By Kate Holton
LONDON, Jan 22 (Reuters) - British fashion retailers willswitch their spending firepower to technology from the highstreet in 2017 after online shopping became the key driver ofsales growth over the all-important festive period.
Marks & Spencer is investing in apps, its websiteand logistics, while spending 350 million pounds over five yearsto close 10 percent of clothing and home space.
Department store John Lewis said it was cutting staffbonuses in part to enable it to invest in its online operationsafter 40 percent of its Christmas sales came from the web.
And Next, which failed to keep up with rivals for asecond Christmas in a row, will spend 10 million pounds toimprove its online operations and marketing.
"They will have to invest in infrastructure and it willweigh on margins, but if you get it right you have a profitableonline business," said one large institutional investor in UKretail who asked not to be named due to company policy.
"And you can engage on multiple platforms."
The renewed drive in technology comes as British web-onlyplayers ASOS and Boohoo continue to raceahead, helping Britons to embrace online shopping more quicklythan their European cousins.
And the pressure is relentless. ASOS, with nearly 5 millionactive users in the UK, said it would increase its own capitalexpenditure to keep ahead of the pack after it posted 18 percentUK sales growth in the four months to the end of the year.
Boohoo grew British sales by 31 percent in the same period.
Online sales have been booming in Britain for years, withecommerce accounting for nearly a quarter of all purchases inDecember, according to the British Retail Consortium.
In the 52 weeks to Dec. 18, overall fashion sales fell 2percent, according to market research firm Kantar Worldpanel,while pure online players grew 7 percent as fashion loverssnapped up goods through simple apps on their mobile.
While trading updates show that traditional retailers grewtheir sales by selling additional goods to customers picking uponline orders in store, the move online also brings newchallenges such as the high number of goods that are returned.
The signs of the change can be seen across the country, onsmall high streets where independent shops have shut - hurt byhigh business rates - and on the stock market where the shareprice of Boohoo has jumped by 500 percent in two years.
Pick-up lockers at railway stations and petrol pumps meanparcels can be picked up at any time, while changing rooms instandalone sites in the centre of towns allow purchases to betried on and instantly sent back if not wanted, making it aseasy to shop online as it is to wander down a high street.
The industry estimates that around 30 percent of womenswearitems bought online are returned.
Traditional retailers have harnessed the web by persuadingcustomers to pick up online-ordered goods instore, forcing firmsto speed up delivery logistics and increase storage space intheir shops.
"The role of the shop does change," said Charlie Mayfield,chairman of the employee-owned John Lewis Partnership.
"We are still opening shops but we will be opening fewergoing forward and we will be investing more in changing existingshops so they can fulfil that different role more."
THINKING DIGITAL
The 133-year-old Marks & Spencer, which has struggled foryears to grow its clothing business, beat forecasts forChristmas trading as investment in its app for iPad and mobiledevices helped boost online sales.
More than 60 percent of all goods sold online were picked upin store - known as click and collect. Seeking to adapt thebusiness to meet the new demand, its said in November it wouldnot return additional cash to shareholders in the second half.
Debenhams, Britain's No. 2 department store chain, also beatforecasts as those customers shopping online and in-store spentabout two and a half times more than a shopper in one place.
The group, which appointed Sergio Bucher as CEO in October,is set to unveil its plans for the future in April and analystsat Liberum have said that could entail higher spending.
And Britain's biggest department store John Lewis, one ofthe leading retailers online over the last 15 years, said itwould speed up its internet strategy after 40 percent of itsChristmas sales came from the web, up from 36 percent last year.
"You might have expected to see a slowdown in the rate ofgrowth but it has basically continued on the same trajectory,"Mayfield said. "And we've got very good data which shows therelationship between shops and online sales is strong."
But the cost to transform the business is clear, withoperating profit down 31 percent in the six months to end July.John Lewis said trading profit would come under pressure thisyear and the need to invest, plus the weaker pound, meant staffbonuses would be "significantly" lower.
Thomson Reuters data shows that 2017 full-year pretax profitat M&S and Debenhams is also expected to fall around 18 and 12percent respectively.
Despite the high costs, the experience of retailer Next shows that the big names have little choice but tofollow their online peers if they want to remain competitive.
Next will invest to improve its website and online marketingin a recognition that it may have fallen behind the standard ofsome competitors, where sites carry more content including videoand numerous photographs to show how an item would look.
"If it's not convenient and the check out process is notgood or you don't portray the product in the right way, thenpeople will just open up another app and order somewhere else,"the institutional investor said.
"It's as simple as that these days."($1 = 0.8113 pounds)
(Additional reporting by Paul Sandle, Sarah Young and JamesDavey; editing by Anna Willard)
Marks & Spencer (MKS)
Next (NXT)