Britain's biggest retailer Tesco said that it would focus on offering customers better value deals in January as it does not believe inflation has peaked, preparing for a tough 2023 after shoppers spent big at Christmas.
Trading updates show consumers did not hold back in December, with families hosting larger Christmas gatherings after two years of pandemic restrictions and treating themselves at home rather than going out to save cash.
For Tesco, that led to a better-than-expected 4.3% rise in quarterly underlying UK sales to 26 November, and a 7.2% rise in the six weeks to 7 January, making it one of the stronger performers on the high street, along with rival Sainsbury's and discounters Aldi and Lidl.
But the sector is now braced for a difficult year, with surging energy and property costs squeezing consumers' budgets, leaving their confidence close to record lows.
"We are more focused this January on value because we think that's what's important to customers," Ken Murphy, chief executive told reporters.
Asked about inflation he said, "We're not sure it's peaked just yet. "We would hope that by the middle of the year it will have peaked and then we will see it come down the other side."
Industry data has shown the grocery sector as a whole delivered record festive sales, albeit growth was driven by price inflation rather than increased volumes.
Tesco, which has a 27.5% share of Britain's grocery market, said it had "good momentum" going into 2023 and it expects to "maintain our competitiveness and deliver a strong performance relative to the market despite the challenging conditions ahead".
Tesco has benefited from a scheme to price-match Aldi on over 600 products and the popularity of a 'Clubcard Prices' loyalty programme that offers cheaper deals.
Tesco, like Sainsbury's, is absorbing some of its cost inflation rather than passing it all on to consumers.
Analysts welcomed the solid trading but Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said the aggressive pricing could hurt profit margins.
"The tug of war between pricing and volumes is clearly producing a good result, which is why profit expectations have been reiterated, but it's still hardly an ideal state of affairs for the big names in industry," she said.
The group maintained its forecast for 2022-23 retail adjusted operating profit of between £2.4 billion and £2.5 billion ($2.9-$3.0 billion), down from the £2.65 billion earned in 2021-22.
It expects retail free cash flow of at least 1.8 billion pounds and profit from Tesco Bank of £120-160 million.
Shares in Tesco have fallen 17% over the last year, but are up 7% over the last month. They were down 0.5% in early trading.