And it has spurred both houses on to achieve sales figures that must make the high street chains feel faint, says Chris Blackhurst.
According to legend, Knightsbridge is so called because two 11th-century knights had a pop at each other there on a bridge over the River Westbourne. A thousand years later, the face-off is between two great retail houses. At either end of the Knightsbridge strip - now home to dozens of boutiques selling Prada and pricy tourist tat - are two grand emporia: Harrods and Harvey Nichols. Not that either department store would own up to any feelings of enmity, of course. Oh no, that would be demeaning. But it is there, under the skin, the one closely watching the other, each checking that its neighbour does not steal a march. Given the chance, one would lob the other into the River Westbourne when nobody was looking. Except it flows underground these days.
They claim to be chasing different audiences: Harvey Nichols the top-end purchasers of womenswear and menswear (but if so, why is it launching a new 'Play Ground' section selling plasma TVs and state of the art hi-fi and DVDs?); Harrods will say it is a far larger concern altogether and that its clientele is drawn from Brits and overseas visitors seeking that unique Harrods touch of class (true, but although Harrods is much larger, there's overlap between them in the key areas of fashion, food and now electricals).
Harrods, sneer Harvey Nichols insiders, is a retail theme park catering to the tourist masses. (And its boss? Well, darling, the less said about him the better.) Their store has a brighter, trendier look and is a magnet for young, sophisticated things with money to burn. Harrods, they say, has an altogether more dowdy appeal and struggles to attract a younger audience.
Harvey Nichols, point out Harrods staffers, may be successful but it is not in their league. Its entire offering does not amount to a few of their departments combined; Harrods, they point out, has 331 departments in total. How can Harvey Nichols' 155,000 sq ft compare with their one million? Restaurants? They have 22, with more planned. They too sell labels like Prada, but a lot more besides.
The truth is, the two stores are scrapping over the same upmarket, fashion-conscious shopper, in clothes, food and now electricals. They want that same visitor to Knightsbridge, that same woman with an outfit to buy, the same man chasing the very latest gizmo for his apartment. And they are both winning. According to recent research by retail analysts at Verdict, the duo show a clean set of heels to almost all other high street retailers.
Verdict ranked them one and two among UK department store groups on the key measure of sales density, ahead of the likes of John Lewis and the widely lauded Selfridges, and far above House of Fraser.
Harvey Nichols was top, with sales of pounds 614 per square foot, and Harrods just behind on pounds 536. Other retailers' problems pass them by. Like House of Fraser and Marks & Spencer, they are long-established brands. But unlike them, they are not in permanent crisis, closing branches, shedding staff and urgently trying to reposition themselves. Instead, they power on, planning further expansion, adding to their selling space, extending their reach.
This seems odd. Think of Harrods and you think Mohamed Al Fayed, maverick entrepreneur; expensive hampers; and anachronistic dress codes (what modern store could afford to turn away Kate Winslet and Jim Threapleton, out shopping in happier days before their separation, because they were not properly attired?). Think Harvey Nichols and you're reminded of Joanna Lumley in Ab Fab, falling from the Jag onto the pavement and tottering into Harvey Nicks, waving her limitless plastic.
Surely, you think, it cannot be: with its flamboyant nod to ancient Egypt and shrine to Princess Diana and Dodi Fayed, Harrods comes across as more theatre than clinical retailer; and Harvey Nichols, with its high-art window displays and focus on exclusive labels, should have a minority appeal.
But behind the glitzy facades, hard-edged business brains are at work.
Fayed, for all his outspoken attacks on the British establishment, is an instinctive entrepreneur who has turned a fading monolith into a lively retail experience. A few hundred yards away, Harvey Nichols may epitomise glamour and excess, but its managers prefer the hair-shirt approach to business.
Nothing illustrates this reality better than Harvey Nicks' head office.
Tucked in the middle of the terrace of shops between the two stores, at number 67, is an anonymous door. None of the shoppers staggering along with bulging carrier bags will notice, but the nameplate indicates the headquarters of Harvey Nichols Group Plc. Inside, the offices of its senior executives are positively scruffy, with utility furniture, cheap carpets and fading wallpaper. The premises look more like those of an eastern bloc trading company. It's deliberate of course, testament to the management style of Harvey Nichols' majority shareholder Dickson Poon, a Hong Kong-based tai-pan, and its chief executive, Joseph Wan.
