By James Davey and Paul Sandle
LONDON (Reuters) - British shoppers spent freely at Christmas, piling their trolleys with party food, drink and clothing as they enjoyed the first holiday season free of COVID worries for three years, but retailers warned most will tighten their belts in 2023.
Tesco, Britain's biggest retailer, and rival Marks & Spencer posted better than expected Christmas sales as people snapped up festive treats despite a deepening cost-of-living crisis.
In-store sales were particularly strong, with strikes by postal workers helping push customers back to the High Street.
Tesco recorded its biggest ever sales day on Dec. 23, the supermarket group's Chief Executive Ken Murphy said.
Results on Wednesday from another big grocery chain, Sainsbury's, showed a similar trend, confounding retailers' worries that Christmas trading would be sluggish given double-digit UK inflation and low consumer confidence.
"(Tesco was) clearly a winner competitively over Christmas ... and so the virtuous circle of scale benefits being reinvested in price to weaken smaller competitors and gain (market) share can continue," a top 20 Tesco shareholder said, speaking on condition of anonymity.
Retailers benefited as wealthier households with pandemic savings bought sparkling wine and sequinned party dresses, while others pursued cheaper value deals, particularly in food, as they chose to celebrate at home rather than eat out.
The biggest jump in demand over Christmas was at discount supermarket chains Aldi and Lidl, which both posted sales growth of over 20%. M&S said it saw demand spread across its value and premium ranges.
That reflects the need to conserve cash as the British economy heads into a recession and households face the biggest squeeze on living standards since records began in the 1950s.
Online-only fashion retailer ASOS, which has stumbled post-pandemic after a decade riding the wave of the shift to internet shopping, lagged its peers. Its UK revenues were down 8% in the four months to Dec. 31, it said on Thursday.
Delivery problems exacerbated ASOS's problems in the run-up to Christmas, showing the value of a bricks and mortar presence.
Marks & Spencer, which has about 1,000 UK stores, gained market share and beat expectations, posting quarterly like-for-like food sales growth of 6.3% and an 8.6% rise in clothing and home sales.
Sales in stores of clothing and homewares were a strong point for M&S - it said they grew 12.8% - while click and collect orders, where people visit shops to pick-up items ordered online, were also up 20%.
Tesco posted underlying sales growth of 7.2% in the six weeks to Jan.7, also stronger than expected.
But Tesco and M&S both warned of more challenging economic conditions ahead as the strain on Britons' household budgets starts to be felt more keenly when Christmas credit card bills arrive.
Food price inflation - which is running even higher than the headline figure - has been boosting the value of sales at supermarkets, even as customers buy fewer items.
"We all would expect customers to tighten their belts after Christmas and that's certainly what we have built into the plan this year," Tesco Chief Executive Ken Murphy told reporters.
That warning tallies with other signs of trouble ahead.
British bank NatWest is preparing to step up support for struggling customers by extending the amount of time they have to repay unsecured loans or overdrafts, while research on Thursday showed more than 3.2 million people were cut off from their energy supply last year because they could not afford it.
Outside the Christmas splurge on food and gifts, Britain's retail market is already finding consumers are cutting back. British motoring and cycling parts retailer Halfords trimmed its profit forecast on Thursday, citing softer cycling and tyre demand.
(Additional reporting by Sinead Cruise; Writing by Sarah Young; Editing by Catherine Evans)