Aldi Steps Up U.K. Push With $390 Million Store Revamp Plan

  • Outlets will get better lighting, extra refrigerator space
  • Discounter committed to U.K. growth despite profit decline

Aldi’s U.K. business said it will spend 300 million pounds ($390 million) developing more upmarket stores as the discounter showed no signs of wilting amid a price war.

The new store formats will emphasize product quality, improve lighting and add refrigerator space for more fresh produce, the German discounter said in a statement Monday. The company also disclosed that rising sales have been at the expense of lower earnings, amid an intensely price competitive market.

“The U.K. price war continues to rage on, but we are prepared to ride out the storm,” Matthew Barnes, chief executive officer of Aldi U.K. and Ireland, said on a call with reporters. “We will cut prices further if necessary.”

While cutting prices on 30 percent of its products so far this year, Aldi has also won favor with more affluent Brits, who have cast aside stereotypes of Aldi as a place where only hard-up consumers shop. The price war, sparked by Aldi and rival discounter Lidl, has seen profits tumble at larger rivals such as Tesco Plc, while Wal-Mart Stores Inc’s U.K. chain Asda posted its worst-ever sales decline this year.

In chasing more upmarket shoppers, Aldi is following Lidl’s lead. Its rival began shedding its no-frills image last year by developing stores with wider aisles and baby-changing facilities.

Aldi’s reformatted stores will have new fixtures and better signs, seeking to capitalize on growth in sales of alcohol and diapers, where the retailer’s Mamia brand is Britain’s second biggest-seller. It plans to open 70 new outlets next year in the U.K.

The retailer has spent about 1.7 billion pounds over the past five years on its U.K. store expansion and according to Bruno Monteyne, an analyst at Sanford C. Bernstein, Aldi’s proposed store changes “won’t be cheap.” Same-store sales in that market has slowed recently, Barnes said.

Having doubled revenue in three years, Aldi said 13.9 million U.K. households now shop at its stores. Its share of Britain’s grocery market has risen to a record 6.2 percent as the country’s big four supermarkets -- Tesco, J Sainsbury Plc, Asda and Wm Morrison Supermarkets Plc -- have all seen their market share dwindle.

Sales in 2015 increased 12 percent to 7.7 billion pounds, while operating profit fell 1.8 percent to 256 million pounds, the second straight drop.

Despite Aldi’s stated commitment to its U.K. growth, two consecutive years of falling profit have some analysts questioning the feasibility of its expansion plans. The discounter is present in 18 countries globally, some of which may now offer more lucrative opportunities than the U.K. market.

“I don’t see them getting there,” Monteyne said of Aldi’s plans to operate from 1,000 U.K. stores by 2022. “They are rational and their returns will be too low to warrant that kind of investment.”

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