J Sainsbury, Britain’s third-biggest supermarket chain, is understood to have missed internal sales and profit targets in the crucial run-up to Christmas.

Industry sources say that the group, the subject of two failed takeover bids last year, was forced into heavy discounts of unsold produce amid fierce competition.

There is also speculation that this week Marks & Spencer may reveal its worst Christmas trading for two years with a fall in like-for-like sales.

More than £4 billion was wiped from the value of retail shares last week after stark profit warnings from DSG International and Land of Leather and a bleak sales forecast from Simon Wolfson, the chief executive of Next.

Tesco is now worth more, at £36 billion, than the combined market capitalisation of all the quoted nonfood retailers.

Sainsbury’s is due to report a trading update this Thursday, when it is still expected to meet the City’s forecast of 3.6 per cent like-for-like sales growth for the final three months of 2007. Internal targets are typically more stretching than external ones.

However, analysts believe that the Christmas performance shows that Sainsbury’s is coming under mounting pressure from its rivals – in particular a resurgent Wm Morrison.

Greg Lawless, retail analyst for Blue Oar Securities, said: “The alarm bells are ringing. Our sources suggest that Sainsbury’s has underperformed the market this Christmas and has missed internal and profit targets. Morrisons was the winner. We believe that Morrisons is winning customers from Sainsbury’s, particularly in the South.”

Kevin Hawkins, director-general of the British Retail Consortium, said last week: “There is speculation that Sainsbury’s is behind the pack and that is a possibility.”

One industry insider said yesterday: “At the moment it’s clear that Sainsbury’s is struggling.”

A Sainsbury’s spokesman refused to comment.

Shares in Sainsbury’s have fallen 10 per cent in the past month. Industry market share figures out this Wednesday are expected to show yet more gains for Morrisons. The Bradford-based chain is thought to be increasing sales at twice the industry average.

Analysts believe that the gap between the winners and losers on the high street this Christmas will be bigger than ever as retailers fight for trade amid a consumer spending slump. John Lewis, Selfridges and Game Group are among those to have emerged unscathed so far.

Marks & Spencer is expected to report a drop in like-for-like sales of up to 2 per cent when it reports Christmas trading on Wednesday, given the slump across the clothing sector.

Any significant downturn threatens to ruin Marks & Spencer’s hopes of generating annual profits of more than £1 billion for the first time since 1998.

Analysts at Citigroup have reduced their forecasts for profits in the year to March 2008 to £1.05 billion, but could be forced to cut the target again.

Jane Norman, the “fast fashion” retailer yesterday became the latest to admit that financial pressure on households was hitting sales. However, results to be filed at Companies House today will show that the chain moved £2.7 million back into the black in the year to March 31, 2007. Operating profits more than doubled in the period from £9.6 million to £21.5 million.

Ian Findlay, the finance director, said: “We had a very good performance. It’s going to be a tough year this year but we are still looking to open 40 more stores.”

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