What: Lidl and discount-driven supermarkets did very well for Christmas.

Why it is important: In the UK, customers are weary of the current context and even for celebrations, they were cautious. This echoes the general picture painted by CEOs during the first 2024 CEO Call on January 10.

January is a key time for UK investors, who analyze festive trading updates from major retailers to assess economic trends and forecast the year ahead. This January, the theme is consumer weakness due to higher prices. The British Retail Consortium reported a modest 1.7% growth in retail sales in December compared to the previous year, indicating that people are buying less and becoming more price-sensitive.

Retailers face a challenging balance between price and sales volume. Higher prices can lead to fewer sales but potentially higher profit margins. The shrinking retail market, especially in real terms, is driving increased competition and discounting to attract customers.

The food retail sector illustrates this trend well, with consumers opting for cheaper products. Discount grocer Lidl saw a 15.3% sales increase in the last three months of the year, outpacing other UK grocers. However, overall food volumes only slightly increased by 1.2% compared to 2022. Discounters like Lidl and Aldi now command a significant market share, which puts pressure on retailers unable to offer competitive prices. This was evident in JD Sports' recent share price drop following lower-than-expected sales projections and weak Christmas trading, partly blamed on high prices from suppliers like Nike.

While early-year retail updates are scrutinized for their predictive value for the rest of the year, their accuracy can vary. Share price movements in the first three weeks of the year, particularly for retailers like Dunelm and Next, have historically correlated with their full-year performance. Next, known for its strong management, has already seen a 5% increase in shares this year following a robust market update. CEO Lord Simon Wolfson reported a 5.7% rise in full price sales last year and anticipates a 2.5% increase for 2024, with a 5% profit growth.

Next's track record of meeting profit guidance, with the exception of 2020, reinforces its status as a retail bellwether. The upcoming report from Dunelm could further clarify the retail outlook for the year. A strong Christmas performance from Dunelm might suggest a less challenging year for the retail sector.

Groceries: Lidl and Next enjoy a successful Christmas