Analysis: Why Sainsbury's and Netto are launching a discount chain

Netto, owned by Dansk Supermarked, will make its reappearance by the end of this year and by the end of 2015 the plan is for 15 stores.

The tie-up came as a bolt from the blue to a grocery retail industry in the midst of seismic change, precipitated in part by the success in the UK of Netto’s hard discounting counterparts Aldi and Lidl, which have been growing apace.

And it’s that change which has convinced Netto and Sainsbury’s chiefs there is an opportunity for them in a disrupted market.

Discounter market growth

Each sees the chance to take share in a growing market. The UK discount sector is expected to double in value over the next five years to £20bn.

Sainsbury’s finance director John Rogers said he could envisage the market share of the discounters to reach 15% over the next five years compared with about 8% now.

“No one knows British customers better than Sainsbury’s and nobody knows discounting better than Netto”

Per Bank, Dansk Supermarked

To claim their share of the growth, Sainsbury’s and Netto bosses are putting their money – £12.5m apiece – into a format and approach they think will give them a distinct and appealing proposition.

“No one knows British customers better than Sainsbury’s and nobody knows discounting better than Netto,” observed Per Bank, chief executive of Netto parent Dansk Supermarked.

The new Netto shops, which will be run as part of a standalone business with its own headquarters and distribution system, will be very different from their predecessors, Bank and Sainsbury’s chief executive designate Mike Coupe argued.

The layout will be new and the range will be transformed. The assortment will be much larger – 2,100 products compared with 1,200 – and there will be a focus on fresh food including meat and in-store Danish bakeries. “Self-evidently, it will be more compelling,” said Coupe.

New grocery appeal

Despite Netto’s limited impact in the UK previously, Bank and Coupe believe that expectations of discount grocers have changed in the intervening years and their model should appeal.

Bank said: “We’re coming back as a much better Netto this time. It will be great value for money and a great shopping experience. It will be easy to park, easy to shop and easy to pay.”

Coupe insisted that the Netto deal was not a sign of panic in the face of Aldi and Lidl’s rise. Instead he sees discounting as a distinct growth channel in which at present Sainsbury’s has no presence.

He maintained that its presence will complement, not conflict with Sainsbury’s, operations in its three existing channels – supermarkets, convenience and online.

“The Netto band has resonance with customers. It’s a great opportunity for us to develop”

Mike Coupe, Sainsbury’s

“It’s as well as, not instead of,” he said. “The bulk of supermarket shopping is still in big supermarkets.

“It [discounting] is ultimately a different sector. Dansk brings us experience we didn’t have and gives us quick entry to the market.

“The Netto brand has resonance with customers. It’s a great opportunity for us to develop.”

Competing with Aldi and Lidl

Although Netto chose in 2010 to abandon Britain to rivals Aldi and Lidl, Bank claims the retailer is perfectly capable of competing with the pair.

He said that Netto already holds its own against Aldi in international markets, including the latter’s German homeland, and that the UK is less mature than Germany from the discounters’ perspective so there is plenty of scope to make up ground.

“If we did not profoundly believe we could deliver, then we would not be introducing Netto to the UK”

Per Bank, Dansk Supermarked

He said: “If we did not profoundly believe we could deliver, then we would not be introducing Netto to the UK.”

The first of the new generation of Netto stores, measuring about 11,000 sq ft will open in the north of England.

That area was chosen because of population density, its logistics infrastructure and the fact that there are suitable property opportunities.

Sainsbury’s-branded products will not be sold in the shops, which will carry a high proportion of own-label lines. “We thought long and hard but it’s important it’s positioned differently,” Coupe said.

The venture’s start-up costs are expected to result in each retailer bearing a pre-tax loss of between £5m and £10m in the year to March 15, 2015. Coupe was reluctant to reveal when he hoped it would become profitable.

He said: “We’re not going in to that. At the moment it’s a trial. We wouldn’t be doing it if we didn’t believe we could make money in the long term.”

As Sainsbury’s rivals such as beleaguered Morrisons and Tesco attempt adapt to shifting conditions precipitated by the discounters, the competition has just been ratcheted up again.