per cent lower at £107 million. But Wm Morrison chief executive Marc Bolland today said customer numbers at Britain's fourth biggest supermarket group jumped 4.7 per cent to about 10 million a week in the first half of the year

The extra customers, and higher food prices, sent like-for-like sales, excluding fuel, soaring 7.6 per cent in the 26 weeks to 3 August. Sales growth in the London area was in "double digits".

It was comfortably ahead of recent figures from rivals such as Tesco and Sainsbury and helped drive underlying profits up 18.5 per cent to £295 million.

Mr Bolland said: "To have grown like-for-like sales by 7.6 per cent in this economic climate is clear testament to the strength of the Morrisons recovery."