Catalogue chain Argos has blamed the squeeze on living standards faced by low-income families for a devastating collapse in trade that almost wiped out its first-half profits.

Profits at Argos crashed 94% to £3.4m in the first six months of its financial year, its worst performance since 1998. Like-for-like sales dropped 9.1% in the six months to 27 August, with sales of important products such as TVs down as much as 20%.

The grim figures wiped more than £160m off the market value of its owner, Home Retail, with the shares closing down 20.2p at 99.5p.

"Core customers at Argos have continued to be under pressure," said Terry Duddy, chief executive of Home Retail.

Duddy has argued that Argos customers, drawn from the mass market C2 and D socio-economic groups, continue to struggle because they have not benefited from falls in mortgage rates as much as those with higher incomes.

The squeeze on British households was starkly illustrated on Tuesday, when official data showed that inflation hit a three-year high in September, driven by soaring gas and electricity bills.

Duddy called on the chancellor, George Osborne, to use his autumn statement to increase the income tax allowance to £10,000 to give lower income households "more pounds in their pocket".

Argos stablemate Homebase also suffered falling sales and profit margins, which meant group profits for the half were down 70% at £28.3m on sales of £2.6bn.

Duddy said: "Market conditions remain weak and in these early weeks of the second half have not seen the improvement in sales that we had anticipated." He predicted like-for-like sales would remain firmly in negative territory for the rest of the year and that Christmas, when the catalogue chain makes up to 80% of its profits, would be crucial.

Home Retail is yet to replace Argos's long-serving managing director, Sara Weller, and following her departure in June Duddy led a strategic review to assess whether any of the retailer's problems were self-inflicted. It concluded, however, that Argos's multi-channel formula was the right one, as customers increasingly shopped online or using their mobile phone rather than just in person at one of its 754 stores. "We are gaining ground with our customers and not losing out to our competitors," insisted Duddy.

To boost sales Argos has launched a series of new ventures including a home shopping channel, as well as tie-ups to sell books and childrenswear.

Despite pulling the plug on an attempt to crack the Indian market, it announced plans to pump £22m into a joint venture with Chinese appliance maker Haier Electronics that will see an Argos branded website launch in the fast-growing retail market next year.

But after four years of declining profitability some analysts argued that Argos had deep-seated problems and needed a radical restructuring. They point to the growth of websites such as Amazon, and aggressive supermarkets, with Asda currently promising to be "cheaper than Argos" on toys – a key battleground at Christmas.

The weak figures saw Panmure Gordon analyst Philip Dorgan cut his profit forecast for the year by 25% to £96m. "Management has stated that it has kicked the tyres, looked under the bonnet, taken the engine to pieces, put it back together and decided that it doesn't need to change strategy," he said. "We take a more simple view. If it walks like a duck, quacks like a duck, then it's a duck," he said.

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Greggs chief executive, Ken McMeikan, is testing a number of new routes to market for the baker. Other projects include a coffee shop in the chain's native Newcastle and selling frozen Greggs-branded sausage rolls in Iceland supermarkets.