The so-called ‘Golden Quarter’ for retailers hasn’t been as cheery as many had hoped, with UK retail sales across the discretionary category falling by 1.4% in December. That marks the weakest monthly performance since November 2024 as consumers continued to feel the pressure on their budgets.
While it was a disappointing festive period for many, some companies bucked the trend.
We’re exploring several emerging trends and delving into three companies we think are well-positioned for 2026.
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Groceries lead the charge
While sales of discretionary items like toys and clothing have largely disappointed, grocery sales have fared much better over the festive period.
UK shoppers spent a record £19.6bn on groceries in the four weeks to 27 December 2025, up 2.5% on the prior year. That growth was driven entirely by higher prices at the tills, which helped to offset a small 0.2% decline in volumes.
Ocado was the fastest-growing retailer for the second consecutive Christmas, with sales up 12.8%. The group’s benefited from the ongoing trend of more customers choosing to shop online rather than face the in-store frenzy.
Store-based retailers Sainsburys, Waitrose, Marks & Spencer, Tesco and Morrisons all delivered low-to-mid single-digit sales growth over the festive period. Asda was the only major supermarket to struggle, with sales dropping 6.5% in December as the group failed to nail its proposition amidst strong competition in the sector.
UK vs overseas
Companies’ geographical exposure is something to bear in mind for 2026.
UK consumers are in a relatively strong position compared to recent years, but it’s not an even playing field. Lower-income consumers are feeling the pressure more strongly than most, causing them to cut back on discretionary spending, which is weighing on sales for stores at lower price points. That was highlighted by Associated British Foods’ (ABF) weak Christmas performance, as its low-cost Primark stores only delivered like-for-like sales growth of 1.7% in the UK.
The picture in Continental Europe is looking a touch more troubling. Both Tesco and ABF called out weaker-than-expected sales in Europe for holding back performance.
The US appears to be on a stronger footing. Major US bank JP Morgan recently issued a promising update, stating that the US economy remains resilient and that consumers are continuing to spend.
Margins – it’s not a level playing field
Different pockets of the retail sector have structurally different profit margins.
At the bottom end of the spectrum, food retailers typically have the lowest profit margins. Much of their revenue comes from largely undifferentiated products, which limits their ability to raise prices without losing customers to competitors. While it’s the most defensive corner of retail if macroeconomic conditions worsen, any more government-mandated increases in costs, such as higher business taxes or wages, could really weigh on profitability.
Clothing retailers tend to enjoy healthier margins, largely because their products are more differentiated. Branding, design, and perceived quality give them greater pricing power, allowing them to pass on some cost increases without immediately losing customers.
While clothing retailers tend to enjoy healthier margins, there is an important caveat. When economic conditions deteriorate, consumers tend to cut back first on discretionary purchases such as clothing, whereas spending on essential items like food is generally more resilient.
Who’s positioned well for 2026?
Tesco
All in, it was a decent period for food retailers, and we view grocery as the most defensive corner of the retail sector if times get tougher. We think Tesco looks well-positioned to continue benefiting in the current environment.
The UK remains its biggest market by some way, so the current weakness in Europe isn’t too concerning for now. In fact, Tesco managed to grow its UK market share over Christmas to its highest level in over a decade.
The group’s continued success stems from its enormous scale and strong relationships with suppliers. This allows Tesco to negotiate hard on prices, giving customers little reason to look elsewhere. It should also help protect its margins if consumer spending comes under more pressure.
The solid Christmas performance has seen Tesco nudge its full-year profit guidance higher, and we see scope for the group to beat it when results are announced in April.
Tesco’s strengths are recognised with a valuation on a price-to-earnings basis at the top end of its peer group, likely putting a ceiling on any potential quick returns. There’s a respectable 3.7% prospective dividend yield on offer to reward investors for their patience. As always though, shareholder returns are never guaranteed and yields are not a reliable indicator of future income.
Marks & Spencer
Marks & Spencer (M&S) is another name that’s caught our eye.
Last year’s cyberattack continued to take some shine off the headline numbers, but operations are expected to return to full flow by March.
Nonetheless, the Food business continued to shine brightly this festive season, with like-for-like sales up 5.6% to £2.7bn. Continued improvement in value and quality has been the driving force in the group achieving a record-high market share.
Its Fashion, Home & Beauty (FH&B) division was hit hardest by the cyberattack. That led to some heavy discounting over the festive period to clear old inventory, which has weighed on performance. Despite this, underlying trends in this segment remain positive, reflecting improved customer perceptions of value, quality, and style.
FH&B is where we see the biggest opportunity. The online journey and margins simply aren’t as good as the competition. Big investments are being made to fix this, and if successful, could deliver a strong uplift in profitability.
With expectations reset, we think the worst is now behind M&S. Sitting at a discount to peers, the valuation offers attractive upside in our view. But competition is fierce, and M&S needs to nail its execution to deliver the expected improvements.
Next
Next continued its track record of under-promising and over-delivering this Christmas. The fashion powerhouse stormed past its previously upgraded guidance, recording full-price sales growth of 10.6% in the nine weeks to 27 December.
Strong online and overseas sales continued to be the driving force behind its stellar growth. Its online channel already accounts for well over half of group sales, and expansion overseas is still in its early stages. We see a long runway for growth here if it can execute its expansion plans well.
The better-than-expected sales growth saw full-year pre-tax profit guidance nudged higher, now expected to rise by 13.7% to £1.15bn in the year to the end of January.
For all the positives, it’s important to keep in mind that fashion is a fickle space. Styles can change quickly, meaning the group will always be chasing a moving target to deliver the right offering to customers. Any big missteps on this front will be costly.
Next remains one of our favourite companies in the retail industry, and we like its long-term prospects. However, the valuation isn’t as attractive as it once was, limiting the potential for upside in the near term. Given the intense competition and cyclicality of the industry, investors still need to prepare for ups and downs.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss. Yields are variable and not guaranteed.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.