Unlike its arch-British rival J. Sainsbury Plc, Tesco Plc looks like it had a pretty cheerful Christmas. U.K. like-for-like sales rose 1.2 percent in the 19 weeks to January 5, and 2.2 percent in the final six weeks of that period. That’s well ahead of analyst expectations.

But before cracking open the Tesco Finest champagne, it’s worth noting that the grocery giant had a disappointing holiday period the year before, after it suffered disruption from the collapse of Palmer & Harvey, a key wholesaler. And in the coming year or so, sales won’t be everything for chief executive Dave Lewis.

His chief goal is lifting the group operating margin to between 3.5 percent and 4 percent by February 2020. It was about 3 percent in the first half of its current financial year. Tesco says it is “firmly on track” to reach the margin target. Analysts at HSBC agree that it will make it – just about. It expects the 2020 group operating margin to be 3.6 percent.

Tesco has the benefits of its purchase of Booker, the British cash-and-carry specialist, coming through. That will boost its buying power. And it clearly has sales momentum, as the Christmas performance shows.

What’s more, Sainsbury had a poor end to 2018. As I’ve argued, when there’s little growth in the grocery market, supermarkets need a weak player to steal sales from. Sainsbury risks becoming that soft target, especially if it’s distracted by its 7 billion pound ($8.9 billion) takeover of Asda.

But Lewis still faces challenges. First, the British shopper remains cautious because of Brexit. Moderating food price inflation and competition from the German discounters Aldi and Lidl means there’s not any margin for error. And Tesco’s international business is a problem. Even with a recovery in recent days, the shares are down about 20 percent since last year’s August high. They trade at about 13 times forward earnings, a discount to Wm Morrison Supermarkets Plc.


If Tesco can maintain the growth it enjoyed over Christmas, and lift the margin, that gap could narrow, particularly if that helps it return cash to shareholders. If it misses the margin target, its hopes will look as shopworn as those cut-price Christmas cards in January.

To contact the author of this story: Andrea Felsted at afelsted@bloomberg.net

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2019 Bloomberg L.P.