The budget brands are attacking the supermarket elite where it hurts most of all: the bottom line

Is Tesco's crown starting to slip? The king of the high street accounts for one pound in every eight spent in Britain's supermarkets. But in recent months, its like-for-like sales have been growing more slowly than discount supermarket chains, such as Aldi and Lidl. In the 12 weeks to 10 August, Tesco's sales rose 6.5 per cent compared with the same period last year. But Lidl saw sales jump by 12.3 per cent and Aldi's soared by 19.8 per cent.

It is, perhaps, not surprising that sales are buoyant in chains that emphasise their low prices. But is this a temporary blip during an economic downturn or could it continue when the good times roll again? Tesco is certainly taking the new threat seriously. It has already privately experimented with store layouts straight from the Aldi school of presentation: fewer brands, piled high on pallets for maximum efficiency.

The credit crisis could see the start of a shift to continental-style "dual shopping", suggests Ian Clarke, professor of marketing at Lancaster University Management School. Clarke, who has made important contributions to the Competition Commission's investigation of supermarkets, says that many continental shoppers bulk shop for the basics at low-cost stores, then top up with luxury items, such as delicatessen products, at mainstream food stores. It's a trend that could be growing in Britain as household budgets tighten.

He explains: "I think there is going to be some long-term behavioural effects as a result of the recession with people looking to spread their money further. I think some people will return to their old shopping habits after the recession, but some element of dual shopping will remain." Marketing expert Terry Tyrrell, chairman of the Brand Union, agrees that a longer-term shift may be under way. "The shift to the discount supermarkets is part of a long-term change in purchasing habits," he says. "People are recognising that they are getting good value for money and they will continue with that purchasing habit."

Stuart Whitwell, joint managing director of brand strategy specialist Intangible Business predicts tough times ahead for the established supermarket giants: "When middle England finds both Aldi and Lidl, their loyalties will switch at the expense of more established stores. Discount stores are in the position now that Tesco was 15 years ago. They will be formidable competition."

Formidable indeed. Aldi may have only 2.9 per cent and Lidl 2.4 per cent share of supermarkets' "total till roll", according to grocery market researcher TNS Worldpanel. But they have extensive financial resources behind them. Aldi was started by German tycoon Karl Albrecht, whose personal fortune is now reported at £13bn. Lidl is owned by the Schwartz Group, which runs more than 8,500 stores, mostly in mainland Europe, with sales of around £35bn. Aldi and Lidl have more than 400 stores each in Britain, and both have announced ambitious expansion plans.

Aldi has said that it plans to invest £1.5bn in Britain, opening one new store every week until 2013. Lidl hopes to take advantage of the downturn in the housing market to snap up unwanted building land on housing estates for new stores. If their expansion plans come off, Britain will have a network of discount supermarkets which can begin to challenge the big four - Tesco, Asda, Sainsbury and Morrison. So who will suffer?

It won't be the discounters or quality stores, such as those specialising in organic produce, according to Nick Keppel-Palmer, head of consultancy at brand business Wolff Olins. Keppel-Palmer reckons Tesco and Sainsbury will be hit hardest, with Asda and Morrison using their reputations for lower prices to dull the pain to their bottom lines. "The advent of the discounters brings with it a race to the bottom," says Keppel-Palmer. "Try as they might, Tesco and Sainsbury can't beat them on cost without trashing their brands. They have to make a choice: upmarket or down market? They can't stay where they are.

Tyrrell notes that the big names among supermarkets are well entrenched with trusted brand names. "I have a feeling that they will survive, but if they are competing solely on price, there is only one way profits will go: down—and that won't be acceptable to shareholders." The big four will fight the low-cost competition by offering more value added services, such as home delivery and petrol sales. They will also move more into non-grocery products, such as clothing and financial services. They will also look for ways to make targeted promotional offers, such as using coupons, according to Charles D'Oyly, managing director of promotional solution business Valassia. But D'Oyly adds: "The low-cost supermarkets trade on their everyday low prices rather than using coupons, but some are now trialling coupons."

What should really worry the big beasts of the supermarket world is that it's not only cash-strapped shoppers who are visiting the discounters. The middle classes are increasingly attracted by the towering pallets of low-cost goods. Sir Jack Cohen, Tesco's legendary founder, originally built his company on the philosophy "pile it high, sell it cheap". It would be the bitterest irony for Tesco, if it was finally knocked from its number one perch by supermarket parvenus that really do.