Has Aldi just made a huge mistake?

Aldi has announced that it is upping its game in one area that it continues to lag the big supermarkets – and that’s in fresh produce.

Coles – owned by Wesfarmers Ltd (ASX: WES), and Woolworths Limited (ASX: WOW) have always prided themselves on their fresh produce offering, but could face increased competition from Aldi from next year.

Aldi says it has a new centralised buying model to improve the quality of its fresh food and produce, as well as long-term, flexible supplier contracts which are designed to get the supermarket retailer a better deal on its fresh produce.

But Aldi could be making a major mistake, by increasing the number of items its sells, increasing store complexity (more refrigeration needed), and fresh produce typically takes up more space that the normal grocery items Aldi has been so successful retailing.

The wider variety of products Aldi sells, the more like Coles and Woolworths it becomes – and the easier for them to compete with the budget retailer.

Another issue is that while many of Aldi’s groceries are home brand labels imported from Europe, fresh produce will by necessity have to come from local suppliers – and may be lower margin than its groceries. You would think that Woolworths and Coles – with their dominant market share and multiples of sales compared to Aldi – would be able to negotiate a better deal on fresh produce than the European upstart.

While analysts have hailed the move by Aldi to ‘freshen’ up its fresh produce range, I see it as a negative and a move away from Aldi’s core strength.

Woolworths, Coles and Metcash Limited (ASX: MTS) – distributor to IGA stores – are all on the alert now and spending millions to improve their offering, and Aldi may finally be feeling the pressure. Has the retailer cracked?


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Motley Fool writer/analyst Mike King owns shares in Woolworths Limited and Wesfarmers Ltd. 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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