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UK retailers are bracing for a tough year and weaker demand as business costs mount and inflation creeps up, some of the country’s largest chains warned this week.
Despite robust festive trading figures from groups including Next, Tesco, Marks and Spencer and Sainsbury’s, investors were spooked by the increased pressures companies face from tax rises following Labour’s October Budget, and dumped their shares.
On Thursday shares in M&S fell 8 per cent, while Tesco dropped 2.7 per cent before a partial recovery. On Friday, Sainsbury’s fell 3 per cent in afternoon trading.
Retailers have warned of higher prices and underwhelming growth prospects as they grapple with bigger annual costs to the sector of up to £7bn largely arising from Chancellor Rachel Reeves’ increases in national insurance contributions and the national living wage.
Next’s boss Lord Simon Wolfson — who is a Conservative peer — warned of “anaemic” sales and profit growth at the fashion chain in 2025 as the economy absorbed the various tax rises. “I think what’s being demonstrated at the moment is that tax rises are much more likely to reduce growth than increase it,” he told the Financial Times on Monday.
M&S separately warned that the outlook for the year ahead remained “uncertain” as the business faced higher costs “from well-documented increases in taxation”.
Bosses at M&S, as well as those at Tesco and J Sainsbury, this week all said that consumers were cautious and more focused on getting value for money.
They expect food inflation to go up but said they would try not to increase prices. Grocery price inflation rose to 3.7 per cent in December — its highest level since March 2024, according to industry data from Kantar this week.
“Customers in food are looking for who’s got the best value and the best deals,” Sainsbury’s chief executive Simon Roberts said on Friday, as the group posted a 2.8 per cent rise in like-for-like sales for the 16 weeks to January 4, compared to last year. The chain’s grocery sales were up 4.1 per cent, but general merchandise and clothing and Argos sales fell 0.1 per cent and 1.4 per cent respectively.
Roberts added that Sainsbury’s and other retailers had spoken to senior government officials about “our concerns as a result of national insurance changes . . . they were so unexpected.”
“If there was the ability to review that decision, it would be, of course, welcome, but I think the reality is, we’ve got to [find savings] elsewhere in the cost base,” he added, referring to the chancellor’s move to lower the earnings threshold at which businesses start to pay NI contributions from £9,000 to £5,000.
Clive Black, head of consumer research at Shore Capital, which is a broker to M&S and Sainsbury’s, said he was “much more worried for the discretionary end of the market” since the Budget. “Food inflation will mean that people will have a little bit less to spend on other things,” he added.
Tesco’s chief executive Ken Murphy said the grocer was adept at dealing with unforeseen costs after the industry had to respond to the disruption caused by the Covid-19 pandemic as well as surging food inflation about a year ago. The UK’s largest supermarket will have to pay an extra £250mn a year in national insurance following the Budget.
Analysts at Peel Hunt said: “There is real nervousness about the next three months . . . If we go quiet again as a nation of shoppers [before Easter] then actually it’s going to be pretty difficult if you were thinking of putting a profit upgrade through for this year.”
The comments come after sector data this week showed that UK retail sales spending growth was “minimal” and below the rate of inflation in the final three months of 2024, suggesting consumers remained cautious in what is typically the busiest period of the year for shops.
Wolfson also warned over the tightening of the labour market, with Sainsbury’s Roberts saying the supermarket chain would “look very carefully at all hiring decisions” this year following the Budget.
Black added: “I think the really big imponderable and greatest worry that I’ve got is that . . . every single business after the Budget is looking at their labour process, and we can see the cooling of recruitment and vacancies. I think through this year, there is a danger that we start to see job losses grow.”
