UPDATE 3-Aldi focused on British sales with $1.25 bln growth plan

* 2018 operating profit down 26% to 197.9 mln stg

* Sales up 11% to 11.3 bln stg

* Targeting 1,200 stores by 2025

* To increase London stores to 100 by end of 2025

* To invest 1 bln stg over 2019 and 2020 (Recasts with CEO comment)

By James Davey

LONDON, Sept 16 (Reuters) - German discount supermarket group Aldi plans to pump 1 billion pounds ($1.25 billion) into Britain, chasing market share at the expense of profit, which dropped by 26% last year as it pursued sales growth, store openings and new customers.

Britain's fifth biggest supermarket, which is privately owned by Germany's Aldi Sud, signalled no let-up for its larger rivals as it reaffirmed a commitment to investing in the UK, despite a low price pledge denting its 2018 profit.

"We’re not and never have been focused on short term profits. Our focus is on growth, it’s on sales, stores and customer numbers," Chief Executive Giles Hurley told reporters.

"Private ownership means we can run the business for the long term and we don’t have to answer to shareholders. Plans are not going to change...Confidence from our parent company is there," Hurley added on Monday.

Aldi UK, which trades from about 840 stores and has a grocery market share of 8.1%, said sales increased 11% in 2018 and it gained 800,000 new customers.

It is targeting 1,200 stores by 2025 and plans to invest 1 billion pounds ($1.25 billion) in stores and distribution centres across Britain over the next two years.

Aldi trails market leader Tesco, Sainsbury's , Asda and Morrisons, but along with fellow German-owned discounter Lidl has been winning market share from the big four with new store openings.

PRICE GAP

Britain's food retailing sector has been transformed in the last decade by the march of Aldi and Lidl which has driven down the returns of the big four players.

They have fought back by trying to narrow the price gap, improving service and chasing greater purchasing power.

Last year Tesco bought wholesaler Booker and launched its own budget chain. Sainsbury's tried and failed to take over Asda, while Morrisons has struck wholesale deals with Amazon and convenience chain McColl's.

Aldi UK reported an operating profit of 197.9 million pounds for the year to Dec. 31 2018, down from 265.9 million pounds in 2017. Sales were 11.33 billion pounds, with customer numbers up 5% to 16.6 million.

Aldi's operating margin fell from 2.6% in 2017 to 1.75% in 2018, which analysts at Barclays said was the lowest since 2010.

"The lower the margin goes then the sooner the point will be reached when it is harder to justify so many new store openings," the Barclays analysts said.

Aldi attributed the profit fall to price cuts, saying its price advantage over the big four was 24% on an average basket of everyday items. It said while its operating margin had fallen, it had improved in the current year.

In 2017 Aldi's profit had risen for the first time in four years.

Hurley said like-for-like sales, stripping out the impact of new space, were positive in 2018 and so far in 2019.

LONDON CALLING

Aldi said it would step up the pressure on rivals by increasing store numbers in London from 45 to 100 by the end of 2025, by opening more standard-sized Aldi stores and new, smaller-format 'Local' stores on London high streets.

While Aldi's London market share is just 3.4%, Hurley said there was scope to eventually have 250 stores in the capital.

He said Aldi was better placed for a disorderly Brexit than rivals because it has a much smaller range of products, while 75% of what it sells comes from British-based suppliers and manufacturers.

Like its rivals Aldi has stockpiled ambient goods, such as tinned tomatoes and olive oil, said the CEO, adding that he could not guarantee there will not be shortages of some fresh products. ($1 = 0.8032 pounds) (Reporting by James Davey, Editing by Paul Sandle and Alexander Smith)