IN the coming days, the picture of how the retail sector performed over the all-important Christmas period will become clear.

German-owned discount grocer Aldi was first out of the blocks, reporting on Tuesday that it had enjoyed record sales in December. Given the mounting pressure on household budgets from high inflation, this was no big surprise. Aldi, which has around 990 stores in the UK, and discount counterpart Lidl have been performing strongly for months now, winning custom from their more established major UK rivals as consumers have sought cheaper prices as inflation has soared.

Having recently overtaken Morrisons as the UK’s fourth-biggest grocer, Aldi reported sales had leapt by 26 per cent, topping £1.4 billion in the UK and Ireland for the first time in December.

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Separate figures released yesterday by Kantar, the retail industry analyst, further emphasised the major trend currently playing out in the grocery sector. Kantar reported that British households had spent more than £12bn on groceries over Christmas, the highest amount on record. But the analyst underlined that the total value of sales had risen because of the cost of food and drink, as inflation continues to blight the economy, rather than because people are spending more.

“Monthly grocery sales were a whopping £1.1bn higher in December versus last year, breaching the £12bn mark for the first time,” said Fraser McKevitt, head of retail and consumer insight at Kantar. “Value sales are up significantly but grocery price inflation is the real driving factor behind this, rather than increased purchasing.

“This is the second month in a row that grocery price inflation has fallen, raising hopes that the worst has now passed.

“However, it’s still a painfully high figure at the current rate, impacting how and what we buy at the shops.”

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The coming days are likely to reveal more of the same, and not just in grocery, but across the wider retail industry.

Next is due to report how it performed over the festive season today, but it has already tempered expectations in the City. Chief executive Lord Wolfson warned in August that shoppers were likely to spend less in the second half of the year because prices have risen.

Analysts Russ Mould and Danni Hewson at stockbroker AJ Bell noted that although Next is traditionally the last major retailer to launch end-of-year sales, “the markdowns went live on Christmas Eve”. They said this suggested the retailer was not “immune to the challenges posed by inflation, uncooperative weather and the squeeze on consumers’ pockets by the cost-of-living crisis.”

Given that Next is traditionally held up as a bellwether of the high street, its results will inevitably be pored over by those keen to get a sense of where the economy currently stands.

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It is certainly beyond question that the coming months are going to be tough for households and businesses, with recession in the UK now seemingly inevitable this year.

Inflation is likely to recede from its current level as the year progresses. There are differences of opinion between economists as to when and by how much it will slow, but the slowdown is not going to happen overnight – and not least because the energy price cap will increase further in April.

Interest rates now stand at 3.5% and are forecast to edge up further still, so the cost of servicing a mortgage (and other loans) has become a good deal greater than it was around a year ago. Indeed, the higher cost of borrowing is already feeding through to the housing market and it is now forecast that house prices will fall this year, following years of going up.

Michael Hewson, chief market analyst at CMC Markets, told The Herald this week that while higher interest rates are good for banks, “the flip side is demand for loans and mortgages is likely to slow”.

Mr Hewson said: “We are already seeing that in lower mortgage approvals, while the banks themselves are starting to batten down the hatches with higher loan-loss provisions. The air is starting to come out [of] the housing market and valuations are coming down.”

As far as retail is concerned, these are not exactly the kind of circumstances that will stimulate an important part of the economy that has found it tough to get going again after the pandemic, with a cost-of-doing business crisis following hard on the heels of lockdown restrictions, supply-chain disruption, and labour market woes. Moreover, even when inflation starts to fall and the cost of doing business begins to ease, there are fundamental changes in the marketplace which retailers have to contend with.

Speaking exclusively to The Herald before Christmas, David Pierotti, centre director of Silverburn in Glasgow, outlined the context retailers are operating within as he revealed a host of major changes that are planned for the destination as its relatively new owners seek to meet the evolving demands of consumers.

Mr Pierotti said Eurofund Group and Henderson Park, which acquired Silverburn from Hammerson in a £140 million deal early last year, are planning to add a range of leisure attractions and other facilities, such as a work hub and children’s play area, as well as further retail tenants, to the centre in the coming months.

In comments that underlined the challenges the retail sector face after a pandemic that has led some people to re-assess how they spend their discretionary income, Mr Pierotti said: “We are thinking of [introducing] more entertainment like putting, ten-pin bowling, all these different, wonderful things that human beings love to do.

“Post-Covid, people are happy to spend £20 less on buying a jumper and spending that £20 on going for a coffee with their mates.

“That is something we took from the period of Covid, which was awful for us all and retail in particular. I think people appreciated other people. And I think my industry has now to got to say: people have got loads of stuff, maybe they just want memories, maybe they just want things to do with their families or their mates.”

Retail is clearly in a period of major flux, and there is no indication that things will settle down into a new normal soon.