Price-cuts pressure on shops in sales slowdown

The London Retail Consortium said sales in the capital last month were at their lowest since May. Year-on-year sales growth fell to 6.8% in September compared with nearly 10% in the previous month.

Heavy discounting in the build-up to Christmas will hit profits and many retailers are also concerned shoppers will wait until later than usual to do their Christmas shopping in the hope of further price cuts.

Helen Dickinson, head of retail at KPMG, warned it will put many businesses under severe pressure over their key trading period of the year. "The real acid test will come in the lead-up to Christmas," she said.

The Tube strikes put many shoppers off going out in early September while the weakness of the US dollar meant fewer Americans visited London. The flow of Middle Eastern tourists to the capital also slowed from August as their holiday season came to an end. However, total visitor numbers to the capital were higher than in September last year and the number of shoppers on the High Street was also up.

Wealthy Russians and other Europeans spent heavily in London's most exclusive shops, with fashion stores at the top end of the market enjoying a particularly good month. Luxury items such as handbags and jewellery continue to fly off the shelves.

Clothing and footwear also sold well, thanks to the cool weather which provided a good start to autumn/winter ranges. But it was a grim month for furniture and electrical goods as households put off making major purchases.

Higher mortgage repayment costs on the back of rising interest rates and tighter lending conditions in the world's money markets have prompted a slowdown in spending across the UK. Interest rates are at a six-year high of 5.75% and economists believe that while the next move will be down, Bank of England Governor Mervyn King is in no mood to make it soon.

The British Retail Consortium believes London stores have fared better than the rest of the UK and official retail sales figures on Thursday are expected to show growth of just 5.6% around the country.

LRC director Kevin Hawkins, who is also head of the BRC, said: "Although London continues to outperform the UK as a whole, sales growth was the weakest since May and is being driven by promotional activity. Spending confidence seems to be weakening as, despite a higher number of consumers on the High Street compared with August, sales growth has slowed. Price is likely to continue to be the main stimulant of demand in the coming months as consumers' willingness to spend weakens."

Dickinson warned that London may have already started to feel the impact of the credit crunch. The London economy is heavily dependent on financial services and the City.

She said: "The margin by which central London like-for-like sales have outperformed the rest of the UK fell in September. It is highly possible that the wider credit issues which, for the moment at least, have left UK consumers' spending largely unaffected, are already having an impact in the capital.

"That said, 6.8% like-for-like growth is a credible performance."