Fears grow for Christmas sales as M&S warns of fierce discounting

A quarter of the bellwether stores' goods are on promotion

Marks & Spencer has warned that discounting levels on the high street are5 per cent ahead of last year, sparking fears for the crucial Christmas trading period.

The high street bellwether made its comments as its unveiled its first fall in profits for two years over the 26 weeks to 1 October, hit by tumbling margins in its clothing and home business.

Underlying pre-tax profits at M&S fell by 10 per cent to £315.2m over the 26 weeks to 1 October, although this was ahead of City forecasts of an 11 per cent decline.

In contrast, rivals Debenhams and Next have both posted a rise in profits over their latest full-year and half-year period respectively.

On the same day that the British Retail Consortium said underlying sales fell by 0.6 per cent in October, Marc Bolland, the chief executive of M&S, warned of fierce discounting in the non-food sector. He said: "We are doing more promotional activity than last year but the market is more promotional than us. If you walk the high street you see a lot more redthis year, compared to last year or two years ago."

He explained that M&S currently has 25 per cent of its general merchandise products on price promotion, which is 5 per cent more than last year. However, this compares to a similar rise in discounting levels to 35 per cent across the high street.

Mr Bolland said: "We expect this sort of promotional pressure in the market to continue in the second half [to the end of March 2012]."

Total sales at M&S, which has 703 UK stores serving 21 million customers a week, rose by 2.4 per cent to £4.7bn over the half year. Underlying sales at M&S's UK general merchandise business fell by 1.3 per cent. The flat non-food UK sales in its first quarter benefited from an early summer clearance sale, which contributed to a 2.5 per cent fall in like-for-like sales in the second quarter.

The bigger story, however, was a fall of 80 basis points in its general merchandise gross margin, as it was forced to discount heavily and was hit by commodity price inflation and currency pressures. M&S guided towards flat group gross margins this year.

But M&S's food business performed better, both in terms of sales and margins. Underlying food sales atM&S rose by 2.1 per cent over the half year. The retailer also grew its food margins by 10 basis points, reflecting improved management of promotions and more efficient allocation of staffin stores.

M&S sold a record number of "Dine in" meal deals, driven by consumers staying in to watch X Factor and Strictly Come Dancing. Mr Bolland said "Saturday night is the new Sunday lunch".

While M&S grew its online sales by 11.7 per cent over the six months, it will be another two years before it migrates off Amazon's online platform on to its own. But Mr Bolland denied this would "hurt or hamper" its performance.

The group's international profits fell by 8.9 per cent to £58.7m, hit by the economic woes in Ireland and Greece.

M&S is launching a range of menswear designed by Richard James, the Savile Row tailor, from next spring.

Mr Bolland wants to bring the "best of British" style to its shops in the UK and overseas, with suits made from British cloth to sell for between £299 and £599.