By James Davey
LONDON, Sept 16 (Reuters) - Aldi ALDIEI.UL reaffirmed its commitment to investing in Britain on Monday, despite a 26% fall in 2018 profit at the German discount supermarket group's UK business as it paid the price of expansion.
Britain's fifth biggest supermarket group trades from about 840 stores and has built a grocery market share of 8.1%, but its pledge to having the lowest prices is denting profit.
Aldi trails Tesco TSCO.L, Sainsbury's SBRY.L, Asda WMT.N and Morrisons MRW.L, but along with fellow German-owned discounter Lidl has been winning market share from the big four, aggressively opening new stores.
It is targeting 1,200 stores by 2025 and plans to invest 1 billion pounds ($1.25 billion) in stores and distribution centres across the UK over the next two years.
“For almost three decades we’ve proven that investment equals growth," Aldi UK Chief Executive Giles Hurley said.
Britain's food retailing sector has been transformed in the last decade by the march of Aldi and Lidl which has driven down the returns of the big four players.
They have fought back by trying to narrow the price gap, improving service and chasing greater purchasing power.
Last year Tesco bought wholesaler Booker and launched its own budget chain. Sainsbury's tried and failed to take over Asda, while Morrisons has struck wholesale deals with Amazon AMZN.O and convenience chain McColl's MCLSM.L.
"The commitment we have made ... to continue investing in the UK over the coming years remains as strong as ever," Hurley said after Aldi UK reported an operating profit of 197.9 million pounds for the year to Dec. 31 2018.
This was down from 265.9 million pounds in 2017, although Aldi UK's sales increased 11% to 11.33 billion pounds, with customer numbers up 5% to 16.6 million.
Aldi's operating margin fell from 2.6% in 2017 to 1.75% in 2018, which analysts at Barclays said was the lowest since 2010.
"The lower the margin goes then the sooner the point will be reached when it is harder to justify so many new store openings," the Barclays analysts said.
Aldi attributed the profit fall to price cuts, saying its price advantage over the big four was 24% on an average basket of everyday items. It said while its operating margin had fallen, it had improved in the current year.
In 2017 Aldi's profit had risen for the first time in four years.
Aldi said it would step up the pressure on rivals by increasing store numbers in London from 45 to 100 by the end of 2025, by opening more standard-sized Aldi stores and new, smaller-format 'Local' stores on London high streets.
"London shoppers regularly tell us they would switch to Aldi if there was one nearby, so there is clearly a significant growth opportunity for us in the capital," said Hurley, pointing out that Aldi's London market share is just 3.4%.
The firm said trials of its Local format – which measure around half the size of a typical store and stock around 1,500 products – had exceeded expectations since they began in March.
Aldi's update made no mention of Brexit, though the firm did point out it sources its entire core range of fresh meat, eggs, milk, butter and cream from British suppliers.
Britain's other supermarkets have warned that a no-deal Brexit on Oct. 31 would disrupt fresh food supplies and could increase prices.
($1 = 0.8032 pounds)
(Reporting by James Davey, Editing by Paul Sandle and Alexander Smith)
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.