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Why Woolworths Group Ltd (ASX:WOW) may not have a clear run-up as supporters might think

Just when you thought that supermarket stocks were on a stronger footing to outperform in FY19, new concerns are emerging about their ability to regain lost market share to German rival Aldi.

Aldi has been voted the most trusted brand in Australia, according to the latest Roy Morgan research. The German discount supermarket even beat other trusted Aussie brands like our national carrier Qantas Airways Limited (ASX: QAN) and community bank Bendigo and Adelaide Bank Ltd (ASX: BEN) for the top spot.

Our supermarket giants Woolworths Group Ltd (ASX: WOW) and Wesfarmers Ltd’s (ASX: WES) owned Coles chains didn’t even make it to the top 10.

The poll isn’t just a popularity contest. It reflects the level of trust Australian consumers have in goods sold at Aldi and this is particularly important given it’s the staples Aussies feed their families with.

What this says to me is that Woolworths and Coles may struggle to win back the market share they have lost to Aldi at a time when Aldi’s share of the local market appears to be peaking.

Our two biggest supermarket stocks have enjoyed a re-rating with their shares jumping around 20% each in the past year, which is twice the gain on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index. Grocery distributor Metcash Limited (ASX: MTS) had also performed very well – right up until its profit warning in May from the loss of a major South Australia contract.

Interestingly for Wesfarmers though is that its Kmart discount department store and its Bunnings DIY outlets were ranked fifth and sixth on the Roy Morgan’s Net Trust Score (NTS) survey, just below Qantas and Bendigo Bank.

Aldi’s position in the survey poses a bigger threat to Woolies in my opinion because it has more riding on beating Aldi with Wesfarmers unlocking value for shareholders with its plan to divest Coles.

The supermarket division also makes up a greater proportion of Woolworths’ total revenue and the industry is bracing itself for the entry of another German rival, Kaufland.

God forbid if the new German hyper-mart were to also score a top 10 place on the NTS!

The price war between the supermarkets may have abated but this peace may not last for long given what’s at stake.

What makes Aldi’s top ranking more impressive is the fact that the supermarket industry doesn’t rank well on the NTS as it ranks behind other sectors like technology, automotive and travel.

The importance of trust is increasingly recognised as a key metrics to the sustainable future of a brand and nowhere is trust a more important factor then when it comes to the provision of the food we eat, according to Roy Morgan’s chief executive officer Michele Levine.

This may be something investors will need to think more about when sizing up any investment opportunity in this space. Price is important but it’s not the be-all and end-all.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. 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 Scott Phillips.

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