Netto's Claus Juel-Jensen and Charles Kay tell Nick Hughes how they'll get the UK's forgotten discounter back on track

It takes a brave chief executive to admit his business got it wrong. Braver still to do so at a time when so many rivals are getting it right. Maybe it's the famous Scandinavian imperturbability that makes Netto International managing director Claus Juel-Jensen talk so candidly about the discount retailer's UK business recording a 50% fall in operating profit in 2008 - widely acknowledged as the year the discounters arrived as a genuine force on the UK retail scene.

Speaking exclusively to The Grocer during a four-day trip to the UK, Juel-Jensen offers some revealing insight into why Netto failed to keep pace with the store development programmes of Aldi and Lidl. But where the profit squeeze is concerned, he is in no doubt that a failure to predict a drop-off in non-food cost the business dear.

"We were not the only grocer that was taken by surprise at what happened to the non-food market last year, but of course we could have been better grocers. We have, over the past four or five years, been depending quite heavily on non-food sales for our turnover and our margin and, of course, what happened last year had a big effect on our results."

Juel-Jensen claims a "massive clean-up" of the non-food business is now complete, following the departure of former MD Richard Lancaster, but the impetus the business has lost has forced a rethink of Netto's expansion plans. Consolidation is the new buzzword. Less than a year after estimating 25 new stores would open in 2009, just seven are now due to open against 18 in 2008. Compare this with Aldi's promise to open a new store a week in 2009 and it appears Netto has spectacularly failed to capitalise on the opportunities presented by the recession.

Juel-Jensen, however, denies Netto has missed the boat.

"I don't think you can say that. Our market share in the first quarter was expanding. We are investing a lot of money into making sure our network of stores has the quality needed for this market.

"You could say we have not been expanding in the past year to the same extent as Aldi and Lidl, but they have been much more aggressively buying stores and that has an influence on the market share and the market power we have."

Juel-Jensen points to the high cost of real estate as a major barrier to Netto's UK expansion. "Here not only are rental prices much higher than the rest of Europe, but also there's a lot more aggression from our competitors to buy these properties. Crazy prices are being offered for grounds just to buy market share and our company is a little bit more conservative. We look at profitability and the potential of that ground and if we feel we need to pay that for it, we'll pay that for it, but we probably stop a bit earlier than our competitors because they're more aggressive in trying to buy market share."

Name: Claus Juel-Jensen
Job: Managing director, Netto International
Age: 46
Born: Bornholm, Denmark
Family: Married to Gitte. They have three children.
Education: Attended high school in the United States for a year before returning to Denmark. Jensen graduated from Copenhagen Business School and continued his studies at the University of Cologne, studying International Management.
Career: Began his career with BMW in Munich as a trainee before joining Netto Denmark in 1992. In 1993, he moved to Netto Germany where his remit was to develop the business in the Berlin area. Following another year in Denmark, Jensen returned to Germany as country manager before being appointed international managing director in 2005.
Hobbies: Hunting, polo and running.
Holidays: This summer, Jensen and the family are holidaying in Ireland.
As Netto scales back its expansion plans, the focus has shifted to refurbishing current stores.

"I can show you fantastic-looking stores, I can show you refurbished ones that are creating great growth," says Juel-Jensen. "But we've also got stores that are giving us a pain in the neck because we still need to work on them."

Juel-Jensen is speaking at Netto's Store Support Centre (head office to you and me) in Doncaster. Also present is the man charged with revitalising Netto UK, newly appointed MD Charles Kay. Kay is the former European trading director for AMS Sourcing, the buying group of Netto's parent company Dansk.

The presence of both men provides a fascinating insight into the dynamic between the UK and international bosses, a relationship that has not always run a smooth course at Netto. Confident and assertive, Juel-Jensen exudes authority, and while he's happy to let Kay field questions on the UK business, he is quick to interject when he feels a point needs developing.

