UK supermarket sales fall for first time on record

The U.K. grocery market has fallen into decline for the first time on record, as discount retailers lead a price war that is squeezing the profits of the traditional U.K. supermarkets.

German retailers Aldi and Lidl have both seen their sales surge in the last year, while profits of the big names Tesco, Sainsbury's and Morrisons, three of the "big four", continue to suffer.

Read MoreGerman investor morale rockets ahead of forecasts

Simon Dawson | Bloomberg | Getty Images

Grocery sales in the U.K. slipped 0.2 percent in the 12 weeks to November 9, when compared with the same time last year, as the fight for market share has pushed the price down for everyday goods, according to new data from Kantar Worldpanel.

The decline marks the first contraction in British supermarket sales since Kantar Worldpanel records began in 1994.

Read MoreUK house prices rise but storm clouds gathering

"The declining grocery market will be of concern to retailers as they gear up for the key Christmas trading season. The fight for a bigger share of sales has ignited a price war which means an average basket of everyday goods such as milk, bread and vegetables now costs 0.4 percent less than it did this time last year," said Kantar Worldpanel's head of retail and consumer insight, Fraser McKevitt.

"This is bad news for retailers, but good news for shoppers with price deflation forecast to continue well into 2015," McKevitt added.

Goldman Sachs warned the only real solution for the overcapacity in the U.K. grocery space is for the chains to drastically reduce the number of stores.

Read MoreBuffett sells off 'huge mistake' Tesco

Since November 2013, Tesco's share price is down 47 percent, Sainsbury's has fallen 35 percent and Morrisons is down 38 percent according to Goldman, which said its new target prices imply a further 19 percent and 42 percent downside at Tesco and Sainsbury respectively.

"We believe Aldi's ability to cut prices is now significantly ahead of the listed three. Having given the discounters the initiative and allowing the behavioral shift to become structural, the big four U.K. grocers are no longer in a position to stop discounter growth through price," according to analysts led by Rob Joyce.

"Our analysis of the U.K. grocery industry suggests capacity exit is the only viable solution for a return to profitable growth," he said, adding that one in five stores needed to be closed.

Of the "big four" Walmart's Asda has recorded the best performance. Its sales have fallen in line with the overall market but its share has held steady at around 17 percent.

Read MoreSainsbury's to cut spending to lure shrewd shoppers

Sainsbury's and Morrisons have both recorded a decline in market share compared with last year with sales down 2.5 percent and 3.3 percent respectively. At the higher end of the market, Waitrose has also posted strong growth, with sales up by over 5 percent, taking its market share to 5 percent.