By James Davey

LONDON (Reuters) -British online supermarket Ocado Retail downgraded its full-year outlook on Tuesday, saying customers are trying to navigate the cost of living crisis by buying fewer products and trading down to cheaper items.

The business, a 50:50 joint venture between Ocado Group and Marks & Spencer, said it now expects a small sales decline over the full 2022 year and core earnings close to break-even. It previously forecast revenue growth and profit margin in low single-digit percentages.

Shares in Ocado Group were down 9% at 0709 GMT, while M&S was down 3%.

Britons are looking to save money in the face of soaring inflation, which hit 10.1% in July.

Last week industry data showed the slowest growth in retail sales since the end of COVID-19 lockdowns last year, while UK fashion retailers Primark and ASOS both warned on profit.

However, economists say Britain’s inflation rate looks likely to slow after new Prime Minister Liz Truss announced a plan to cap surging household energy prices.

Ocado Retail said its third quarter to Aug. 28 sales rose 2.7% to 532 million pounds ($622.4 million), improving from a decline in the previous three months, and it forecast stronger growth in the fourth quarter.

Customer numbers are up 23% over the last year to 946,000, it said, driving a 10.7% increase in average orders per week.

Its average basket size, however, was down 6% at 116 pounds as shoppers sought savings in the face of inflationary pressures.

Ocado Retail also said that higher costs, predominantly for energy and dry ice, would weigh on profitability in the fourth quarter.

As consumer spending stabilises, we expect Ocado Retail will again deliver attractive and accelerating growth in sales and a strong recovery in profitability,” said Chairman Tim Steiner.

Separately on Tuesday, industry data showed German-owned discounter Aldi has overtaken Morrisons to become Britain’s fourth-biggest supermarket group by value market share.

($1 = 0.8547 pounds)

(Reporting by James DaveyEditing by Elizabeth Piper, David Goodman and Louise Heavens)