When Sainsbury’s revealed it was calling time on its tie-up with Netto, it reeled off a list of reasons explaining the decision.

Assessment of trading data, customer and operational insights, expansion costs, the evolving food retail market and the long-term strategies of both retailers drove the decision to seek a quickie divorce and shutter all 16 stores – some of which have only been open for a matter of weeks.

But according to analysts, there was a proverbial white elephant in the room that Sainsbury’s failed to mention when coming to what boss Mike Coupe dubbed a “difficult decision”.

While Coupe also flagged the fact Sainsbury’s would now be prioritising the integration of Argos, following completion of the proposed acquisition later this year, analysts suggested that actually a different retailer would have been uppermost in Coupe’s thinking – grocery rival Tesco.

Shore Capital’s Clive Black believes the improving performance of Britain’s biggest retailer would have spooked Sainsbury’s chief decision-makers Coupe, finance boss John Rogers and chairman David Tyler into making the call.

“I think it’s probably fair to say that the industry is tightening up further in the wake of the self-improvement that is taking place at Tesco,” Black suggests.

“We’ve said for a little while that if Tesco starts to regroup and gets its act together, the organisation that has the most to think about in the long term is Sainsbury’s.

“It’s taken Tesco longer to regroup than we thought it would, but if you dig deep into the grocery numbers there is quite a strong volume differential now between Tesco’s UK grocery business and Sainsbury’s.

“I think it’s probably fair to say that the industry is tightening up further in the wake of the self-improvement that is taking place at Tesco”

Clive Black, Shore Capital

“Over time, that has got to be a cause for concern for Sainsbury’s, as has integrating Argos effectively. Management has realised the limitations of its own capabilities, realised the fact Netto would require capital to roll out on a meaningful basis and have taken the decision.”

Investment in expansion

Black estimates it would have taken a sizeable capital expenditure for Sainsbury’s to grow the Netto business at the required pace and, for TCC Global insights director Bryan Roberts, that is what has proved the ultimate stumbling block for the joint venture.

“It’s all about the scale – or lack of it,” Roberts says.

“There is a lot of competition out there for the best sites, notably in the shape of Aldi and Lidl, so that would have involved Sainsbury’s being fairly extravagant with rent or freehold prices to have secured enough sites to make it viable.

“If they could have ramped it up, they could have made a go of it, but it became quite tricky to secure those sites.

“Arguably they could have become a bit more flexible – as, indeed, Aldi and Lidl have learnt to become – in terms of retail parks, high streets and pretty much leaving no stone unturned really in terms of expansion.

“So perhaps they were being a bit too disciplined about where they were willing to put sites and how much they were willing to pay.”

Lessons learned

With that in mind, many will view the end to the joint venture after just two years as an admission of failure, but both Black and Roberts insist Sainsbury’s will have benefited from the short and sweet partnership.

Black, who lauded the tie-up with the Danish discounter as “a genuinely novel approach for Sainsbury’s to attack a category where it has got no heritage”, says “the silver lining to the cloud” will be the invaluable insights the supermarket giant will have gleaned into the discount model.

He highlights “the cost base, the metrics needed to make it profitable, the buying capabilities of the business and what is needed in terms of volume per SKU to make value work in stores” as the main learnings it will have absorbed about how discounters operate.

Roberts reckons some of those findings have already manifested themselves noticeably in Sainsbury’s stores, in the shape of its move to everyday low prices, the eradication of multibuy promotions and its rationalisation of ranges.

“It wouldn’t have been a waste of time or money, because it’s been a fairly inexpensive experiment”

Bryan Roberts, TCC Global

Although Sainsbury’s has now been lumbered with cash costs of around £10m to wind down the business, Roberts maintains that the retailer’s investment in the partnership was a price worth paying.

“It wouldn’t have been a waste of time or money, because it’s been a fairly inexpensive experiment,” he says.

“I remember someone from Sainsbury’s telling me ‘we’ve invested less in this than Tesco did in Watford,’ so that gives it some sort of scale.

“But obviously they now have bigger fish to fry with the Argos deal on the horizon.”

As one joint venture comes to a relatively speedy end, Sainsbury’s is rightly focusing its attention on that bigger deal, which it hopes will have more longevity and help it fend off the threat of a Tesco turnaround.

Sainsbury's cuts ties with Netto – all stores to close by August