SUPERMARKETS have shown themselves to be almost impervious to the recession, growing profits while other retailers foundered.

But both Tesco and Sainsbury’s have now warned the bolstering effect of rising food inflation is coming to an end. And as the big names scrap for a larger slice of the UK pie, the battle for the nation’s wallets is fast turning from eye-catching promotions to customer loyalty.

Tesco, the UK’s largest retailer by a distance, reported half-year profits at the top end of analyst expectations this week, at £1.4 billion - a rise of 1.5%.

But while the wheels are far from coming off the supermarket giant’s trolley, the firm also said the days of big like-for-like sales increases were numbered as food inflation narrows.

Shoppers have seen the price of the food in their baskets stabilise in recent months, with the eye watering increases of last year fading into memory.

Official data for annual food price inflation show it fell to its lowest level in more than three years in August - at 1.6% - after a better than expected European harvest helped bring wheat prices down.

This compares to a 4.7% annual percentage rise last year after world agricultural prices rose 40% in 12 months.

According to Office for National Statistics figures on key grocery purchases, the price of pork sausages fell 2% in the 12 months to August, following an 18% leap the previous year. White bread prices jumped 23% between 2007 and 2008 but have since fallen back, by 3%.

The onset of recession has had a profound effect on shopping habits and consumers "trading down" to value ranges have also pulled down prices.

Analysts predict food price inflation is on its way to zero and this is already showing through in supermarket figures.

Tesco same-store sales growth, excluding VAT and fuel, has slowed from 4.3% in the first three months of its financial year, to 3.1% in the second quarter.

Results from Sainsbury’s this week told a similar story, despite the fact the retailers have different reporting periods.

The supermarket has seen its same-store sales growth slow from 7.8% in the first quarter, to 5.4%.

Morrisons also cautioned there would be slower market sales growth to come when it posted its interim numbers in September, despite its like-for-like sales growing from 7.3% in the first quarter to 7.8%.

Nick Coulter, of Numis Securities, said as consumers have helped push down inflation by buying cheaper products in the recession, there is a chance they could trade up during the recovery, sending it back on an upward path.

Despite concurring on their sales forecasts, the supermarkets are engaged in a ferocious battle for market share as Tesco’s smaller rivals take bites out of its dominant position.

According to the most recent market figures Tesco continued to lose ground to its UK rivals, with its share slipping from 31.1% to 30.9% in September.

Morrisons made the biggest inroads, increasing its share from 10.8% to 11.3%, while Asda and Sainsbury’s also rose to 17.4% and 15.8% respectively.

Tesco has recently posted smaller sales growth than its competitors, allowing them to grow their slice of the market.

But Tesco appeared to suggest a turnaround in recent trading this week, as it said the second half meant it could "confirm that our growth rate has converged with the wider industry".

The group also continues to expand and is on target to open two million square feet of space this year, helping its total revenues.

Mr Coulter said Tesco was still number one in the sector, with more space and a greater return than its rivals.

"Reports of its demise are greatly exaggerated," he said.

After the recent encroachments into Tesco’s market share, he expects the sector to go back to an attritional style.

"I guess the guns have turned slightly and moved away from out and out promotion towards loyalty," he added.

Tesco stepped up its fight for customers by doubling points in its Clubcard loyalty scheme in August. The firm said it was already seeing "encouraging results" although it expects the benefits to grow over time.

Sainsbury’s was hot on its heels with a new voucher loyalty scheme. By November, shoppers in all 535 stores will be handed money off coupons at the till giving them up to 20% off hundreds of branded and Sainsbury’s own products.

The group, which said the move has been long in the pipeline, described the initiative as "a multi-million pound investment over five years" and its biggest customer loyalty drive since it jointly introduced the Nectar card in 2002.

Despite the hyped rise of the smaller supermarkets, Tesco remains a favourite among analysts.

Freddie George, retail research analyst at Seymour Pierce, said while the Sainsbury’s figures were in line with expectations, he still preferred Tesco and Morrisons.

He said food price inflation will remain a key factor for the industry as a whole, with a rate predicted to be between 0% and 1% in the last quarter 2009.

Mr George said he believes Tesco has started to outperform the food retail market over the last two months.

"This is due to comparatives coming up against the anniversary of the introduction of the discount brands and the recent offer of double loyalty points as from the middle of August, which ensure the company had strong ’Back to School’ sales," he said.

Mr George added that Tesco’s international operations should now start to see "significant upside in earnings" over the medium term.

Tesco’s breadth of offering is what sets it apart - and has made it the most profitable British retailer in history.

The differentiation of its portfolio compared to others in the sector is seen as giving the grocery giant an advantage, so where UK competitors are seeking to grow in a mature local market, Tesco is extending its fingers into as many pies as possible.

The group has announced the rebranding of its personal finance division as Tesco Bank, reflecting its ambitions to take on the high street banking sector.

It is looking to capitalise on consumer mistrust of the established names in the wake of the financial crisis and it is expected to add current accounts to the savings, loan and credit card services already on offer.

Jonathan Jackson, head of equities at Killik & Co, said: "At a time when Sainsbury is focused on expanding in the low growth UK market, Tesco is building a portfolio of stores in emerging markets and a financial services business."

But there are some hurdles to overcome for the firm, with a fledgling US business Fresh & Easy seeing losses widen to £85 million in the first six months of the financial year.

And a recent Competition Commission decision to recommended a ’competition test’ - which will prevent those with a strong presence in a particular area shutting out rivals by building more stores or major extensions to existing outlets - could also see growth curtailed for all of the big names.