Based at Netto's head office in Koge, Denmark, Jensen expects to be a regular visitor to Doncaster in the following months as he looks to steer Netto's UK arm back on the right course.

"Charles is quite new to running the business. So until he is 100% settled in then my presence here is a little bit bigger than in other countries where the management is more experienced."

This big brother role is rumoured to have driven a wedge between Juel-Jensen and former MD Lancaster, who joined Morrisons last November after less than two years in the hot seat.

Juel-Jensen denies there were personal differences between the two. But while he refuses to lay the blame for last year's poor performance solely at Lancaster's door, neither does he absolve him of responsibility. "I was very happy to work together with Richard. I think he was a person with very good energy levels. Having said that, our results for 2008 could have been better."

Lancaster, Juel-Jensen concedes, may have been frustrated at the lack of autonomy in the Netto business model, which is based on "a fixed concept" that's applied to all markets.

Could this fixed concept explain why Netto was slow to react to changes in the UK market? Not so, says the Dane.

"We are not the only grocer on the UK and European market that was too narrow in the way we worked, there were a lot of other grocers that were actually not good enough at reading the signs in the market and changing the profile, changing the scope, giving the customers what they actually wanted."

The problem is that Netto's two major UK rivals were so much better in this respect. Not only did Aldi and Lidl strengthen their price and quality proposition to win over cash-starved shoppers, they talked about it incessantly.

I broach the subject of Aldi boss Paul Foley's tireless courting of the media. Did Netto miss a trick? "We need to get better there," Juel-Jensen admits. "Because we are Scandinavian, we are modest. So we sit here waiting, thinking one day the press will find out about us."

So how do consumers perceive the UK's most bashful retailer?

"I think we're phenomenal on price," says Kay. " If anyone says, what's Netto, they say price. We'd like it to be more price and quality. We'd be looking to create a better perception of the quality we have in stores, because we have very good quality."

Juel-Jensen believes that pushing a quality message through will take time. "It's not something you do overnight. But we will be going and looking at each of the tools and seeing which ones are most effective at bringing that as fast as possible."

But when I tell him Netto failed to enter The Grocer's Own Label Excellence Awards this year he is visibly annoyed. "That's poor isn't it? We should be better than that."

The launch last year of premium range Simply Irresistible marked Netto's first attempt to move upmarket but Kay says more range developments are unlikely until the economic storm blows over.

As I leave, Juel-Jensen hands me a packet of Netto own-label instant coffee. "It's very good," he says. "As good as anything you'll taste." As it turns out, he's right. But as Juel-Jensen knows only too well, it's not me he needs to convince.

Netto slows UK growth as it expands overseas
Netto UK has been on a significantly slower growth trajectory than its discounter rivals since entering the UK market in 1990.

Aldi's aggressive expansion saw its store estate reach 415 at the turn of the year, almost double Netto's estate of 214 stores, having arrived on these shores just a year earlier.

Lidl trumps both its rivals, however, with 508 store openings since launching in the UK in 1994. Netto's share of sales in the UK grocery market is just 0.7% compared with 2.9% for Aldi and 2.3% for Lidl [TNS 12w/e 14 June]. This year, Netto has scaled back its UK store expansion programme following a halving in operating profit in 2008. Internationally, however, the business is growing strongly, says International MD Claus Juel-Jensen. Netto operates just over 1,000 stores in total, in five European countries - Denmark, Germany, Sweden, Poland and the UK.

"We have been expanding much more heavily in some of our other markets in 2009. We have been doing extremely well in Denmark, we are looking much stronger in Sweden where sales are increasing heavily and in Germany we expanded our network of stores by 30 - quite good when you're coming from a base of about 250 stores there."

One reason why European expansion has outpaced the UK, according to Juel-Jensen, is a greater understanding of the discounter concept. "In European countries where the share of discounting is high, the consumer has grown up learning that you can do one-top shopping in a hard discounter. This has taken a long time to get across in the UK and we are still not there."