WRAPUP 3-UK retailers face inflation hangover after blowout Christmas

* Tesco, M&S lift forecasts on better than expected sales

* Retailers warn of inflationary pressures

* British consumers splashed out in December
(Adds details, links)

By James Davey, Paul Sandle and Kate Holton

LONDON, Jan 13 (Reuters) - British consumers enjoyed a
blowout Christmas, results from the country's biggest retailers
show, treating themselves to upmarket food, drink and clothes
before the sober reality of surging prices hits home in 2022.

Retailers Tesco https://www.reuters.com/business/retail-consumer/tesco-upgrades-profit-outlook-second-time-four-months-2022-01-13
, Marks & Spencer https://www.reuters.com/business/retail-consumer/ms-nudges-up-outlook-after-strong-christmas-2022-01-13
and Next performed better than expected in the
final weeks of 2021, as a surge in COVID cases left pubs and
restaurants deserted, and consumers crowding supermarket aisles
for tempura prawns, novelty bottles of gin and turkeys.

But they warned of pain to come https://www.reuters.com/business/retail-consumer/inflation-casts-shadow-over-uk-retailers-2022-2022-01-06
as pressure built across their operations, from higher freight
costs, wage hikes for warehouse workers and more expensive raw
materials.

Retailers also saw no immediate relief from supply-chain
disruption, with the online fast-fashion retailer ASOS
flying in more of its stock from Asia, at greater cost, to
guarantee delivery for Christmas.

The trading updates https://www.reuters.com/markets/europe/how-uk-retailers-fared-over-omicron-hit-christmas-2022-01-10
give an early indication of how retailers globally may have
fared during the festive season, with earnings from the major
U.S. and European groups expected later this month and next.

Britain's most famous retailer M&S, a provider of food,
clothes and homewares, said it had largely held the line against
price rises, but with inflationary pressures building in the
pipeline that would have to give in 2022.

"We have to just try and make sure we get that balance and
do what's right for the consumer," M&S finance chief Eoin Tonge
told reporters.

He said inflation in the food market in the 12 weeks to
December was 2.7%, rising to 3.5% in December, but M&S had not
passed that much on to its shoppers.

British consumers have already seen food prices rise, with
post-Brexit economic barriers pushing up the cost of trade, and
hikes in taxes and energy bills are set for April. The Bank of
England expects consumer price inflation to hit 6% in April, its
highest since 1992, before easing.

Official economic surveys show household spending, which
accounts for nearly two thirds of the UK economy, held up well
to the end of December, but a lack of spending firepower in the
spring will hit retailers hard while their costs remain high.

SOARING COSTS

Britain's biggest retailer Tesco said it was seeing
operating cost inflation of about 5%, up from the normal levels
or 2-3%.

"There's no doubt that there are inflationary pressures,
(it’s) very hard for us to predict what those are going to look
like over the coming months but we'll do our very best to manage
them," CEO Ken Murphy told reporters.

Fast fashion groups have struggled as supply chain
disruption limits their ability to deliver new ranges from
factories in Asia to customers at speed. ASOS said it had
already introduced low to mid-single digit price increases to
offset the cost inflation.

That fitted with comments from Japanese clothing retailer
Uniqlo https://www.reuters.com/business/retail-consumer/uniqlo-owner-fast-retailing-reports-56-rise-q1-profit-beats-estimates-2022-01-13
which said it would raise some prices due to higher
shipping and raw materials costs.

ASOS noted that despite the pressures it expected demand to
hold up as it is cheaper than many rivals and some shoppers will
not have spent on holidays or weddings for two years. The
retailer added that factories producing spring-summer ranges
were closer to home, unlike winter coats which come from China.

"I do think there is a lot more demand to run," Chief
Operating Officer Mat Dunn told reporters. He said that freight
costs, while high, had plateaued, and that recent wage rises for
warehouse workers had filled the staffing gaps.

For Christmas, the supermarkets said the arrival of the
Omicron variant of coronavirus had prompted many Britons to stay
at home, even though restrictions were not as tough as 2020 when
a last-minute December lockdown hit hospitality and boosted
supermarket sales. That provided tough comparatives.

For Christmas 2021, Tesco sold more than 8 million bottles
of champagne and sparkling wine and highlighted smoked salmon as
one of its best sellers. In comparison, sales at pubs group
Mitchells & Butlers fell 10.2% in the four weeks over
Christmas compared with pre-pandemic times.

M&S said it had sold one in four of the country's fresh
turkeys, along with more than 1 million light-up snow globe
bottles of gin. M&S and Tesco both upgraded their profit
outlooks.
(Writing by Kate Holton
Editing by Keith Weir and Jane Merriman)