Consumers appear to have thrown caution to the wind when it came to the recent Christmas grocery shopping season, judging by better-than-expected festive sales unveiled by Tesco and its more upmarket rival Marks & Spencer (M&S) this week.
Tesco, led by Corkman Ken Murphy, said its group retail sales for stores open at least a year, as well as its Booker cash-and-carry business, rose by 7.9 per cent in the six weeks to last Saturday – beating the consensus call among analysts for a 6.2 per cent increase in the first “normal” Christmas in three years after the worst of the pandemic.
The biggest upside surprise was in the Republic, where like-for-like sales advanced 6.4 per cent, almost double the pace expected by the stock market.
The impressive growth, however, was driven by price increases at a time of heightened inflation, as Tesco, the largest UK supermarket chain and second-largest operator in the Republic, conceded that the volume of items it sold had actually dropped during the period.
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M&S said bumper Christmas trading helped it deliver 7.2 per cent like-for-like sales growth in the UK for the final three months of 2022, its financial third-quarter, more than twice the rate expected by analysts. It also managed to grow food sales volumes by a little over 1 per cent, amid strong demand for everything from turkeys to sparkling wine, to outperform the wider market, in December.
Tesco, according to Murphy, who took charge in late 2020, benefited during the period from changing spending habits as consumers grappled with the cost-of-living crisis.
“We have seen customers trading down, but that has taken a number of different forms,” he told analysts on a call on Thursday. “For some customers, it’s trading down from national brands to great-value Tesco products. For others, it’s seeking out Tesco from one of the higher-priced premium-focused retailers – or using our [Finest] range of ready meals as a substitute for a takeaway or restaurant meal.”
Even more price-conscious shoppers switched from fresh foods into frozen. Sales of an expanded frozen range were up by a quarter on the previous year in the week before Christmas.
Still, despite Tesco’s consensus-beating recent sales performance, Murphy is sticking to his forecast that the group’s retail operating profit for the year to the end of February will be between £2.4 billion and £2.5 billion. This suggests, according to Alliance Bernstein analyst William Woods, that the group has a more cautious outlook on its profit margins than when it reported interim results in October.
“We are not sure that inflation has peaked just yet, but we would hope that by the middle of the year it will start to come down the other side,” said Murphy. UK food inflation was running at 13.3 per cent in December, according to the British Retail Consortium (BRC) trade body and data firm Nielsen.
Still, Tesco announced only last week that it was extending a price-freeze that has been in existence since October on more than 1,000 everyday products, spanning leading brands including Heinz, Birds Eye and Kellogg’s and own-label items until Easter in the face of heightened competition from German discounters Aldi and Lidl. And on Friday, Tesco Ireland followed up by saying it is continuing a price lock on hundreds of products over the same period.
Shares in M&S – which had dropped almost 50 per cent last year, about twice as much as Tesco – benefited most from the strong Christmas trading.
M&S’s stock has jumped more than 16 per cent so far in 2023, outshining Tesco’s 7 per cent advance, even though it, too, failed to raise its profit forecast in light of better-than-expected sales for the past three months.
But with the UK on the brink of recession – which the Bank of England expects to last for at least the whole of 2023 and the first half of next year – the outlook for retailers is uncertain. Both Tesco and M&S expect consumers to tighten their belts after a festive blowout.
However, industry observers are largely in little doubt about which of the two investors should be putting money into in the near term.
Tesco, which has a 27.5 per cent share of the UK groceries market, is the only major traditional player in the market offering a full line of products that has increased its slice of the action since before Covid-19 struck – helped, of course, by its online sales returning to growth during the pandemic.
The consensus view among number crunchers is that Tesco’s shares have about 10 per cent further upside over the next 12 months, even if UBS analyst Sreedhar Mahamkali, for one, expects the group will post a 3 per cent drop in operating profits in its next financial year, following an expected 6 per cent decline in the current one.
Analysts, on the other hand, largely see about 5 per cent downside to M&S’s shares. Mahamkali sees its operating profits declining by 20 per cent in the current financial year and by a further 3.5 per cent over the following 12 months. When will the Christmas hangover set in?
