UK Supermarkets Were Full of Festive Cheer. Will it Last The Year?

However, changes to National Insurance (NI) imposed by UK Chancellor Rachel Reeves in last year’s Budget could create headwinds for these companies.

How Will Tax Changes Impact Supermarkets?

As some of the UK’s most visible and biggest employers, supermarkets are among the businesses facing higher costs from April, when new NI rules and wage rules arrive.

From Apr. 1, employer contributions will increase to 15%. But the earnings threshold for employers to start paying NI will also fall from £9,100 to £5,000. The national living wage will also increase to £12.21 an hour for people aged 21 and over, and to £10 for those aged between 18 and 20 years old. Supermarkets often have younger people on the payroll, so this change will have a direct impact on the sector.

Reports now suggest some of the UK’s biggest employers face a bill of more than £500 million to cover these costs and have already started to make adjustments in advance of the changes. Sainsbury’s is believed to be cutting thousands of jobs, in a media report on Jan. 23.

Hiring Workers Just Got More Expensive

Michael Browne, chief investment officer at Martin Currie, the home of the FTF Martin Currie UK Equity Income Fund, which has a Morningstar Medalist Rating of Silver, foresees UK supermarkets facing a tougher time in 2025 as a result.

“From Apr. 1, hiring two-part time workers is now more expensive than employing one full time,” he explains.

“It’s worth remembering that the retail, leisure, and hotels sectors employ about 20% of the population—it has about 25% of vacancies.”

In Browne’s view, supermarkets and other retailers will inevitably reduce their staff to cut back on costs.

Are Tesco and Sainsbury’s Good Investments?

Sainsbury’s enjoyed good festive trading, with a rise in sales over the Christmas period of 2.8%, driven by a surging demand for products like champagne, party food, and sparkling wine, the usual festive staples.

Tesco’s sales also rose 3.8% over Christmas, with the supermarket chain now issuing full year-guidance for adjusted operating profits of £2.9 billion.

Both companies release full-year results in April 2025.

Online supermarket Ocado, which had a challenging 2024 after it was booted out of the FTSE 100, also had a bumper Christmas. Its revenue increased 17.5% in the final quarter of 2024 to £715.8 million. The company, which was founded in 2000, was launched as a disruptor to the existing in-person food shopping model. Its shares have had a wild ride since then, having an amazing 2020 and 2021 during the lockdown era as many consumers discovered online food delivery for the first time.

While M&S isn’t seen as a “traditional” food supermarket because it sells a range of products, its seen as a bellwether for high street sentiment. Shares have soared since 2023 amid a long-awaited turnaround program. Over the festive period, M&S’s food unit saw an increase in sales of 8.7%.

Tesco Takes the Fight to Aldi and Lidl

Douglas Scott, portfolio manager of the Aegon UK Equity Fund, which has a Morningstar Medalist Rating of Silver, holds Tesco at 3.04% of the fund.

In his view, Tesco and Sainsbury’s have been successful in stealing market share from private equity-backed Morrisons and Asda, which he says are both struggling. They have also undermined low-cost Aldi and Lidl.

“[Sainsbury’s and Tesco] have invested more in their food proposition and matched Aldi and Lidl in terms of pricing,” he says.

“They are benefiting from their own actions but also from the poor actions of others. They both have good strategies; they are not going to allow prices to run away from them.” He also thinks investing in premium products is paying off at the tills.

“Tesco, Sainsbury’s and M&S are benefiting from the special occasion on a Friday night where people may buy a couple of steaks and a bottle of wine for around £20,” he says.

“If you were to go out for a meal you would pay a lot more. They are pricing the basics low to get you in the door, and then customers start trading up while inside.”

Is This the Start of Ocado’s Comeback?

Ocado was one of the worst-performing UK stocks last year, losing around 45%. From early 2024 to early 2025, the online supermarket’s market share dipped to 1.7%, as per Kantar figures, but consumer spend rose 4% over that period.

For Martin Currie’s Browne, there are reasons to be optimistic as online shopping makes a comeback. Ocado has benefited from a surge in online shopping, he says, as well as changing its commercial relationship with Waitrose to take on a joint venture with M&S.

Source: Morningstar Direct

“If I look at the general retailing scene, post-pandemic we went back to the high street a little bit. But online is picking up again,” he says.

However, Browne believes that, as an online retailer, Ocado will face more headwinds, as shoppers are more likely to stick to their budgets when they shop online.

Investing in Ocado: For and Against

Despite Ocado’s tie-up with M&S, Aegon’s Scott does not consider Ocado a desirable holding. He says the company, which many investors see as a software and logistics player rather than a UK retailer, is still struggling to make money.

“We have seen a lot of volume growth as they have captured online shoppers that are feeling that they can get better prices than before,” he says.

“But coronovirus highlighted the frailty of Ocado’s business model.”

On the other hand, Morningstar analyst Verushka Shetty continues to back Ocado, arguing the business is well positioned in its market.

In her view, Ocado is an undervalued stock because of its ability to provide digitized fulfilment center offerings to other grocers, and the bet that, in the long term, online grocery shopping will become increasingly popular.

Ocado currently trades at £3.19, well below its Morningstar Fair Value Estimate of £9.20.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.