Budget cuts, tax hikes, rising unemployment—it's enough to make you lose your appetite. Not if you're British. As Britons brace for the austerity that will accompany Prime Minister David Cameron's campaign to wipe out the nation's record deficit, the U.K.'s top supermarket chains are betting that consumers will party this Christmas. Verdict Research is forecasting that this holiday season will be the best for U.K. retailers since 2007, with spending on food and grocery items climbing 3.5 percent, to $53 billion—39 percent of all projected holiday spending. "Despite the woes of the political economy, don't underestimate the propensity of the average British household to have a good time when Santa is in town," wrote Clive Black, an analyst at London brokerage Shore Capital Group in a recent note to clients.
J Sainsbury, the U.K.'s No. 3 supermarket chain, and rival Wal-Mart Stores' Asda, the No. 2, believe consumers will defy the downturn and add more expensive products to their shopping baskets as treats before the belt-tightening starts. On Jan. 4 the value-added tax levied on all prepared foods, including holiday goodies such as ice cream and salted nuts, will rise to 20 percent from 17.5 percent. "Christmas is a time where people trade up on food," says Sainsbury Chief Executive Officer Justin King. "We've seen people quite clearly manage their weekly spend so they can preserve things that are important to them."
In preparation for the holidays, Asda and Sainsbury have bulked up their private-label offerings. "The U.K. consumer is always prepared to splash out at Christmas, and the own-brands are typically higher gross margin, so it's a clever strategy," says Sam Hart, a retail analyst at Charles Stanley, a brokerage in London.
Sainsbury, for instance, is doubling its highest-priced "Taste the Difference" line of food, which typically accounts for about 5 percent of everything it sells. Among the approximately 300 additional items: a $4.80 tub of mince-pie ice cream and $8 cognac-laced Christmas pudding.
Asda is adding 140 products to its Extra Special premium line over the next six weeks, including sherry trifle gateaux, trout and horseradish terrine starters, and Christmas pudding aged for six months. Almost three-quarters of the purple-and-cream-branded items have been updated or changed to attract holiday shoppers. As a further inducement, the chain began offering up to 25 percent off the new premium products in October. "We try and keep customers with us when they trade up at Christmas," says Jo Johnson, brand manager for the Extra Special line. "We're getting customers to understand we have a truly premium range with the discounts."
Some merchants warn that the predictions may be too optimistic. Wm Morrison Supermarkets CEO Dalton Philips is less upbeat on the outlook, predicting a "tough" festive season. "People say the British are going go to have a great Christmas irrespective," of the economic backdrop, Philips says. "I'm not so sure."
The bottom line: Retailers J Sainsbury and Asda are expanding their premium private-label offerings to lure holiday shoppers looking to treat themselves.