In a clear sign that cost is becoming top priority for shoppers, Waitrose dropped to fourth in an annual satisfaction survey after three years in first place.
Senior industry insiders told The Sunday Times that Britain's biggest supermarket was developing a separate brand which would match German discounters Aldi and Lidl on price, and offer a far more limited range of products than the average Tesco store.
Customers also rated Aldi highly when it came to special offers, the quality of its fresh and own-label products and the ease of finding items on the shelves.
Elsewhere, Sainsbury's ended up bottom of the list, with a spokesperson pointing to confusing methodology of the ranking system and highlighting how it beat Aldi in categories like store appearance, queuing time, staff availability and product range.
This was largely down to a two-star rating Waitrose was given for value for money, compared to Aldi's five.
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Matthew Barnes, Aldi's United Kingdom chief executive, said: "To be named the UK's favourite supermarket shows just how much we are resonating with shoppers.' Aldi patrons loved the supermarket's "fantastic prices" with many also praising an 'always improving" selection of food, Which? said.
Marks & Spencer was placed second, while Lidl was third, with Sainsbury's placed bottom of the in-store survey.
The discounter is the UK's fifth biggest supermarket with a market share of 6 per cent, growing 16.8 per cent a year. Iceland did well in the Which? survey, receiving five stars for its home delivery service.
An entry into the low-priced supermarket war would be "very late in the day" but Tesco could use the Booker deal to spearhead its attempt to fend off the German discounters, retail expert Nick Bubb said. Asda =7. Morrisons 9.