As sales swell, stores fear shrinking margins.

• Position: Retail industry in North Carolina - Industry Overview

North Carolina's retail economy keeps plugging along, defying predictions for a big slowdown. It's not that the predictions are totally wrong - sales aren't growing as rapidly as they were in the early 1990s. But they're growing faster than many economists predicted a year ago. "Last fall, the expectation was for a little over 5% growth this year," says economist James W. Kleckley, president of Problem-Solving Research Inc. in Greenville. "And in the first half we're running at 10%."

Spurred by a better-than-expected 1995 Christmas season, gross retail sales for the fiscal year ended in June totaled $97.3 billion, up 12% from the previous year, according to the N.C. Department of Revenue. But N.C. State University economist Mike Walden says several factors should slow growth in 1997. "Debt levels are at almost a historic high, so consumers aren't going to have the ability to borrow as they have in the past. Plus, income growth is slowing. Both those factors will work toward slowing sales." Job losses in manufacturing, particularly in textiles and apparel, could also dampen demand.

Given those trends, many economists expect the state to fall into pace with the nation, where retail sales are growing at about half the rate of North Carolina's. "But we haven't seen that happen yet," Kleckley says. "North Carolina has a strong, vibrant economy, and if it continues to grow strongly and bring in new jobs and new people and new income, we're going to do better than the nation."

But profits for retailers - particularly in the crowded discount segment - could be elusive as they shrink their margins to gain market share, says Janice Laney, an industry analyst with NationsBank. In October, Richmond, Va.-based Best Products Inc. announced that it would fold, closing 169 stores, including eight in North Carolina. Best Products was one of the nation's first big discount retailers, but its showroom-sales format became an anachronism in the era of discount "superstores."

Another victim of the showroom-sales format, Elkin-based Brendle's Inc., announced in December that it was closing its 12 remaining stores. The chain, which reached 58 stores in 1991, had filed earlier in the year for its second Chapter 11 reorganization. Henderson-based Roses Inc., which emerged from Chapter 11 in 1994 and closed half its stores, made it through 1996 intact. But the 105-store chain's plans for long-term viability suffered a blow when shareholders rejected a proposed merger...