European shoppers seek value as economy darkens

By Mark Potter

LONDON (Reuters) - Europe's shoppers are focusing on cheaper goods and essentials, despite policymakers' best efforts to boost spending, resulting in the best ever Christmas for British supermarket group J. Sainsbury, but hitting specialists like German DIY chain Praktiker

Consumers across the continent are cutting back amid fears of a deep recession as banks rein in lending and unemployment rises in the wake of last year's financial market crisis.

Policymakers are doing what they can to lift demand.

The Bank of England on Thursday cut UK interest rates by half a percentage point to a record low of 1.5 percent, and the European Central Bank is expected to reduce rates by the same amount to 2 percent next week.

But there is little sign of success so far.

The European Union economy shrank 0.2 percent in the third quarter over the second, while unemployment rose to 7.2 percent in November and economic confidence fell to a record low in December, official data and a survey showed.

Financial markets remain worried.

At 8 a.m. EST, the FTSEurofirst 300 index of leading European shares was down 1.6 percent, with the European retail index down 3.3 percent.

BASICS

The downturn has been comparatively mild on retailers that focus on selling low priced or essential items.

Sainsbury, Britain's third-biggest supermarket group, reported a 4.5 percent rise in sales from stores open at least a year, excluding fuel, for the 13 weeks to January 3, at the top end of analysts' forecast range.

Sales were driven by demand for its own label goods as shoppers traded down from more expensive branded items, with sales of the group's budget range up over 40 percent, including a 45 percent rise in "basics" mince pies over Christmas.

Consumers are "incredibly challenged" at the moment, Chief Executive Justin King told reporters, adding Sainsbury would expand its "basics" range to over 600 products by the end of January, with over half selling at less than 1 pound ($1.51).

In a rare piece of good news on jobs for the retail industry, Sainsbury also said it expected to create up to 4,000 positions this year as it opens more convenience stores.

British retailer Marks & Spencer announced 1,230 job cuts on Wednesday and a string of smaller chains have gone bust in recent weeks.