Shore Capital expects UK supermarkets to continue generating solid earnings and cash flow in early 2026, despite lingering volume weakness and inflation-related distortion.
In a sector update following January trading, the broker said the backdrop remains “competitive but rational”, with easing input costs and fewer pricing shocks likely to support a more stable trading environment in the months ahead.
According to NIQ data cited in the note, industry value sales rose 4.1% in January, although volume declined 0.6%.
Shore said the data suggest consumers remained price-sensitive, with trade driven by cost recovery and category shifts rather than growth in underlying demand.
M&S, Waitrose and Sainsbury’s all gained share in the 12 weeks to late January, with sales growth of 6.3%, 6.0% and 5.6% respectively.
Tesco PLC (LSE:TSCO) posted a 3.9% increase, holding share, while Ocado Retail and Lidl continued to outperform, growing 9.8% each. Asda and the Co-op were the weakest performers, with Asda’s sales down 5.3% on the prior year.
Looking ahead, Shore expects first-quarter trends to resemble those seen in January. Food inflation is forecast to ease gradually through the second and third quarters, though the effect on volume is “a little more nebulous”.
Analysts flagged the rise of so-called “diet suppressance” (shifts in consumption away from volume and towards healthier or more premium choices) as a potential ongoing drag on unit growth, but one that may improve category mix.
Premium private label ranges are expected to remain in strong demand, supporting margins even as inflation wanes.
While the sector faces tougher year-on-year comparatives, Easter 2025 coincided with good weather and strong promotional activity, Shore said the 2026 FIFA World Cup could offer some upside to sales, particularly in alcohol categories, despite ongoing shifts towards low or no-alcohol options.
The broker concluded that the sector outlook supports continued earnings delivery and free cash flow generation, particularly for Tesco, J Sainsbury PLC (LSE:SBRY) and Marks and Spencer Group PLC (LSE:MKS).
Asda remains under scrutiny, with stabilisation expected in the second half of the year as the effects of its Project Future initiative dissipate.