Supermarkets sparkled at Christmas but challenges loom

Some of the UK’s leading supermarket groups topped expectations for Christmas trading, buoyed by unprecedented December demand and a ramp-up in online shopping. But tough new coronavirus rules and Brexit-related challenges raise questions over how far such strength can be sustained in the coming weeks, even as grocers continue to benefit from ‘essential retailer’ status during the pandemic.

Last month was the busiest on record for British supermarkets, with customers spending £11.7bn on take-home food and drink, data from Kantar showed. That trend was bolstered by the closure of restaurants, bars and pubs under government rules, redirecting billions of pounds away from such venues and into people’s shopping trolleys. On 21 December alone, 15m households hit the grocery aisles.

Champagne put fizz into festive sales

That step-up in activity spurred FTSE 100 grocer J Sainsbury (SBRY) to lift its guidance on 7 January as it posted like-for-like sales growth of 9.3 per cent for the Christmas period and an 8.6 per cent improvement (excluding fuel) for the third quarter overall.

Grocery sales alone rose 7.4 per cent, with premium champagne sales up more than half as people celebrated in smaller numbers at home. The group’s online grocery revenues more than doubled, reflecting the continuation of a virus-induced shift towards digital food shopping. Sainsbury’s now expects full-year underlying pre-tax profits to reach at least £330m, up from an earlier estimate of £270m, even after excluding £410m in business rates relief which it said it would forego last month alongside various other essential businesses.

WM Morrison (WRM) also cited an increase of almost two-thirds in champagne sales in the lead up to the holidays, helping to lift non-fuel revenues 9.3 per cent over the Christmas and New Year period. Morrisons is “learning and growing online”, but still posted strong digital growth – underpinned by the popularity of its own eponymous website and relationships with tech giant Amazon (AMZN) and takeaway app Deliveroo.

M&S dampened by in-store clothing sales

Elsewhere, Marks & Spencer (MRKS) endured a tougher trading period as physical store closures knocked clothing and home sales – sending overall third-quarter revenues down 8.4 per cent. 

But the pace of that contraction was eased by a 2.2 improvement in food revenue, higher than broker Jefferies’ estimate of 0.5 per cent. For the four weeks up to Christmas, management cited a very strong performance “beneath the Covid clouds” from its food sales including its joint venture with FTSE 100 online delivery platform Ocado (OCDO).

Discounters bolstered too

Mainstream grocers weren’t alone in benefiting from a pre-Christmas rush to supermarkets. German discounter Lidl revealed on 13 January that it had enjoyed UK sales growth of 17.9 per cent year-on-year in the four weeks to 27 December - even higher than the increase of roughly a tenth posted by rival group Aldi earlier this month. Evoking the higher champagne demand noted by peers, Lidl customers bought 1m bottles of pink prosecco during the festive period.

Virus hampers visibility

Still, increased grocery demand forms only part of the recent narrative for supermarkets, which have incurred considerable costs to continue trading during the pandemic while complying with safety protocols. And uncertainty prevails about the course of the crisis over the next weeks, with surging infections and the threat of a more transmissible virus variant prompting another nationwide ‘stay at home’ order.

M&S conceded that “the announcement of an effective UK wide lockdown, potentially enduring until Easter will impact store sales”. It said it was continuing to manage its clothing and home stock and store cost base accordingly.

Sainsbury’s also reminded shareholders of the persistent business risk posed by Covid-19, even as it reported strong numbers. “The impact of the pandemic on sales, colleagues and costs adds additional uncertainty to our financial outlook for the remainder of the year”, it said.

For Morrisons, the “extremely unpredictable current circumstances, and the consequences for both consumer behaviour and our Covid-19 costs, make precise guidance difficult”. The group still expects 2021 pre-tax profits to be in line with expectations, though the introduction of new virus constraints mean it now anticipates total direct pandemic costs of roughly £280m for the full financial year, up slightly from £270m projected last month.

Brexit disruption not over yet

Coronavirus wasn’t alone on Westminster’s Christmas priority list. The government spent the final days of 2020 finalising the terms of the UK’s divorce from Europe. But Brexit-related challenges are far from over, with cabinet minister Michael Gove warning of “significant additional disruption” at the border in the weeks ahead, particularly on the Dover-Calais route.

Ocado chairman Stuart Rose ventured that border issues will cause “some short-term shortages”. “You can’t… interfere with a finely honed 50-year legacy supply chain and expect it all to run smoothly on day one”, he told BBC Radio 4’s Today programme earlier this month.

Lord Rose clarified that “there’s not going to be a famine. Food will continue to come in”. Still, at this time of year, “50 to 80 per cent plus of our fruit and veg comes in from Europe and beyond – and a lot of that comes in through Dover on trucks”.

For Ocado’s food retail partner M&S, the UK’s free trade deal with the EU means it won’t face tariffs on core domestic sales. But “potential tariffs on part of our range exported to the EU, together with very complex administrative processes, will significantly impact our businesses in Ireland, the Czech Republic and our franchise business in France which we are actively working to mitigate”.

Intensifying competition

Virus restrictions will gradually lift, subject to the pace and effectiveness of vaccine roll-outs. Traders and hauliers will presumably come to navigate their way through Brexit-related red tape. But those challenges are set against an increasingly competitive backdrop, as grocers encroach on each other’s market share while advancing into a digital sphere occupied not only by Ocado, but also by stateside behemoth Amazon. 

What about Tesco?

At the time of writing, FTSE 100 giant Tesco had yet to update on Christmas trading – with a statement due on 14 January. Like its peers, the group has enjoyed escalating online activity – with digital grocery sales reaching more than 16 per cent of total UK revenues by the end of the first half.

Shore Capital expects Tesco UK to have acquired some market share, while boosting asset utilisation – “a key beneficial outcome of the step-up online”. The broker said it would not be surprised to see signs of upward guidance.

Tesco's share price has risen just over a tenth in the past six months. Sainsbury’s shares are up roughly a fifth. M&S is up more than a third, while smaller peer Morrisons’ shares are down roughly 2 per cent.