Sainsbury’s has blamed “significant headwinds” from weak consumer confidence, heavy online competition and widespread discounting for a fall in sales at its Argos chain over the all-important Christmas quarter.

The UK’s second-largest grocer said its supermarkets increased sales by 3.4% at established stores in the three months to 3 January but Argos sales fell 1% in the period.

Argos, which has more than 600 stores and 400 collection points, most of which are within Sainsbury’s outlets, performed particularly badly in the crucial final six weeks, with total sales down 2.2% compared with the Sainsbury’s chain’s 4.6% increase.

The company said it had sold more items at Argos but the average price of products across the market was down amid “subdued spending on higher ticket items such as furniture, heavy promotional activity and a weak gaming market”.

It said it had faced “significant headwinds from online traffic trends, a tough and promotional general merchandise market and weak consumer confidence”.

Online competition, amid the continued rise of cut-price online sellers such as Temu and Shein,has put significant pressure on traditional retailers this Christmas.

Simon Roberts, the chief executive of Sainsbury’s, joined calls for the government to bring forward plans to crack down on tax breaks on the import of low-priced goods that have been exploited by online sellers based overseas.

The government does not plan to change the rules until 2029, but Roberts said: “I would encourage that to happen as soon as possible.”

Roberts also said that shoppers had “held back” spending before the government’s November’s budget and were “looking for value for money” because of concerns about the cost of living and inflation.

Roberts said he believed food inflation had peaked as commodity prices had stabilised and labour cost rises were more manageable and predictable for 2026.

However, he added that shoppers were likely to continue to focus on price and the market continued to be “heavily competitive”.

He said the government should continue to review business rates as there was a “big difference between physical and digital retail” on costs.

The poor performance at Argos is likely to fuel speculation that Sainsbury’s will aim to offload the catalogue shop, which was the target of an approach from the Chinese group JD.com in the autumn.

Roberts said a strong performance at its supermarkets meant it was still on track to achieve profit expectations. He said the group expected to return more than £800m of cash to shareholders this year, including a £250m special dividend.

Roberts said Sainsbury’s had “smashed this Christmas out of the park” on groceries as it benefited from shoppers buying more healthy and fresh foods and premium own-label goods as well as searching for cheaper basics and using their loyalty cards. Sales of fresh food rose 8% and its Taste the Difference range increased by 15%.

He said: “Investments in value, quality and service have delivered further strong grocery trading momentum and market share gains and, despite weaker general merchandise market conditions, we continue to expect to deliver retail underlying operating profit of more than £1bn.”

Online sales of groceries increased 14% in the quarter, helped by a rise in demand for rapid delivery.

In contrast, Sainsbury’s said its clothing sales had been affected by “softer demand and milder weather”, building on fears for the wider fashion market over the period.

Sainsbury’s shares closed more than 5% down in London on Friday, to value the company at just over £7bn.

Nicholas Found, of industry analyst Retail Economics, said: “Sainsbury’s results reinforce a stark divide in retail. Food retailers capitalised on cautious spending over Christmas, while general merchandise is feeling the brunt of fragile consumer confidence.”

Marks & Spencer on Thursday said its clothing sales had fallen in the run-up to Christmas when food sales soared.

Tesco, the UK’s biggest supermarket chain, said it was aiming to grab an even bigger slice of the grocery market this year after winning its best share in more than a decade over Christmas, with strong sales of fresh food and its Finest own-label range.