Dalton Philips says he takes inspiration from Vietnam PoW by accepting harsh present but vividly imagining better future

Supermarkets need to confront the "brutal reality" of the changes taking place in their market and fight back or pay a huge price, the chief executive of the struggling Morrisons chain has warned.

Dalton Philips compared the big grocery retailers' current situation – under attack from the discounters – to that of the airlines, where low-cost operators such as Ryanair and easyJet now control about half the market. He also pointed to one-time big corporate names like Kodak and Nokia, whose market dominance was wiped out because of their failure to accept that the industry had changed.

Philips said it was feasible that discounters could take up to 25% of the UK grocery market – which would make them nearly as big as Tesco is now.

The big supermarkets are losing market share fast as customers buy more online and defect in droves from big edge of town superstores to smaller, and cheaper in-town discounters.

"You can't out-discount a discounter but you have got to face into their challenge," Philips told the British Retail Consortium's annual symposium in London. "That's what we are about, fighting back. If the middle market doesn't fight back it pays a huge price."

Philips, who admitted he was nervous about giving his speech after Morrisons founder Sir Ken Morrison recently criticised his strategy as "bullshit", is attempting to win back customers lost to discount chains such Aldi and Lidl by slashing prices.

He has recently cut prices on 1,200 items by an average of 17% and has warned that the Morrison's profits will halve as a result. The price cuts are costing £1bn and the company's share price has dived since he unveiled his strategy.

Philips said he took inspiration from long-term Vietnam prisoner of war Jim Stockdale who survived years in a detention camp because he realised: "You have to retain faith that in the end you will prevail while the whole time confronting the most brutal reality of the state you are in. Retailers need to face that brutal reality.

"You have got to be in the game on price. If you are not, customers will just leave you. It is not about being a discounter it's about getting to a level where customers will reappraise you."

He said that France's Carrefour had shown that fighting back against discounters was possible as it had seen its market share grow after cutting prices.

In the face of massive structural change in the UK market, Philips said Sainsbury's decision to form a joint venture to bring Danish discounter Netto back to the UK was a smart move.

"It's a recognition of the structural shifts in the market and a channel growing so quickly that you have got be a part of it," he said. But he suggested that a joint venture could be a challenge as it depended on the record of the partner.