Of the two stores, Harvey Nichols is the older by 30 years. Founded in 1813 by Benjamin Harvey, the shop originally sold linen. When he died, his daughter teamed up with a Colonel Nichols and expanded into oriental carpets, rugs and fabrics. It was only later that women's fashion was added to the range and the shop became a department store.
By 1991, Harvey Nichols was part of Burton, acquired in 1985 when the high street chain had bought Debenhams. Poon took the business off Burton's hands for pounds 51 million and installed Wan, a former KPMG accountant no less, as manager. What Wan found, he says, appalled him: 'The company was not operating at the right cost ratio - the wages bill was too high; a lot of space was not being used; there was a cafe with poor service; the store had a large rugs and carpet department with no prospect of making anything; there was a run-down hairdresser; and the head office was inside the store.'
He set out to restore the company to profitability in five years. So successful was he that in 1996 the company was floated on the stock market with a value of pounds 148 million.
By taking the head office out of the shop, he released 20,000 sq ft of retail space. He brought a clinical eye to retailing. Staff were incentivised to work harder. In-store concessions for Debenhams and Top Man, part of the Burton group, were removed. 'The message they sent out was unclear and confused,' explains Wan. 'Our intention was to take Harvey Nichols back to the top end of the market. We only wanted the very top fashionable names.'
With trading capacity limited to 155,000 sq ft, it was vital that he 'made the space sweat'. Like all department stores, Harvey Nichols had the problem of how to get customers off the ground floor and spending cash on the upper levels. Wan's solution was smart, shifting Harvey Nichols' fortunes at a stroke. He turned the fifth floor into a chic restaurant and food hall, a must-go location for ladies who lunch and for glitzy diners. 'I could not understand why UK department store restaurants were such run-of-the-mill crap,' says Wan. 'You take your tray, you eat and you go - that's it. We said: 'Why not have a serious restaurant on offer?''
He hired a manager from the Mandarin Hotel, Hong Kong, and a chef from Bibendum restaurant in London and urged them to recruit and train the best staff. The roof restaurant became one of London's most acclaimed eateries, brightening Harvey Nichols' image and bringing benefits downstairs.
Express lifts whisked visitors to the fifth floor, but when they came to leave they took the stairs, resulting in a 'massive increase in our footfall density'.
Harvey Nichols combined upmarket food with international high fashion, opening stand-alone restaurants in London's Oxo Tower and in the City and focusing on designer labels. The formula worked. A new store was opened in Leeds and other branches are being readied in Manchester and Edinburgh.
There's now a Harvey Nichols in Riyadh, Saudi Arabia, the result of a licensing arrangement with a local business. And Wan wants more: to establish Harvey Nichols elsewhere, perhaps in the emerging countries of South America, in India and in cities like Istanbul.
He outlines a four-step strategy. 'We'll open further stores in Edinburgh and Manchester. We will open more restaurants in central London. We will continue to look for opportunities overseas. We will develop our own brand.' His target for the next five years is to double profits to more than pounds 20 million. And he is planning 10 smaller boutique stores in affluent centres such as Bath and Cheltenham, averaging 15,000 sq ft (Leeds is 43,000 sq ft, Edinburgh and Manchester will each be 65,000). They will sell 51% own-brand fashion and food and 49% what Wan calls 'the hottest of the hot' seasonal fashions.
As for a downturn, Wan shrugs. 'We're recession-resistant but not recession-proof. Sure, there are fewer functions and dinners, but a wealthy man still wants to buy fashion for his woman.' It is the mid-market that will be squeezed, he believes, not the top end. 'Our customers are not buying baked beans, they never wear the same thing twice and you will never see two women wearing the same Harvey Nichols dress at a party.'
All this is delivered in a manner that suggests a man at the top of his game. As indeed he is, says Richard Hyman, chairman of Verdict. 'Harvey Nichols is a great business, it's very well run. Wan has done a tremendous job and has not always been given the credit he deserves. If you can trade at over pounds 500 per sq ft you're right up with the world's best.'
Wan's performance has not gone unnoticed by its neighbour. Once, Harrods had a large slice of London's lucrative luxury fashion market to itself.
Then it had to contend with a rival so slick and smart that it looked dowdy in comparison. Fayed responded by recruiting the best talent. In his quest, this impatient and unforgiving master has gone through several senior managers. In June last year, to a fanfare in the trade press, he appointed Ed Whitehead, former boo.com marketing director, to spruce up the store's image. A Harrods spokesman said Whitehead would provide an umbrella to pull Harrods' business together 'under one creative point of view'. His appointment was viewed in the industry as an attempt to impress upon the market that Harrods, too, could be cool.
