July 2 (Bloomberg) -- Marks & Spencer Group Plc, suffering from a slump in U.K. consumer spending, said sales dropped the most since 2005 and ousted its top food executive after his unit had the worst quarter in at least a decade.

Marks & Spencer fell 25 percent in London trading to a seven-year low. Steve Esom, the director in charge of food, will leave little more than a year after he joined, the U.K.'s largest clothing retailer said today. Sales at U.K. outlets open at least a year slid 5.3 percent in the 13 weeks ended June 28.

A 4.5 percent decline in same-store sales of food was the biggest drop since at least 1998. London-based Marks & Spencer lost market share in food after Tesco Plc and Wal-Mart Stores Inc.'s Asda reduced prices, in what Executive Chairman Stuart Rose said was ``the biggest price war we've probably had in the last 20 years.'' Conditions won't improve for two years, he said.

``We were definitely expecting a weak set of numbers from Marks, but I think the numbers were even worse than we anticipated,'' Sam Hart, an analyst at Charles Stanley & Co., said by telephone today. ``Things appear to have fallen off a cliff in June.'' Hart cut Marks to ``reduce'' from ``hold.''

Marks & Spencer fell 78 pence to 240 pence, the lowest level since Sept. 25, 2001. The percentage drop was the steepest since Bloomberg records began in 1988 and reduced the company's market value to about 3.8 billion pounds.

`Feeling the Pinch'

``Consumers are feeling the pinch,'' Rose said on a conference call, adding that the latest slowdown in sales started ``about three weeks ago.'' The retailer brought forward the update, which Rose said was ``effectively an earnings downgrade,'' by a week from the scheduled date of July 9.

Marks, which gets almost half its revenue from food, faces increased competition on price from Tesco, Asda and J Sainsbury Plc, along with discounters such as Aldi Group and Lidl. Tesco last week said it cut prices on 8,000 items. A Marks & Spencer 400 gram beef lasagne ready meal costs 2.39 pounds, while Tesco sells its own version for 99 pence and Sainsbury's costs 1 pound.

``Sainsbury and Tesco are all advertising you can feed a family of four for 5 pounds,'' said Jane Coffey, who helps manage $63.7 billion as head of equities at Royal London Asset Management, and doesn't hold Marks. ``M&S has to catch up with that and really start pitching that they are a value offering.''

Estimates Cut

Same-store sales of clothing and home furnishings fell 6.2 percent in the quarter, Marks said. U.K. shoppers are spending less as rising energy and food bills erode disposable incomes.

Charles Nichols, an analyst at Landsbanki, said he plans to cut his estimate of pretax profit for the year ending March 2009 by about 10 percent to 800 million pounds ($1.6 billion).

Pali International Ltd. analyst Nick Bubb said he expects the sales drop to reduce full-year profit by at least 50 million pounds. He cut his price estimate on the stock to 275 pence from 300 pence and kept the shares as a ``sell.''

Rose expects other U.K. retailers to follow in saying they are experiencing tougher conditions.

``I can't believe this is a Marks & Spencer exclusive problem,'' he said. ``Everybody now is just going to have to swallow hard and cut their cloth according to their needs.''

Next Plc, the U.K.'s second-biggest fashion retailer, and department store company Debenhams Plc also slid in London trading today. Next declined 7.9 percent, while Debenhams weakened 12 percent. The 19-member FTSE 350 General Retailers Index dropped 9.8 percent.

Fewer Shopping Trips

Fewer Britons visited retail outlets in June, the fifth drop in six months, as soaring gasoline prices deterred shoppers from driving to stores, a report by Experian Group Ltd. showed today.

Marks ``needs a different skill set'' to cope with the tougher conditions, Rose said, referring to the decision to replace Esom. There was no disagreement, the chairman said, though he added he would like to ``have seen a bit more pace'' on food. John Dixon, the director in charge of the home furnishing and online units, will take over as head of the division.

Marks & Spencer will have to be ``quite innovative in terms of some of the offers,'' Finance Director Ian Dyson said on the call, though he added ``that's not saying we need to really compete on price.'' The retailer will offer more deals like its recent ``dine in for 10 pounds'' promotion, which included two meals, a bottle of wine and two desserts, Rose said.

Potential Successor

Marks paid Esom 500,000 pounds to join from supermarket chain Waitrose in June 2007. He was appointed to the retailer's board as part of a management shakeup unveiled in March, when Marks said Rose, then chief executive officer, would become executive chairman. Analysts said at the time of his appointment that Esom may be a potential successor as CEO.

``It's certainly a sign that M&S is backtracking from their recent decision to bring new blood into the company,'' said Luca Solca, an analyst at Sanford C. Bernstein in London.

Marks still plans to invest 800 million to 900 million pounds in its business this year, and there is ``no prospect'' of a dividend cut, Dyson said on the call.

Fitch Ratings reduced its outlook on the retailer's debt to ``negative'' from ``stable,'' it said in a statement. Marks is rated BBB+ by Fitch, three steps above junk.

Credit-default swaps on Marks & Spencer rose 23 basis points to 248 in London, according to CMA Datavision, indicating a deterioration in the perception of credit quality.

To contact the reporter on this story: Louisa Nesbitt in Dublin at lnesbitt@bloomberg.net

Last Updated: July 2, 2008 12:00 EDT