City snapshot: UK profits plunge at Aldi as investment in price hits bottom line

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Aldi suffered a near 80% drop in operating profits in 2021 in the UK as sales flatlined ahead of a strong rebound in growth in 2022.

The UK arm of the German supermarket chain announced that sales edged up 0.9% in 2021 to £13.65bn in its 2021 financial year.

The dramatic slowdown in growth was accompanied by a 79% drop in operating profits back to £60.2m from £287.7m, while pre-tax profits dropped £35.7m to £264.8m.

Giles Hurley, CEO for Aldi UK and Ireland commented: “Preserving our price discount and rewarding our people will always be more important to us than short-term profit. Being privately owned means we can keep our promises even when times are tough.

“It also means we can continue to invest in the UK, with 16 new stores planned over the next 12 weeks alone, including Broadstairs, Luton, Lincoln and New Southgate in London. As well as bringing our award-winning quality and low prices to even more households, this will also help to create thousands of much-needed jobs whilst boosting British farming and manufacturing.”

The group released a 2022 trading update alongside its annual results, showing a dramatic rebound in sales so far in 2022.

For the first six months of the year growth was 18.7%, up from a 0.4% decline in 2021.

Customers numbers were up by 1.5m to 14.2m, while market share has grown from 8.1% to 9.3%.

Aldi said trading had accelerated quickly in the past six months as pandemic restrictions were lifted and rising living costs affected shopping habits.

The group pledged today to continue to provide the lowest grocery prices in the UK to help households meet soaring living costs.

As well as overtaking Morrisons in the latest Kantar market share figures to become the UK’s fourth largest supermarket, it said the percentage of households shopping at Aldi also rose to 65% to make it Britain’s third most popular supermarket.

In particularly, sales of its ‘specially selected’ range had increased 29% in the last 12 weeks as customers switched from the more expensive supermarkets in search of more affordable, premium quality food.

Aldi, which operates over 970 stores, said it planned to open 16 more before the end of the year. Other investment – part of its ongoing £1.3bn two-year pledge - will include expanding or relocating dozens of existing stores and developing its network of distribution centres and technology infrastructure to support growth.

This expansion is set to create over 6,000 new jobs this year, adding to the 4,500 permanent roles created last year.

Hurley added: “The cost-of-living crisis is worsening, and it’s being felt by millions of households across the UK. It’s in times like these when our customers rely on us the most, which is why we’re focusing on continuing to deliver our longstanding price promise by offering the lowest possible prices in Britain, every single day.

“It’s also a time when Aldi comes into its own. From our carefully selected range to our smaller format stores to our trademark efficiency, we can leverage our unique approach for the benefit of all of our customers.

“Independent research shows our discount is as compelling as ever and that’s why more and more people are switching to Aldi. We will do whatever it takes to maintain our discount to the traditional full price supermarkets and keep grocery prices as low as possible for the millions of customers that shop with us.”

Morning update

Unilever has announced CEO Alan Jope will step down from his role at the end of 2023.

Jope has informed the board of his intention to retire from the company at the end of 2023, after five years in the role.

Unilever’s board will now proceed with a formal search for a successor and will consider both internal and external candidates.

Chairman Nils Andersen said: “Unilever has seen improved performance, enabled by its clear strategic choices and a significant company transformation. The Board will now conduct an orderly succession process and support Alan and the management team in further driving the performance of Unilever.

“Alan’s retirement next year will mark the end of a remarkable career with Unilever. Under his leadership, Unilever has made critical changes to its strategy, structure and organisation that position it strongly for success. This work continues, and we will thank Alan wholeheartedly for his leadership and contribution to our business when he leaves next year.”

Jope added: “As I approach my fifth year as CEO, and after more than 35 years in Unilever, I believe now is the right time for the Board to begin the formal search for my successor.

“Growth remains our top priority, and in the quarters ahead I will remain fully focused on disciplined execution of our strategy, and leveraging the full benefits of our new organisation.”

Elsewhere, on a busy morning, Sainsbury’s has scrapped the sale and leasback transaction for 18 of its stores announced last week.

On 21 September the supermarket announced it was in discussions to sell 18 supermarket stores to LXi REIT plc on a sale and leaseback basis.

LXi REIT has this morning announced that given current stock market volatility it is not proceeding with the share issue that would have part-funded the transaction. Therefore discussion with LXi REIT over the transaction has ended.

Sainsbury’s previously stated that if the LXi transaction were to proceed, the cash received from this transaction would have been used to part-fund the purchase of 21 freehold Sainsbury’s supermarkets from the Highbury and Dragon portfolios.

The purchase of these 21 stores will still complete in the first half of the financial year to March 2024.

Sainsbury’s said, given the strength of its balance sheet and property portfolio, it has “a wide variety of alternative options to finance this transaction”.

Meanwhile, Supermarket Income REIT has announced the acquisition of a Tesco supermarket, an Iceland Food Warehouse and complementary non-grocery units in Bradley Stoke, Bristol, for a total purchase price of £84m.

The 19.8 acre site includes a 74,717 sq ft net sales area Tesco supermarket with a 16-pump petrol filling station and 925 car parking spaces. The store is an online hub for Tesco, operating 20 home delivery vans and a dedicated Click & Collect facility. Tesco has operated at the site since the 1980s and through an extensive refurbishment, expanded the store in 2007.

The site also includes an Iceland Food Warehouse and further complementary units providing convenience and health services with tenants including Boots, Greggs, Costa Coffee and Pets at Home.

The site is being acquired from CBRE Investment Management. The Tesco store has an unexpired lease term of 14 years, with annual, upwards-only, RPI-linked rent reviews (with a 3.5% cap and a 0.0% floor).

