Speculation is rife that UK high street favourite Marks & Spencer is facing problems of a previously underestimated depth, following the revelation, through the Competition Commission's supermarket report, that profits from the retailers' food division have plunged.

The news will shock investors, as M&S normally refuses to publish returns and it was consistently assumed that, financially, the upmarket food business was the store's saving grace. That is simply not the case, however. From a five-year peak in 1996 of £247m, operating profits during 1999 fell to just £137m, despite an 8% increase in sales to £2.8bn.

Food division "abysmal"

M&S is a high-street staple, and just ten years ago was the most profitable retailer in the UK, but it experienced financial problems that most assumed generated from its clothing ranges, leaving its profits margins lower than main rivals; Tesco, Sainsbury and Safeway. An analyst remarked: "Everyone has been focusing on clothing as the problem, but food has been worse than we thought… it is abysmal."

Operating margins have halved

According to the Competition Commission's inquiry, food division operating margins halved between 1995 and 1999, falling to a low of 5%. It seems apparent now that the downward trend in food profits was gathering momentum up to two years before the widely publicised difficulties with M&S' clothing sector, and many analysts believe that the figure for 1999-2000 is now resting at somewhere near 4%.

The reasons for this are varied. A severe decline in group trading was experienced, but M&S insists the margin differences are meaningless, because of the differences in cost allocation. Higher property and staffing costs were incurred with the buyout of 19 Littlewoods stores, financial investments in counter bakeries and butchers have been made, and changes in management have left the food division with no clear leadership.

Outlook is not good

It remains to be seen if M&S can readdress the downtrend, but the outlook is not good. Sales have nose -dived since 1998, and group profits from this point have halved from £1.1bn to the £557m posted in March this year.

Due to post results for the interim on 7 November, the retailer's announcement of store closures and restructuring provisions is widely expected. Since 10 October, profit expectations have been cut by nearly 4% by several analysts, and the series of downgrades are increasing pressure on already weak stock. Over the last six months, share value has dropped 30% and early in trading yesterday (11 October) hit a ten-year low of 181p.