Controversy of the day: Will Sainsbury’s fall next in the Great Supermarket Wars?

"Sainsbury [LON:SBRY] suffered its first fall in Christmas sales for more than a decade", said the Telegraph, though that performance was "better than City analysts had feared". Sainsbury's sales fell by 1.7% in the third quarter of 2014, but had been expected to fall by almost twice as much (3.2%).

The supermarket, which typically outperforms rivals at Christmas, saw its share price rise as much as 4.2% in early London trading following the news. Sainsbury's did well relative to the other three of the big four' supermarkets Tesco, Asda and Morrisons - but relative to 2013, performance was poor. The coming year could be just as tough as the one just past.

"The outlook for the remainder of the financial year is set to remain challenging", Sainsbury's CEO Mike Coupe told the Financial Times. "Given the uncertainty in the trading environment, food price deflation and the price reductions we announced this week, we currently expect our fourth quarter like-for-like to be similar to that of our first half."

Start your trial of MoneyWeek today

Get unparalleled financial insight, analysis and expert opinion you can profit from.

Start your trial

Sign up for MoneyWeek’s free twice-daily newsletter.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.

Sign up

Sainsbury's is not the only grocer cutting costs to stay competitive. Tesco is set to announce a "focus on cost cuts and asset sales" on Thursday, says Reuters, while Asda has already announced £450m-worth of cuts to thwart Tesco's recovery, says the Guardian.

Each of the big four' is feeling the squeeze from discount retailers, as savvy shoppers look for bargains. "The UK supermarket industry has experienced radical change over the past five years with consumers becoming much more focused on value for money," said John Stokes, research analyst at financial services group Davy.

Figures published by market researchers Kantar Worldpanel told the same story. Aldi's sales were up by 22.3% and Lidl's up by 18.3% last quarter, giving them a combined market share of 8.6%.

Over the same period, Tesco's market share fell by 2.7%.

Mid-range supermarkets are under pressure from high-end retailers as well as budget chains. Waitrose announced a 7% rise in sales over the five weeks to last Saturday, to £728m. Like-for-like sales at stores open for more than a year were up 2.8%. Gains made by high-end and budget chains are eating into the big four'. Despite its recent stock market boost, Sainsbury's might find 2014 toughest of all.

"Lacking Tesco's buying power and Asda's efficiency, Sainsbury's margins are set to be under further pressure.", said Bryan Roberts, Kantar's Director of Retail Insights. "This might prompt some focus on costs, but we can only hope that any action in this regard focuses on back-end efficiencies rather than in-store."