Supermarket wars hit UK retail sales

A "race to the bottom" by Britain's biggest supermarkets hit retail sales in May, and could harm a recovery in the sector, the British Retail Consortium (BRC) warned on Tuesday.

Like-for-like retail sales rose just 0.5 percent in May 2014 from the year before, and on a total basis were 2 percent higher, the BRC said. This growth is significantly lower than the 1.8 percent and 3.4 percent year-on-year rises clocked up in May 2013.

The food sector was behind the slowdown, according to the data, where sales fell 0.2 percent – the first negative reading since BRC's records began in 2008.

Chris Ratcliffe | Bloomberg | Getty Images

It comes as Britain's biggest supermarkets battle to recapture market share from their lower-end rivals, Aldi and Lidl, who have succeeded in targeting budget-conscious customers throughout the economic downturn.

Read MoreTesco reports 3.7% drop in same-store sales

The so-called "big four" supermarkets – Tesco, Asda, Sainsbury's and Morrisons – have been hard hit by the customer shift. Tesco last week reported a 3.7 percent drop in first-quarter sales, Sainsbury's posted its slowest growth in annual profit in almost 10 years in May, and Morrisons issued a profit warning earlier this year.

In response, Tesco, Asda and Morrisons have all promised to cut prices, leading to heightened concerns of a supermarket price war in Britain.

"There is a very clear pattern in food sales emerging where customers continue to be discerning in search of value," Helen Dickinson, director general of the BRC, said in a statement.

"Supermarkets are providing great quality food in a very competitive market and this shows in the three-month average food growth… Let's hope this rebalancing will eventually be rewarding for retailers."

Read MoreUK supermarkets caught in dangerous middle ground

What should Tesco do next?

Earlier this month, researcher Kantar Worldpanel revealed that three of the big four's market shares continued to be eaten up by rivals in the 12 weeks to May 25.

The market share of Tesco, Sainsbury's and Morrisons all fell compared to the same period a year before, while Asda's edged up only slightly. By contrast, Aldi's rose from 3.5 percent to 4.7 percent, and Lidl's grew from 3 percent to 3.6 percent.

David McCorquodale, head of retail at professional services firm KPMG, said a paradox had emerged, with food sales holding back the retail sector. He identified supermarkets' price battle as "the main barrier" to a recovery.

"While non-food retailers are seeing steady sales growth, the grocers appear locked in a race to the bottom, imposing price cut after price cut to maintain their sales volumes," he said in a statement.

"This price war is hindering the retail sector's overall recovery, which without the effects of these cuts would have seen like for like sales growth outpace inflation over the last quarter."