Analysis
By Declan Curry BBC Breakfast business presenter

UK retail chains such as Tesco and Morrison are reporting record profits, despite steadily cutting their prices - so what is the secret of their success? If the price of something is falling, how can you make more money selling it?

That's the puzzle British shopkeepers have been wrestling with for well over a year - and there's a whole trolley load of figures this week to show that many of them have cracked it.

The latest official figures about our shopping tell the story.

The Government's number-crunchers told us on Thursday that the amount of stuff we've bought has gone up by 5% over the last year.

But the amount we've paid for it has gone up only by 3.7%.

Who's cheapest?

The gap is caused by falling prices.

Not prices that are rising more slowly than expected - but goods that actually cost less in hard cash. Over the past year, shop prices have fallen by more than one percent.

The 'miracle cure'

Squeezing suppliers Moving production overseas Work staff harder Higher turnover per sqare foot of shelf space

In fact, that's just the broad average. In some stores, the drop in prices has been much greater.

Yet retail giants like Next, Marks & Spencer, BHS, Dixons and B&Q are all making more money - as are the supermarkets like Tesco and Sainsbury, where the squeeze on prices is particularly tight.

Attacking costs

It's the miracle of modern retailing. But how do they do it?

In most cases, it's a ruthless attack on costs.

Marks and Spencer was famous for this in the old days. When times were good, it cultivated its relationship with its suppliers, investing time, expertise and (occasionally) money in new technology and products; but when times were bad, the suppliers were asked to make their "contribution" - and cut the cost of their goods, even if it caused them acute pain.

In the modern world, it's not always so gentlemanly.

• The stores flex their buying power, and simply tell suppliers that they're getting less money.
• Production is shut down in the UK, and moved overseas. Staff work longer and harder for the same wages.
• More sales are squeezed out of small floor space.
• Goods are stacked higher, and sold cheaper.

Pile them high, sell them cheap

This has social costs. Dairy farmers complain they supply milk at virtually no profit, while the supermarkets sell it for five times the price.

They want the supermarkets to pass some of their profits back to the countryside - and claim the public backs them. However, that public still buys the supermarkets' low price milk, and thinks nothing about going to another superstore to save a few pennies.

The supermarkets are not squeezing prices because they want to be rotten to farmers, or because they're providing a charitable cheap-food service. They're doing it because the customers demand it, and go elsewhere if they don't get it.

But the big weapon isn't cost cutting - it's volume. If retailers are making less money on each item, they can rescue their profits by selling more of them. That's why the sales figures for volume are so much higher than the sales figures for prices.

But is it sustainable?

Not all of them are managing to do it, of course. On the day the retail sales figures were released, the department store group Allders revealed a 5% fall in its sales over the past year.

And profits are down at its rival John Lewis - but no wonder: a director there told us this week that some of the clothes he sells are 10% cheaper now than they were a year ago.

Retail experts say there are too many stores chasing too little money

And in that there's a terrible warning for the future. If shoppers start hoarding their cash and buying less stuff, it could spell big trouble for the retailers that are relying on high volumes to hold up their profits.

It's not a remote possibility. It may look like boom-time for the High Street now, but the foundations appear pretty shaky to some economists.

Borrowing figures released on Thursday showed another sharp rise in credit card lending. A rise in interest rates, or more importantly, fears of rising unemployment could bring a sharp end to that borrowing boom - and the spending boom that accompanies it.

Some retailers are already hoisting the storm cones.

The suit and shirt seller Austin Reed says it's cautious about the future outlook for consumer spending. And Arcadia has warned that high street spending is set to fall sharply; that was one of the reasons its directors backed the recent take-over bid from the BHS billionaire Philip Green.

There could be more of that to come.

Retail experts say there are too many stores chasing too little money - and the need to strip out this excess capacity will lead to more mergers, take-overs or even outright closures.

Arcadia has been bought by BHS. C&A has shut down altogether.

The big question is - who is next?