UK Retailers Shine This Christmas, But Economic Challenges Ahead

By James Davey and David Milliken

LONDON (Reuters) - Britain's largest retailers including clothes group Next and supermarkets Tesco, Sainsbury's and Lidl were the big winners at Christmas, ahead of what is set to be a tough 2025 marked by spending restraint and tax rises.

Britain's economy has struggled to grow in recent years and companies are now bracing for the new Labour government's solution - a hike in employer taxes to invest in infrastructure and public services, but which bosses fear will lead to higher costs and lower hiring.

Trade body the British Retail Consortium (BRC) said growth was minimal in the final quarter of the year - in effect a fall in sales volumes once higher prices are taken into account - and the higher taxes due in April will likely push up prices and cut investment in stores and jobs.

Amid the gloom, the biggest companies performed the strongest.

Next, the first major UK-listed retailer to update on Christmas trading, reported on Tuesday a better-than-expected 6.0% rise in full-price sales for the nine weeks to Dec. 28 and raised its profit outlook for its year to January 2025 for the fourth time in six months.

Its performance was helped by strong international demand.

But it warned that UK sales growth is likely to slow in its 2025/26 year as the higher taxes potentially impact prices and employment and begin to filter through into the economy. It said its own prices would rise 1% on like-for-like goods.

"If you want to find things to worry about in the UK economy, I think employment and prices would be the two things," Next CEO Simon Wolfson told Reuters.

GOLDEN QUARTER

Monthly data from market researcher Kantar showed Tesco, Britain's biggest grocer, No. 2 Sainsbury's and No. 6 Lidl GB also performed robustly in the Christmas trading period with sales growth of 5.0%, 3.5% and 6.6% respectively in the 12 weeks to Dec. 29.

That contrasted with the BRC's data for overall UK retail sales which showed fourth quarter spending increased just 0.4% in annual terms.

"Sales growth during the golden quarter of October to December was minimal, reflecting the ongoing careful management of many household budgets during a time when many costs remain at a heightened level compared to past years," Linda Ellett, UK head of consumer, retail & leisure at advisory firm KPMG which helps compile the data, said.

The BRC forecast sales growth of 1.2% in 2025, below its projected shop price inflation of 1.8%.

BRC Chief Executive Helen Dickinson said the forecasts meant sales volumes were likely to fall this year, adding to pressures on retailers including increased National Insurance contributions, a higher national minimum wage and new packaging levies.

"With little hope of covering these costs through higher sales, retailers will likely push up prices and cut investment in stores and jobs, harming our high streets and the communities that rely on them," she said.

Separate debit and credit card data from Barclays also painted a weak picture with consumer spending unchanged in December compared with a year earlier.

Spending on essentials dropped by 3%, partly due to lower petrol prices, while spending on non-essentials rose.

Cinema spending jumped 52%, helped by films such as "The Wizard of Oz" spin-off "Wicked", but spending at restaurants and pubs grew only modestly.

Tuesday's raft of retail data came after a survey on Monday showed British business activity growth slowed to a crawl in December and employers cut staffing at the fastest rate in almost four years as a slump in corporate morale after the government's budget rumbled on.

Trading statements from Marks & Spencer, Tesco, Greggs and B&M due on Thursday and Sainsbury's on Friday will shed more light on the sector outlook.

(Reporting by James Davey, David Milliken, Paul Sandle and Sarah Young; Editing by Kate Holton and Emelia Sithole-Matarise)