The major grocery retailers have been scratching their heads for some time over what to do about the rise of the discounters. Sainsbury’s now thinks it has got the answer – if you can’t beat them, join them.
In an announcement that took the market by complete surprise this morning, Sainsbury’s announced it would form a 50/50 joint venture with Scandinavian group Dansk Supermarked to bring the Netto brand back to the UK.
The pair will open 15 Netto stores around the M62 corridor by 2015, with five new stores to be opened by year end. If this trial is successful, the Netto brand will roll out the Netto brand across the country.
Precise details of the plans remain under wraps at this stage, but Sainsbury’s CEO Designate Mike Coupe did say the JV would operate entirely separately from the Sainsbury’s business itself and will require its own head office, buying team and logistics infrastructure.
The new Netto stores, he said, would not be reformatted Sainsbury’s stores and instead would be developed at existing leasehold sites across the north of England.
The scale of the new Netto’s ambitions does not look vast at this stage. The 15 new stores pale in comparison to the 500-plus Aldi stores in the UK or indeed the 200 Netto stores sold (primarily to Asda ) when it exited the UK market in 2010.
The two firms will initially invest £12.5m in the JV and each expects to make a post-tax loss of around £5-10m on the venture by 31 March 2015 due to start-up costs.
Again, compared to Sainsbury’s pre-tax profits of £827m, these figures are a drop in the ocean.
But a major UK supermarket’s first concerted move into the discount market looks like a significant strategic step.
It also perhaps shines further light on Sainsbury’s – and Coupe’s – views on the so-called supermarket price war and indicates that the company has no intention of straying from its current pricing policy largely based on brand matching.
Rather than trying to aggressively compete on price and get dragged down by the discounters, Sainsbury’s views the discount model as entirely separate to its own superstore, convenience and online businesses and believes the way to claw share back from the discounters it to compete directly on their turf.
Certainly on a call with journalists this morning, Coupe was dismissive of the idea that Sainsbury’s could be cannibalising its own market share, arguing it has the least overlap with discounters of all the major players.
Cantor analyst Mike Dennis called the venture “a smart move” that “makes sense strategically”.
“They are taking an exposure to the discount sector which is growing at 15% against the root retail sector which is growing at 2% and benefiting from a 50% share of that growth,” he argued. “It’s a smart move in which they can put a limited amount of capital in and if the trial doesn’t prove successful with a brand called Netto they can obviously withdraw.”
It is clear why Sainsbury’s wants a chunk of the discounter pie - the IGD predicts the discount market will grow by 96% over the next five years, compared to 8.2% growth for superstores and hypermarkets.
Using the Netto name rather than launching a discount venture under the Sainsbury’s umbrella also makes sense – the company gains exposure to the discount market without watering down Sainsbury’s upper-mid market position and customer service proposition.
Additionally, Netto is a well-known brand name in the UK, though it’s fair to say that consumer sentiment is probably not all positive. One of the major challenges will be re-marketing Netto as a contemporary of modern discounters Aldi and Lidl that concentrates on fresh products and special offers, rather than the downmarket reputation it previously had attached to it.
The other intriguing question the news throws up is how Sainsbury’s supermarket contemporaries will respond.
It is probably more difficult to see Asda or Morrisons launching a dedicated discount brand, given their geographical strength in the north of England and the importance they have already put on price as a central part of their customer proposition. Asda has already passed up the chance of a presence in the market when it bought Netto stores and chose to take discount capacity out of the market.
Tesco has dabbled in discount in Eastern Europe but its recent investment in price might suggest it sees the discounters as more direct competition than Sainsbury’s does.
Dennis concludes: “Perhaps they have been distracted by other factors, which has meant they haven’t had time to think about what to do next in terms of the discounters. Needless to say, I think they will be thinking now.”