September 25, 2017 / 6:59 AM / 10 months ago

UPDATE 2-Aldi sticks with UK expansion despite profit fall

* Aldi UK 2016 operating profit falls 17 pct

* Invests nearly 1 bln pounds in 2016 and 2017

* German owner “very happy” with UK performance (Adds detail, CEO, analyst comment)

By James Davey

LONDON, Sept 25 (Reuters) - Aldi is pressing on with its expansion in Britain despite a third straight year of falling profits there, the German discount supermarket group said on Monday, signalling no let up in the pressure on UK rivals.

The rise of privately-owned budget chains Aldi and Lidl has transformed the competitive landscape of UK food retailing over the last decade, driving down the returns of Britain’s big four players - market leader Tesco, Sainsbury’s, Asda and Morrisons.

The big four have been fighting back by cutting their own prices, reducing multi-buy promotions and improving service.

For 2016, Aldi UK and Ireland reported a 13.5 percent rise in sales to a record 8.74 billion pounds ($11.8 billion).

But operating profit fell 17 percent to 211.3 million pounds, reflecting its strategy of maintaining a price gap over larger rivals as well as investment in infrastructure - mainly a large store opening programme.

“The owners of our business see such a huge potential for future growth in the UK market,” Matthew Barnes, chief executive of Aldi UK, told reporters. Discount supermarkets still account for a much smaller share of the UK market than in Germany.

“Our investment in the UK is ramped-up if anything,” Barnes said, noting 450 million pounds was invested in stores and distribution centres in 2016 and 459 million pounds was planned in 2017.

Barnes added future capital expenditure plans were “entirely unaffected” by Britain’s decision to leave the European Union.

He said the German parent, Aldi Sud, was “very happy” with the UK performance in 2016 despite a fall in the operating profit margin to 2.42 percent from 3.3 percent in 2015.

“Our owners very much see that (margin decline) in the context of long term growth,” he said. “It’s about investing for the future, it’s not about working quarter to quarter and delivering short term gains to our shareholders.”

Analysts at Barclays said lower profit margins at Aldi would be read as a positive for Britain’s big four grocers.

“The lower that margins go – and the more the company has to invest in refurbishments – the sooner the point will be reached when store openings start to diminish,” they said.

Aldi, which in February overtook the Co-operative to become Britain’s fifth biggest supermarket, currently trades from 726 UK stores, giving it a UK grocery market share of 6.9 percent, according to researcher Kantar Worldpanel.

It plans to have over 1,000 stores by 2022.

Aldi said like-for-like sales, which strip out the impact of new space, were “strongly positive” during 2016 and had accelerated in 2017.

“The fact that more and more customers walk through our doors every day of the week gives us the confidence to carry on investing,” said Barnes.

$1 = 0.7409 pounds Editing by Paul Sandle and Mark Potter

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