UK retailers face inflation hangover after blowout Christmas



* Tesco, M&S lift forecasts on better than expected sales

* Retailers warn of inflationary pressures

* British consumers splashed out in December

By James Davey, Paul Sandle and Kate Holton

LONDON, Jan 13 (Reuters) - British consumers enjoyed a blowout Christmas, results from the country's biggest retailers show, treating themselves to upmarket food, drink and clothes before the sober reality of surging prices hits home in 2022.

Retailers Tesco Link TSCO.L , Marks & Spencer Link MKS.L and Next NXT.L performed better than expected in the final weeks of 2021, as a surge in COVID cases left pubs and restaurants deserted, and consumers crowding supermarket aisles for tempura prawns, novelty bottles of gin and turkeys.

But they warned of pain to come Link as pressure built across their operations, from higher freight costs, wage hikes for warehouse workers and more expensive raw materials.

Retailers also saw no immediate relief from supply-chain disruption, with the online fast-fashion retailer ASOS ASOS.L flying in more of its stock from Asia, at greater cost, to guarantee delivery for Christmas.

The trading updates Link give an early indication of how retailers globally may have fared during the festive season, with earnings from the major U.S. and European groups expected later this month and next.

Britain's most famous retailer M&S, a provider of food, clothes and homewares, said it had largely held the line against price rises, but with inflationary pressures building in the pipeline that would have to give in 2022.

"We have to just try and make sure we get that balance and do what's right for the consumer," M&S finance chief Eoin Tonge told reporters.

He said inflation in the food market in the 12 weeks to December was 2.7%, rising to 3.5% in December, but M&S had not passed that much on to its shoppers.

British consumers have already seen food prices rise, with post-Brexit economic barriers pushing up the cost of trade, and hikes in taxes and energy bills are set for April. The Bank of England expects consumer price inflation to hit 6% in April, its highest since 1992, before easing.

Official economic surveys show household spending, which accounts for nearly two thirds of the UK economy, held up well to the end of December, but a lack of spending firepower in the spring will hit retailers hard while their costs remain high.

SOARING COSTS

Britain's biggest retailer Tesco said it was seeing operating cost inflation of about 5%, up from the normal levels or 2-3%.

"There's no doubt that there are inflationary pressures, (it’s) very hard for us to predict what those are going to look like over the coming months but we'll do our very best to manage them," CEO Ken Murphy told reporters.

Fast fashion groups have struggled as supply chain disruption limits their ability to deliver new ranges from factories in Asia to customers at speed. ASOS said it had already introduced low to mid-single digit price increases to offset the cost inflation.

That fitted with comments from Japanese clothing retailer Uniqlo Link 9983.T which said it would raise some prices due to higher shipping and raw materials costs.

ASOS noted that despite the pressures it expected demand to hold up as it is cheaper than many rivals and some shoppers will not have spent on holidays or weddings for two years. The retailer added that factories producing spring-summer ranges were closer to home, unlike winter coats which come from China.

"I do think there is a lot more demand to run," Chief Operating Officer Mat Dunn told reporters. He said that freight costs, while high, had plateaued, and that recent wage rises for warehouse workers had filled the staffing gaps.

For Christmas, the supermarkets said the arrival of the Omicron variant of coronavirus had prompted many Britons to stay at home, even though restrictions were not as tough as 2020 when a last-minute December lockdown hit hospitality and boosted supermarket sales. That provided tough comparatives.

For Christmas 2021, Tesco sold more than 8 million bottles of champagne and sparkling wine and highlighted smoked salmon as one of its best sellers. In comparison, sales at pubs group Mitchells & Butlers MAB.L fell 10.2% in the four weeks over Christmas compared with pre-pandemic times.

M&S said it had sold one in four of the country's fresh turkeys, along with more than 1 million light-up snow globe bottles of gin. M&S and Tesco both upgraded their profit outlooks.
Writing by Kate Holton Editing by Keith Weir and Jane Merriman

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