M&S price cuts fail to stop festive sales fall

Disappointing figures for retail giant, while discounts see shop price inflation tumble

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 – which was 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.

Debenhams yesterday staked its claim for a place in the winners' circle by delivering scorching underlying sales up 6.5 per cent over the five weeks to 31 December. The out-of-town furnishing chain Dunelm and the wine specialist Majestic Wine also grew like-for-like sales.

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 than in recent years."

Certainly M&S sees further discounting in the early part of 2012.

Marc Bolland, the chief executive of M&S, said: "We expect there will be some promotional pressure, but we will also have some opening price points coming through."

Total UK sales at M&S, which has more than 300 shops overseas, rose by 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. But M&S said this will 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 four years ago.

While M&S's total clothing sales grew 1.1 per cent over the 13 weeks, this was boosted by new stores and non-food inflation and means they fell on a like-for-like basis.

Neil Saunders, at the retail consultancy Conlumino, said its general merchandise figures were "disappointing". But Mr Bolland described as "outstanding" a 3 per cent rise in its underlying food sales over the 13 weeks – double consensus forecasts.

He said: "The last week of Christmas was a record week in food."

While Mr Bolland touted a boost from this summer's Diamond Jubilee, European Football Championship and Olympics, he expects another tough year for the sector.

"It is going to be a more difficult year, like 2011 was, for customers," he said.