Whether Netto and Sainsbury’s will succeed is today’s hot topic - to answer this we need to look at it from three angles, what we refer to as the three pillars of success.

Pillar I.  Financial.

Financial success is easy to measure:   Profit.  Netto’s track record in Denmark, Germany, Sweden, and Poland is pretty good on this front.  The UK start-up needs to contain the costs of property, supply-chain, staff, and energy to about 16-17% of revenues. 

The fact that Sainsburys already has a supply-chain in place and efficient operations with suppliers is a bonus here.  The fact that Netto already has a profitable formula in four other countries is also a bonus.  Testing “15 stores” to get the model right on a limited investment is a good sign.  The fact that both companies have deep pockets and are looking long-term would also indicate this is a business that will grow over time. 

Assessment:  It will work

Pillar II.  Something Shoppers Need

UK shoppers have been voting with their feet.  Discounters are growing – big out of town supermarkets are not.  In Denmark, 2012 Brandz data shows that Netto shoppers say they love the store – a 5% bonding score, which is rare in the world of grocery – more than any other supermarket or discount store including Lidl.  Netto is more brand friendly and better at fresh than most discounters.

Assessment:  It will work

Pillar III.  Management Discipline 

On paper, this is a 50-50 relationship.  However, given initial statements it appears Sainsburys has more at risk here than Netto owner Dansk Supermarked. Sainsbury’s business needs will transform over time.  Today, the company is eager to find new ways to grow revenue.  In the future, the focus may return to profit optimization or portfolio synergy. 

Over time, it is likely that Dansk and Sainsbury’s needs may transform in ways which can create disagreements on where the Netto UK initiative fits in the overall business portfolio.

A review of successful long-term joint ventures in grocery retail is difficult to create.  Just have a look at the adulterous fall-out from the Waitrose-Ocado-Morrisons love affair and you can see some danger here. 

Assessment:  Danger Ahead

Ray Gaul is director of research at Kantar Retail