Tesco beats off rivals with 5.7% rise in festive sales

Tesco brushed off stiffer competition from a recovering J Sainsbury with the strongest growth seen from any of the top four supermarket groups over Christmas.

The popularity of its non-food ranges, which contribute one-fifth of its revenues, helped the country's biggest grocer to increase its like-for-like sales by 5.7 per cent during the seven weeks to 7 January, excluding the distorting impact of petrol sales.

Its trading met City expectations but provided no scope for profit upgrades. Coupled with evidence of a slowdown in sales from its overseas businesses this hit shares in the group, which slipped 2 per cent to 312.25p.

Andrew Higginson, the finance director, said consumers had clearly "decided to enjoy themselves over Christmas after tightening their belts" last year. He reiterated the group's habitual caution, warning of a "real crunch on retailers' margins" in 2006.

"It will be a tough year for retailers to make money. Deflation of 1.5 per cent in our sales line at the same time as an incredible increase in costs mean the year ahead will be tough," he added. Tesco warned in the autumn that costs this year would be £60m higher than it had pencilled in.

Analysts believe Tesco is well placed to increase its lead over rivals, despite signs that Sainsbury's has turned the corner and some evidence that trading at Wm Morrison has stabilised, because it does not have to worry about rebuilding its margins.

Philip Dorgan, at Panmure Gordon, said: "We believe that 2006 will see the so-called recovery stories disappoint and Tesco's outperformance widen in profit and cash flow terms."

Over Christmas, non-food sales continued to grow at double-digits, although analysts predicted the rate was slightly below the 13 per cent seen in the first half. Tesco.com, which is growing sales at 25 per cent year on year, delivered more than 1 million orders in the four weeks to Christmas Day, although its web business is still tiny compared with the 14 million weekly visits its stores receive. International sales grew by 16.1 per cent over the period, below estimates.

Mr Higginson hit back at claims made in a Friends of the Earth report that Tesco manipulates the country's planning system. "The thought we might get any advantage is risible really," he said. He also denied claims the group has a landbank of 185 sites awaiting development.