The Leeds company is starting a two-month strategic review of its retail division and said the four options are – to close it, fix it, sell off parts of the business or form strategic alliances with other traders.

Chief executive Jonathan Straight said his preferred option was to fix it. "We can take costs out of distribution and I think the market will take higher prices."

The retail division employs 16 people at the group's head office in Leeds. Asked whether their jobs might be at risk, Mr Straight said: "We are not planning anything so dramatic. Efficiencies might be made but there will not be a wide-ranging kicking out. My belief is that if you have a talented team, you maintain that."

He added that a couple of people have left the business and they won't be replaced.

The retail business, which makes up 20 per cent of the group's sales, has seen sales fall from £3m in the first half last year to £1.4m. Analysts expect the retail business to lose £700,000 and that will result in profits below expectations.

Mr Straight warned that unless there is a significant improvement over the next quarter, the group's full-year performance is also likely to be "well below market expectations".

A cold and rainy start to the year plus an early Easter hit sales. There was a slight pick-up during the sunny weather in early May, but the rain in June and a cool July have deterred people from buying water butts which are used to conserve rainwater in the garden.

Mr Straight said the recent hot spell had not lasted long enough to have an impact on sales. In addition to the bad weather, the consumer downturn has hit sales of non-essential items.

"If people are struggling they won't buy water butts, they will buy baked beans," he said.

While the retail side is struggling, the group is continuing to see good growth in its traditional steel bins and its kerbside caddies. Sales in the core trade business, which makes up 80 per cent of the group's sales, have risen 11 per cent to £12.1m over the first half.

Sales of new product lines, such as a kitchen organics range and the Steelybin, have been higher than initial expectations.

The group has begun developing its overseas business with the production of water butts and composters starting in Australia this month. The group has also seen its first sales in North America through a newly- appointed distributor.

The retail business includes the online site Evengreener which sells water butts, composters and recycling containers straight to the public. It also includes contracts with water companies to supply water butts to their customers and agreements with local authorities to supply compost bins.

Mr Straight said that part of the division's problem is that because volumes are low, the cost of distribution has become much higher.

The board reported a cash balance of £2.8m at the end of June, in spite of record expenditure on new tooling and product development of more than £650,000 in the first half which will benefit trading in the future.

The group's order book for the rest of the financial year is strong at over £5m.Straight's shares closed the day down 14 per cent, a fall of 6.5p to 40p.