Tesco bucks UK holiday retail gloom as small chains suffer

By BLOOMBERG

LONDON • In an increasingly tough UK retail environment where the looming threat of Brexit has ground down consumer confidence, the holiday shopping season was all about survival of the fittest.

Tesco plc, the country’s biggest retailer, weathered brutal price pressure and a decline in shopper visits better than smaller rivals, posting Christmas sales that beat expectations. But other stores more exposed to the threat of Amazon.com Inc and consumer jitters performed poorly, while warning of economic conditions described as “volatile” or “challenging”.

The FTSE 350 General Retailers Index fell 1.1%. Tesco shares bucked the trend, rising as much as 3.3% after the supermarket operator’s modestly reassuring report. Marks & Spencer Group plc gained as much as 1.5% after its food sales did slightly better than expected, though the clothing business continued to slump.

“It’s definitely a challenging time and you can see customer confidence is down in the data, but inside Tesco, I can’t say I’ve seen a change in pattern,” CEO Dave Lewis said on a call.

UK consumption is reeling as the country moves toward the Brexit deadline in March amid growing signs that Parliament will reject the deal Prime Minister Theresa May negotiated with the European Union (EU). Consumer spending grew just 1.8% last month from a year earlier as Britons cut back on essentials and supermarket food, according to a report from Barclaycard. That’s the smallest increase since 2016 and a decline in real terms after adjusting for inflation.

Brexit Plans
Tesco said it’s making contingency plans for Brexit and working with suppliers to stockpile goods. Lewis warned, however, that it’s difficult to guarantee supplies of fresh food if border snags arise.

One of the most troubled UK retailers, department-store chain Debenhams plc, slumped as much as 4.7% as sales fell and the company said it was in talks with lenders. Many smaller retailers are saddled with debt and are facing repayment deadlines. Grocer and department-store operator John Lewis Partnership plc said it will repay £275 million (RM1.4 billion) of bonds maturing in April out of existing cash reserves, but its board might forgo a bonus payment to its employee-owners.

Weakness was most pronounced among smaller, more focused retailers like Halfords Group plc, which sells automotive and bicycling gear.

Its shares slumped as much as 29% after a profit warning. Another retailer exposed to weak traffic on the UK’s shopping streets, Card Factory plc, fell as much as 18% after warning of a difficult year ahead.

The latest reports yesterday followed downbeat updates from grocers Wm Morrison Supermarkets plc and J Sainsbury plc earlier this week and a profit warning from online clothing seller Asos plc over the holidays, followed by a surprisingly robust performance at clothier Next plc. A series of retailers confirmed that consumer confidence is weak as the country prepares for Brexit, and that’s compounded the damage from a rise of online shopping that’s emptied storefronts across Britain.

Tesco’s Size
Tesco has used its scale to keep down prices and appeal to budget-conscious shoppers who’ve been defecting to discounters Lidl and Aldi. Morrison and Sainsbury also cited pressure on pricing as consumers hunt for bargains amid worries about what Brexit holds in store.

John Lewis posted sales that were better than those of rivals, but only after a tough year and helped by deep discounts. It warned that profit will fall substantially and that conditions for the UK’s shopping districts will remain challenging.

“Two main factors are affecting the retail sector — oversupply of physical space and relatively weak consumer demand,” chairman Charlie Mayfield said in a statement.