Shares in Tesco (LSE:TSCO) fell 7% on Thursday (8 January) after the company reported weak Christmas sales. The big issue for investors is why this has been happening.
GLP-1s
Tesco reported like-for-like sales growth of 2.4% over the Christmas period. That’s below the level of inflation and represents a disappointing result.
One potential reason for this is the increased use of GLP1s – anti-obesity drugs that actually work. And this might be changing the way consumers shop and eat.
This could be a long-term issue for the company and its shareholders. But I’m sceptical of the idea that this is the main reason for the weak update in the last quarter.
For one thing, J Sainsbury reported stronger growth in its food sales over the Christmas period, especially in its premium ranges. Furthermore, I can see another reason for Tesco’s weakness.
Unemployment
UK unemployment has risen from 4.4% at the start of 2025 to 5.1% at the end of October. And in addition to competition from Sainsbury’s, this won’t have helped Tesco’s sales.
This view is borne out further by looking at the report Sainsbury’s issued on Friday (9 January). The firm’s weakest performance was in Argos, especially in big-ticket items.
At the risk of stating the obvious, you don’t eat those things! And that suggests to me that a lot of what’s going on is to do with consumer confidence, not falling consumption.
UK unemployment isn’t something Tesco can do something about. But it’s likely to be more temporary than the rise of GLP-1 medication and that’s a positive sign.
What should investors do?
If I’m right, Tesco shares are down 7% because of some short-term challenges. And I’m including the loss of market share to Sainsbury’s in that category.
One feature of the supermarket industry is that switching costs for consumers are very low. That makes it hard to keep customers, but easy to win them back if they go elsewhere.
Tesco, however, has some unique strengths in this area. Its scale means it’s a convenient choice for a lot of people and gives it negotiating power with suppliers.
Whatever else has been happening over the Christmas period, this hasn’t changed. And it’s a key long-term strength that sets the firm apart from its rivals in an important industry.
A buying opportunity?
A differentiated business in a durable industry can be a great investment. And despite underperforming Sainsbury’s over Christmas, Tesco is still the market leader by some margin.
Since I’m sceptical about the long-term threat, I think the stock is clearly better value than it was a week ago. But I’m not convinced it’s cheap enough to be my top idea right now.
It’s staying on the list of shares I’m watching, but I’m not buying it yet. One of the things I’ve learned in recent years, though, is that opportunities do present themselves sooner or later.
