Annual profits at Sainsbury's are on course to hit the top end of expectations following strong Christmas sales, but one analyst has warned that the threat from discounters Aldi and Lidl has "never been greater" as the slowdown in consumer spending takes hold.
The UK's second-largest supermarket chain said total sales excluding fuel during the 16 weeks to January 7 rose by 5.2 per cent on the same period a year ago as shoppers "went all out for a big Christmas". Customers were on the lookout for the best deals which led to a 10% increase in sales of Sainsbury's own-label products, but also treated themselves: party food was up by 30%, and the group sold record amounts of champagne and prosecco during the period.
Online grocery orders fell by 10% as more shoppers opted to come into stores to compare the offers available. Home deliveries were also down in the group's Argos subsidiary amid concerns about postal services during strike action by Royal Mail workers.
There was a 50% increase in visitors to Argos outlets located within Sainsbury's stores, with Argos sales up by 4.5% during the quarter and that of Sainsbury's general merchandise rising by 5.4%. Grocery sales increased by 5.6%.
The sales figures were boosted by the impact of inflation, though Sainsbury's said it has been increasing prices at less than current headline rates. It added that the volume of groceries sold only fell "slightly" during the four key festive weeks.
READ MORE: Food inflation rockets to record 13.3%, price index shows
Chief executive Simon Roberts said profits for the full year to March should therefore be towards the top end of an estimated £630-£690 million, though it remains to be seen whether customers will spend as freely in the coming months.
"We understand money will be exceptionally tight this year particularly as many people wait for Christmas bills to land," Mr Roberts said.
"We are working together with our suppliers to battle cost inflation and we're keeping prices low again this year with our biggest value campaign yet in January, price matching Aldi on around 300 of our most popular products."
Analyst Charlie Huggins of Wealth Club went one step further warning that as the economy is strangled by high inflation, Sainsbury's "will have to run very hard to stand still".
"The squeezed middle is never a particularly pleasant place to be, but especially not in an inflationary environment, when cash-strapped shoppers are feeling the pinch," he said. "Sainsbury’s lacks the scale and financial muscle of its larger rival, Tesco. And it simply can't compete with the prices of Aldi and Lidl.
READ MORE: Aldi profits slump but market share grows
"The German discounters enjoyed a stellar Christmas, growing their UK sales by a quarter over the festive period. With grocery prices soaring, their appeal is only likely to increase.
"In fact, the threat from Aldi and Lidl to the big four supermarkets has arguably never been greater. Their aggressive expansion means they now command a combined market share of over 16%, placing them second only to Tesco. This is up from 10.7% five years ago."
John Moore of RBC Brewin Dolphin said Sainsbury's has other options available if required.
"The backdrop for consumers is expected to darken in 2023, and there are several hints at this in today’s statement," he conceded.
"That said, Sainsbury’s is reasonably well-placed in terms of the balance of its business offering and still has levers to pull in property – which could be sold and leased back – and further cost and efficiency savings, giving it the opportunity to keep pace with competitors and reinvest in product pricing.”
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