Whitehead lasted six months, the victim of the latest stage in Fayed's search. Never one to do things by halves, Fayed has acquired three senior executives from Nordstrom, the upmarket US fashion store chain: John Whitacre, its former chairman and CEO, is appointed as managing director; Martha Wikstrom as his deputy; and Kathy Valentine as marketing director. The spokes-man said: 'Nordstrom has a reputation for offering spectacular customer service, which is something we are famed for.'
Fayed retains his faith in Tim Delaney, chairman of the Leagas Delaney advertising agency and an image-conscious disciple of 'cool Britannia'.
A friend of Fayed, Delaney takes personal charge of the agency's Harrods account. Its campaigns have become noticeably younger, with one TV burst emphasising how the store was at the cutting edge of fashion.
'Mr Fayed is not a conventional guy and Harrods is not a conventional store,' says Hyman at Verdict. 'In most businesses you want continuity but maybe this is not what Harrods needs - look at where continuity got M&S.'
Every day, about 30,000 people visit Harrods. During the sale season ('The Only Sale', as Delaney's ads claim), that figure can rise to well over 100,000. The record is 300,000 people in 11 hours - 'There was not a spare seat in any of our 22 restaurants,' says Bill Najdecki, Harrods' financial director. Harrods, he says, is the third must-see tourist site after the Tower of London and Buckingham Palace. Najdecki is an American, like Wikstrom sitting beside him. The pair rattle off statistics: the average cash purchase is pounds 20; with a credit card it tops pounds 100.
This, though, is Harrods' dilemma. Sometimes on the ground floor you cannot move for tourists. They pile through the doors and wander round in great rucksacks, but they are not big-ticket purchasers. And there are the London locals who use the food halls, an area that continues to provide a rare level of quality; but food does not comprise large, high-margin items.
Harrods has to attract younger people who will spend serious money - just as they do at Harvey Nicks. Fayed's strategy is to try to appeal to both tourists and locals. But getting the balance right is hard: make it too fashion-oriented and the tourists will not come; make it too touristy and the locals are put off.
Since he bought the store as part of House of Fraser, Fayed has spent hundreds of millions on Harrods, some of it in dramatic adornments, but much of it on backroom accounting and delivery systems. 'Mr Fayed has brought entertainment to the building,' says Wikstrom. 'He looks at retailing as entertainment. He wants to keep customers in the store for as long as he can. Our role is tactical; he's a very visionary person. He's here every day and he walks the floor and picks out things we don't notice.'
While Wan was able to draw people upstairs with a world-class restaurant and food hall, Fayed is restricted in what he can do. Harrods is a listed building and shifting the food halls was never an option - they are protected by law. 'Even if they weren't,' says Najdecki, 'we would never move them.
Our food halls are in the top 10 most important food businesses in the world in terms of quality.' The trick to drawing people upstairs has been to create visually exciting escalators, to make the upper levels compelling (the vast sports, toy and youth fashion departments are deliberately located high up) but to retain what Najdecki calls with fervour 'our very compelling product mix and very good service'.
Some of the famed Harrods range of services has gone. The store no longer has a library, for example. Every change has been made to increase the retail area. Another 150,000 sq ft will become available when the office functions move into the converted Crown Court building across the road.
Small gift boutiques have been opened at Gatwick and Heathrow and abroad, but there are no plans to follow Harvey Nichols and Selfridges in opening full-scale operations in the north of England. 'We have enough opportunity to grow the brand without a new store,' says Wikstrom. Neither will Harrods be setting up joint ventures with overseas partners. 'We're very protective of the brand, very selective about what we do.'
Criticism that Harrods has devalued its name by putting its logo on teddy bears and knick-knacks is misplaced, argues Najdecki. 'We want tourists to take a bit of the business home, that's all.' There is no danger, he says, of Harrods falling into the trap that has caught other luxury labels.
'It's very easy to exploit the brand, but if you're not careful you end up like Gucci, having to buy back licences, or Pierre Cardin.'
Judging from the figures, Fayed is doing something right. 'Harrods is a very successful business,' says Hyman. Certainly, none of the problems besetting other high street operators have attacked this bustling and glitzy corner of west London. By pushing upmarket and constantly investing in their premises, Harvey Nichols and Harrods each afford a lesson to the rest of the industry.