Ben Green, director of Atrato Capital Limited, the investment adviser to Supermarket Income REIT, said:  “We are very pleased to be adding this top trading omnichannel Tesco store to the portfolio together with the complementary essential retailers at this site.”

Also this morning, Finsbury Food Group posted strong full year revenue growth on the back of the re-opening of the food service sector.

The cake and bakery group posted a sales increase of 13.9% to £356.8m, bolstered by a particularly strong second half performance with revenue up 18.7%, against the corresponding period in the prior year.

Revenues were driven by 8.7% of volume growth which the group said “indicates the quality, relevance and innovation of the group’s products”.

Sales growth was achieved through a good performance in the group’s UK bakery, up 12.1%, which includes a continuation of the recovery in foodservice (up 38.1%).

There was also a 26.6% increase in its overseas division, reflecting the management team’s excellent execution and growth ambitions, along with its efforts to invest in the European opportunity.

Adjusted EBITDA increased by 6.9% to £28.7m while adjusted profit before tax increased by 12.1% to £17m.

In terms of outlook, the group said it “remain confident in our strategy”.

While the “past few years have not been easy”, across the group, NPD continues at pace, it has diversification of products, channels and markets which “stand us in good stead”.

“We have a strong track record of moving forwards as a business in difficult times. This gives the board confidence that the group will continue to make progress and deliver profitable growth.”

CEO John Duffy commented: “To have delivered a record revenue performance that is in line with market expectations despite the numerous and complex challenges faced in the year - initially the effects of the Covid-19 crisis and more recently significant input cost inflation and falling consumer confidence - demonstrates the resilience and agility of the Group and the enduring appeal of our product range. Throughout the period, our retail business continued to perform well, we saw a bounce back in foodservice, and our overseas division experienced further strong growth. The level of internal response required to deliver these results cannot be understated, and I am grateful to our teams for their considerable efforts.

“Pleasingly, we were able to mitigate most of the impact of the macro challenges through revised commercial arrangements, operational improvements and other supply chain initiatives. We will continue in the same vein in the new financial year, as these pressures are expected to worsen.

“While significant macro headwinds are set to persist, we have a successful track record of navigating challenging market conditions and are supported by a strong balance sheet. We will continue to meet challenges head on, and I remain confident we will emerge a stronger business well set to deliver on our long-term growth ambitions.”

Finally, UK wine producer Chapel Down saw first half sales and profit growth as on-trade sales rebounded and strong sales of sparkling wine offset a challenging harvest for still products.

Net sales revenues (which excludes duty) was up 4% to £6.9m in the six months to 30 June, with traditional method sparkling wine performance up 35% year-on-year, offsetting the anticipated decline in lower margin still wine availability.

Average selling prices increased 21% due to a combination of the increased share of traditional method sparkling wines in its sales mix and price increases on both sparkling and still wines in April 2022.

Price increases had no negative impact on volume “demonstrating the strength of the Chapel Down brand”.

Sparkling now represents 72% of wine sales by value, compared to 61% last year.

Group gross sales revenue from continuing operations was up 1% to £7.9m after the divestment of its beer and cider business in April 2021.

Gross margin increased by 5ppts to 51% primarily as a result of changes to the sales mix.

Adjusted EBITDA, excluding share-based payments was up 14% to £913k, with pre-tax profits up 6.4% to £489k.

CEO Andrew Carter commented: “The profitable growth achieved in the first half of the year was primarily driven by 35% growth in traditional method sparkling wine sales, as we delivered a substantial shift in our sales mix in line with our premiumisation strategy. Since the summer of 2021, we have been preparing for the impact of that year’s challenging harvest and the resulting lower availability of still wines in 2022.

“English wine is in the ascendancy as a result of our terroir, climate and the sustained investment in the industry resulting in our wines winning both international recognition and growing loyalty from UK consumers. In an exciting and growing market, Chapel Down is the leading and largest brand, with unrivalled brand awareness driven higher this year by partnerships with the England and Wales Cricket Board, the Boat Race and Ascot.

“With a strong first half delivered, we look to the remainder of the year with confidence. Despite the evolving consumer backdrop, we continue to trade positively and expect to deliver net sales revenue growth and sustained margins for the full year.

“This, together with our positive 2022 harvest, ensures we are on track to meet our target of doubling the size of the business by 2026.”

He said the group enjoys the strongest customer distribution base across English wine with a growing significant off-trade distribution, growing on-trade outlet numbers and a strong DTC offering that includes both ecommerce and its retail site in Tenterden.

On-trade has rebounded strongly from 2021 and was up 109% in the first half, underpinned by a significant increase in outlet numbers from 420 at the start of the year to 1,230 as at 30 June 2022.

On the markets this morning, the FTSE 100 has fallen 0.2% to 7,008.3pts so far today.

Of more significance is a further slide in the pound, hitting a 50-year low this morning of almost $1.03 before rebounding slightly.

Grocery risers include Nichols, up 3.3% to 1,126.3p, FeverTree, up 2.3% to 906.5p and Devro, up 2% to 178.6p.

Fallers include B&M European Value Retail, down 2.5% to 310.3p, Glanbia, down 2.1% to €11.85 and THG, down 1.7% to 38.8p.

This week in the City

After a hectic start to the week, newsflow will slow a little for the rest of the week.

AG Barr will post interim results tomorrow morning, while SSP Group will issue a full year sales update and Hotel Chocolat will post full year earnings.

On Thursday McBride will post full year earnings.

Also this week a number of UK and international fmcg firms and retailers will present at the Bernstein Pan European Strategic Decisions Conference.