Shock News: Has Aldi’s growth come to an end?

Credit: Mike Mozart

Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) – owner of Coles – might be cheering about some recent news.

According to data obtained by the Daily Telegraph, budget supermarket retailer Aldi is struggling to maintain its growth in Australia’s Eastern states and is losing market share.

The newspaper reports that Aldi’s market share has slipped to 11.7% in June 2016, down from 12% in June 2015 – despite opening a number of stores across Queensland, NSW and Victoria. It’s the first time Aldi’s sales have gone backwards since it launched its first store in Bankstown, NSW 15 years ago.

Aldi’s sales on the Eastern seaboard grew by just 0.4% during June 2016 compared to the previous year – while the market experienced growth of 3% over the same period.

That’s probably more a reflection that Woolies and Coles – along with Metcash Limited (ASX: MTS) – the supplier to independent IGA stores have finally acknowledged Aldi as a serious threat, and are now actively pushing back against the upstart retailer.

It’s no secret that Woolworths’ profit margins of around 8% were among the highest in the world for major supermarkets, and Coles’ margins were steadily growing too. That provided an opportunity for the low-cost operator Aldi to steal market share and take budget-conscious shoppers away from the two incumbent market leaders.

Woolworths’ EBIT margin has now dropped to 5%, while Coles’ margin was 4.7% (including Food, liquor and convenience stores) in the 2016 financial year- but you may see that grow very little in the next few years. The retailers have aggressively slashed prices and revamped their offerings, enticing customers back into their stores.

Woolworths vs Coles EBIT margins Sep 2016

Source: Company reports

This may be the first sign that Aldi may need to do more to keep or grow its market share. While the retailer will most definitely continue growing – it may be slower than in the past.

Foolish takeaway

The good news is that consumers now have a much more competitive supermarket sector, with more choice and more options. It was only a matter of time before Woolworths and Coles started taking Aldi seriously.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

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.

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