Costs control plan to offset more M&S price-cutting

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Marks & Spencer warned of no let-up in the fierce discounting on the high street yesterday after it posted disappointing general merchandise sales over Christmas and industry data showed shop price inflation tumbling to a 16-month low.

The City estimates that the retail giant's price slashing will result in its non-food margins tumbling this year, although the 128-year-old retailer said it would offset this fall with costs savings.

The 703-store chain's promotional activity failed to prevent M&S's underlying general merchandise sales falling by 1.8 per cent over the 13 weeks to 31 December – below City forecasts – although its food division performed much better. The retail bellwether's performance supports the view that while Christmas 2011 was not great, it was not the disaster zone that some industry experts had predicted.

Further hope for consumers came as shop price inflation eased, falling to 1.7 per cent in December from 2 per cent the previous month, according to the closely watched British Retail Consortium and Nielsen survey. Mike Watkins at Nielsen said: "Non-food inflation slowed considerably in December, particularly in clothing, footwear, electrical and heath and beauty as seasonal discounts kicked in much earlier." Certainly M&S sees further discounting in the early part of 2012.

Total UK sales at M&S, which has more than 300 shops overseas, rose 1.8 per cent, while they were up by 0.5 per cent on a like-for-like basis. But intense promotional activity took its toll on the chain, with Credit Suisse estimating a 200 basis points hit to its non-food gross margins in its third-quarter. M&S said this would be offset by additional savings from "ongoing, tight management of costs" over its current financial year.

Alan Stewart, the retailer's finance director, said: "This is about efficiencies across all parts of our business." Asked about any potential job cuts, he said: "We are not talking about big redundancies at all."

M&S maintained its full-year profit guidance for £697m, down on the £714m in 2010-11 and a long way from the £1bn-plus of four years ago.