Strong demand for premium foods and clothing helped British grocer J Sainsbury to beat Christmas sales forecasts. 

However, the company continued to lose market share to discounters and warned of another tough year for mainstream supermarkets. 

The company, which trails troubled market leader Tesco and Wal-Mart Stores' Asda by annual sales, said it expected falling grocery prices and intensifying competition to offset the benefits of an improving economy. 

While shoppers' disposable incomes have been increasing, helped by lower fuel prices, there has not been a corresponding pick up in food sales, Sainsbury's chief executive Mike Coupe said. 

"It's undoubtedly the case that customers have a little bit more money in their back pocket. They are choosing currently to spend that on other items," he said. 

Britain's main supermarket groups have been hit hard by the rise of discounters such as Aldi and Lidl, and are also struggling to adapt to changing shopping patterns as customers buy more online and locally rather than at out-of-town stores. 

Sainsbury's said sales excluding fuel at stores open more than a year fell 1.7% in the 14 weeks to January 3, its fiscal third quarter. 

That was better than a second-quarter drop of 2.8% and analysts' forecasts for a decline of 2.5-4.4%.

It was helped by demand for its premium "Taste the Difference" food range, as well as a 10% rise in clothing sales and a 16% increase in sales at convenience stores. 

But analysts said Sainsbury's remained vulnerable to a fightback from Tesco, whose new chief executive is expected to unveil price cuts tomorrow, and noted it was still losing share to discounters and upmarket chain Waitrose. 

Lidl said this week its UK sales rose more than 20% year-on-year over Christmas, while Waitrose posted a 2.8% increase in same-store sales. 

Until early last year Sainsbury's had been outperforming its main rivals, reporting nine unbroken years of sales growth with a strategy focused on own-brand products, the quality, provenance and ethical credentials of its food, and on expanding its fast-growing convenience and online businesses. 

Compared with Tesco, it also excelled operationally, with clean and uncluttered stores, as well as good product availability and customer service. But it has now posted four quarters of falling sales in a row amid an escalating price war. 

Asda said earlier this week that it was investing £300m in the first quarter of 2015 to cut prices on 2,500 lines, while the UK's fourth biggest supermarket group Morrisons is also lowering prices. 

Sainsbury's said in November it would cut costs, dividend sand new store openings to fund an extra £150m investment in lower prices. This week, it cut prices on more than 700 products, including meat, fish and poultry. 

"Whatever happens we will invest in price, we will remain matching our competitors toe to toe," said Coupe.