Shares in HMV Group fell 4.7 per cent yesterday as the books and entertainment retailer gave warning that a slump in the music market combined with a supermarket-led price war would hit profits.

UBS, HMV’s house broker, cut forecasts by 20.5 per cent from £85 million to £67.5 million as the company said that underlying sales at its HMV chain had risen by only 0.6 per cent in the 12 weeks to December 16 despite considerable price cuts.

Simon Fox, chief executive, who joined the company in September, said that the value of the music market, including digital downloading, had slumped 14 per cent as prices dropped by about 5 per cent and the volume of top-selling music albums also fell.

Mr Fox said that the weak market had meant that, although HMV increased its market share by 3.5 percentage points to 24 per cent, it had not increased sales sufficiently to offset a 2.5 percentage point decrease in margins resulting from planned price cuts.

The Waterstone’s bookstore chain lost about 1 percentage point of market share to the supermarkets and internet retailers such as Amazon. Underlying sales at the chain sank 3.2 per cent over the 12 weeks, amid heavy price cuts including half-price offers on top-selling books such as Peter Kay’s autobiography and The Dangerous Book for Boys.

There were also disappointments internationally, with underlying sales in Asia down 3.8 per cent and in Canada down 3.4 per cent.

Analysts said that HMV was structurally challenged because the merchandise it sold was increasingly what was sold at cut price in supermarkets and online, while the music and DVD markets appeared to be in decline because fans were turning to digital downloads.

Richard Ratner, at Seymour Pierce, said: “We see no catalyst for this to reverse, although in the medium term, particularly in relation to music, we do expect a flattening of that decline.”

Mr Fox said that the group had performed well in a weak market and pointed out that sales at its online HMV store had risen by 200 per cent compared with last year, almost doubling its online share to 13 per cent. He added: “The music market is tough, but I am anticipating it getting easier next year. I am also optimistic about what we can do in our own stores to improve trade.”

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