M&S back in trouble as sales dip proves revival is short-lived

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After a miserable decade when even Marks & Spencer's most loyal customers began to take their business elsewhere, the high street icon seemed to have recovered its crown at the start of the millennium. Out went the frumpy old fashions; in came clothing lines which would not disgrace a designer store. Its food halls became indispensable for hard-pressed commuters. M&S even moved into home furnishings.

Luc Vandevelde, its Belgian chairman, was convinced, declaring its "recovery phase" well and truly over just two months ago. But dire Christmas trading figures published yesterday suggest that M&S's recovery may have been a figment of Mr Vandevelde's imagination. Worse, the company appears to have alienated exactly those shoppers who made the store chain what it is.

M&S admitted yesterday it had let down its most important customers ­ women ­ with uninspiring and over-priced clothing ranges over its most crucial trading period. Sales of ladies' knitwear, coats and suits plunged by more than 10 per cent during the Christmas period, even worse than the City had been expecting.

Roger Holmes, the chief executive, said the company had bored its customers with "safe and samey knitwear", adding that the unseasonably warm weather had also not helped. He said the group had failed to grasp what women wanted from their formal wear these days: smart separates that they could mix and match rather than traditional suits.

"We haven't done the right things and offered the right product in some of our core women's wear ranges," he said. "We are disappointed with this performance."

City analysts said the poor figures, which included a 3.3 per cent plunge in sales of clothing and footwear over the past 15 weeks, raised a big question mark over the group's so-called recovery. "They are making schoolboy howler errors," Tony Shiret, a retail analyst at Credit Suisse First Boston, said.

The group's £600,000-a-year clothing director, David Norgrove, paid the price for the deteriorating performance with his job. His departure is likely to trigger a new payment-for-failure row because he is thought to be in line for a payoff of up to £330,000. M&S is expected to seek fresh talent from outside the business to replace him; potential candidates are understood to include Belinda Earl, the former boss of Debenhams, and Stephen Sunnucks, who heads the cheap-and-cheerful womenswear chain New Look.

A tricky Christmas for retailers has left a range of stalwarts, from WH Smith to J Sainsbury, struggling. Observers have warned that 2004 will be the toughest year for the high street for some time as interest rates rise from historic lows, reminding consumers just how large their credit card bills are. Yesterday's relapse at M&S will have tarnished the reputation of Mr Vandevelde, who had been credited with rescuing the company. His innovative salary package, which pays him in shares rather than cash, means he will escape further "fat-cat" charges if sales remain weak. But it may make the City rue its earlier leniency towards the multimillion-pound pay packets he has already received.

Although the retailer scored some successes, notably with its George Davies-designed Per Una collection, analysts said it had lost its appeal to younger customers.

Yesterday's M&S figures signalled a return to the dire years at the end of the Nineties, marred by plunging profits, a tumbling share price and bitter boardroom feuding that forced regiments of family board members, such as Sir Richard Greenbury, to leave the business.

The store was then saddled with a dowdy and ageing image not helped by the revelation that John Major bought his suits there.

Mr Vandevelde's much-trumpeted recovery was meant to have put an end to all that, attracting younger, more fashion-conscious customers, and his introduction of affordable cutting edge fashions made it Europe's favourite clothes store in 2002.

But along with the rest of the high street, M&S majored on Sixties-inspired monochrome basics this winter, and unlike its rivals, M&S's intransigence on discounting core lines meant its prices were fixed firmly in the 21st century.

Mr Holmes yesterday acknowledged the retailer's need to become more competitive. "We need to look at our values. We have a gap at the entry-price point that we need to fill," he said. While trousers at £25 a pair may be a far cry from the £4 jeans that Tesco sells, Mr Holmes's pledge that the "pricing trend was down" was hailed as a step in the right direction by the City.

Mr Holmes highlighted the scale of the retailer's problems by admitting that: "Clothing and womenswear is the touchstone of our customers' relationship with the brand." Its tops, skirts and coats drive the footfall for its men's and children's wear lines, which both have problems. It relies on clothing for just more than half of its £8bn annual sales.

Yet it was not just clothing that let M&S down yesterday. Its food sales rose just 0.5 per cent on a comparable basis during the seven weeks over Christmas. Mr Holmes blamed the similarity of its Christmas lines to those offered last year, but the City failed to swallow this. Fingers were pointed at Justin King, who ran M&S's food arm until November when he quit to join Sainsbury's as chief executive.

The retailer will be hoping that next month's high-profile launch of its new "Life" home stores will make up for yesterday's disappointment.