British retailers under pressure

Both the companies have struggled to compete in the increasingly competitive UK market for some time, although both had also shown signs of an upturn in recent quarters as they implemented restructuring programmes. But with the top four players (with the possible exception of Sainsbury) tightening their stranglehold on the British grocery retail sector, the positive effects of restructuring are fading once again, casting real doubt on both companies' ability to survive.

Of particular concern for M&S is the revelation that its food business is now suffering along with the perennially under performing clothing and home units. Actual food sales rise 4.3 per cent during the fourth quarter of the year, but this was entirely due to the rollout of the new Simply Food format stores.

Like-for-like food sales dropped by 1.4 per cent compared to the previous year, one of the worst performances in the UK grocery sector (Tesco and Morrisons, for example, regularly post double digit gains, and even struggling Sainsbury has managed to see quarterly improvements in recent months), a decline attributed primarily to the fact that the company has lost a lot of ground to its rivals in terms of new product development and marketing - its shoppers have simply got bored with buying the same old products, week in, week out.

While the relatively high cost of M&S products (all of which are own label but with a distinct premium positioning) also played a part in the poor performance, high street rival Waitrose, undoubtedly the most upmarket food retailer in the UK, recently showed excellent sales growth - because of its continued investment in innovation. And with the major retail groups all introducing premium own label ranges in recent years, M&S' unique selling point is rapidly disappearing.

The Simply Food rollout is also putting the pressure on M&S to perform in a market where it will be in direct competition with the likes of Tesco and Sainsbury - the convenience store sector. In fact, all the leading chains have a growing small store portfolio, bringing them back into the high street locations they left to the likes of Waitrose, M&S and Iceland in the '90s out-of-town development boom.

It is still too early to see whether M&S will survive in this cutthroat sector, but Iceland's latest results show that the relatively recent arrival of the major players is already having an effect.

Fourth quarter turnover at the chain dropped by 0.2 per cent, and while parent company Big Food Group took some comfort from improvements at its Premier business (an umbrella fascia used by independent retailers supplied by the group's Booker wholesale unit), the decline in sales reflected a significant increase in competition.

Iceland also has perhaps greater reason to be optimistic than M&S, despite their similarly disappointing performances. The group has been steadily refitting its stores, moving away from its high street supermarket image towards a more convenience-focused strategy, and this is paying real dividends in terms of sales growth - suggesting that once the hurdle of in-store upheavals is overcome, the benefits will be even more evident.

But the problem both groups are likely to face above all others this year is further pressure on prices, with analysts Goldman Sachs this month suggesting that both Tesco and Asda will react rapidly and brutally to Morrisons' widespread cost reductions at its newly acquired Safeway unit.

The price cuts at Safeway have been faster and deeper than anyone had expected, GS said, with prices down by 5 per cent since 8 March alone, but the top two groups still have the lowest prices in the industry, with Asda just ahead of Tesco.

GS also suggests that Sainsbury, until now content to follow the others in lowering prices, is likely to come more proactive in this regard, further widening the gap between the price-driven retailers and the top-end companies like Waitrose and M&S.

Convenience store prices tend to be higher than those in mainstream stores - convenience, after all, has to come at a price - and Iceland's increased focus on this area should give it some leeway, but it will still have to match or better prices at competing Tesco Express or Sainsbury's Local outlets to compete in the longer term.

M&S, meanwhile, will have to do more than simply roll out more food-only stores if it is to survive in the convenience sector - and serious questions must remain about its long term future in this sector without (apparently) a coherent strategy.