On Wednesday German discount supermarket giant Aldi opened its first stores in South Australia as it continues to bolster its presence throughout Australia. Should Woolworths Limited (ASX: WOW), Coles – operated by Wesfarmers Ltd (ASX: WES), and Metcash Limited (ASX: MTS) be worried, or is there room for four players in the industry?

Being from Britain, Aldi supermarkets are nothing new to me and not something I personally missed when I moved over to Australia. In the UK we already had a highly-competitive supermarket industry with four big players in Tesco, Asda, Sainsbury’s and Morrisons.

The price war between these four supermarkets was extremely beneficial to consumers and, for the average shopper, negated the need to shop at a place like Aldi. But it has to be said that in the three years since I left the mother country Aldi’s market share has grown from under 3% to 5.2% in January 2016. Britain’s biggest supermarket Tesco appears to have been the victim of this market share grab, dropping from a 30.6% market share to 28.3%, according to Kantar Research.

Judging by this data, I would expect Woolworths, Coles and Metcash to be quite concerned by what lies ahead.

Coles has already lost over 5% market share in the last decade, Metcash has lost a third and ranks below Aldi now, and while Woolworths is holding firm losing just 1.8%, the aggressive expansion that Aldi is making is going to put a lot of pressure on it.

Aldi is closing in fast on its bigger rivals and currently has 400 stores nationwide, compared with the 961 Woolworths stores and 776 Coles stores. It also has the advantage of needing almost a fifth less workers per store than Woolworths and Coles, making expansion less costlier and the stores much more efficient.

In the UK the supermarkets fought back the only way they could, with lower prices. Great for consumers but not for shareholders, as this ultimately means that the supermarkets are now operating on lower profit margins, which has the effect of slowing earnings down.

The price war took its toll on Tesco’s profits, as earnings dropped to just £166million in the first half of its latest fiscal year, from £543million a year previous. This to me seems inevitable now in Australia and so I believe an investment in Woolworths, Wesfarmers, and Metcash must come with much lower expectations.

In my opinion there is room for four players in the market, but as overall profitability slides to low levels, it’s not a market that I would expect fantastic share price gains from in the future. Especially if another German retailer by the name of Lidl finally steps foot on Australian shores.

Foolish takeaway

If I had to choose one of these three shares to invest in I would choose Wesfarmers. This is due to the diverse portfolio of brands it operates in Australia, which includes Target, Kmart, Bunnings, and Officeworks. For me, it is less reliant on its supermarket segment than the other two.

 

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

Forget Woolworths. These 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.