According to data collected by researchers Kantar Worldpanel, Tesco (LSE: TSCO) lost more grocery market share in Britain than any other supermarket chain between September 2013 and May 2016.

They say the biggest have farthest to fall and Tesco is falling hard.

The small players are winning

Ranked in order of market share gains or losses in Britain over the two-and-three-quarter year period the players in the sector performed like this:

Company

Market share September 2013

Market share May 2016

Market share gain/loss over the period

Tesco

30.2%

28.3%

(1.9%)

Asda

17.3%

15.8%

(1.5%)

Morrison’s

11.1%

10.7%

(0.4%)

Sainsbury’s

16.6%

16.2%

(0.4%)

The co-operative

6.5%

6.2%

(0.3%)

Iceland

2%

2.1%

0.1%

Independents and others

4.7%

5%

0.3%

Waitrose

4.9%

5.3%

0.4%

Lidl

3%

4.4%

1.4%

Aldi

3.7%

6%

2.3%

The big four supermarkets — Tesco, J Sainsbury (LSE: SBRY), Asda and WM Morrison Supermarkets (LSE: MRW) — lost 4.2% of the market between them but Tesco delivered the largest plummet, losing 1.9% of Britain’s grocery business to others.

The smaller players are winning the market share grab with Aldi and Lidl heading the charge. It’s sobering to realise that Aldi and Lidl combined control almost the same percentage of Britain’s grocery market as the fourth largest operator, Morrison’s. Together, the German discounters will soon be the fourth largest force in the game — that’s how serious the threat is to the big four in this country.

A changing sector

The sector is changing fast and leaving the big players struggling with business models born of an earlier time. The big four must adapt or die, but further controlled shrinkage of their businesses seems inevitable.

With such a headwind in the sector, it’s hard to see any attraction in the shares of Tesco, Sainsbury’s and Morrison’s. The long-term picture looks bleak and these market share figures keep coming relentlessly to tell the story of how a once-cosy, defensive sector has become a very uncertain investment arena for those seeking income, growth or both.

At today’s 159p share price, Tesco trades on a forward price-to-earnings ratio of 24 for the year to February 2017. That’s nuts, and the forward dividend yield of just 0.6% is no consolation. City analysts following the firm expect earnings to rebound 141% that year but that’s a trick the firm probably can’t repeat. The forward consensus is for an uplift in earnings of around 38% for the year to February 2018, but even then Tesco has to go a lot further to grow into its current valuation.

Investors must have high hopes for Tesco but is such optimism realistic? Aldi and Lidl have been growing at a double-digit clip for years but something bigger could be about to happen — the firms have been around long enough for word to spread and they could be on the cusp of gaining critical mass in the market. Already we see anecdotal evidence of embedding into the public’s hearts and minds as Aldi tears down a small store to replace it with a larger one or Lidl relocates from a small site to a larger one in the same town. These market share gains are real, accelerating and permanent in my view.

What to do instead

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.