Asda’s £778m acquisition of hard discounter Netto’s UK operation has catapulted it from third to second place in food. But opinion is divided about whether the deal will fulfil Asda’s ambition to be “the clear number two” in grocery.

Last week’s deal means Asda will add 193 stores - subject to approval by the Office of Fair Trading - to its fledgling small supermarket portfolio of 22 shops.

Asda’s grocery share for the 52 weeks to May 16 was 16.2% according to Kantar Worldpanel, and Netto’s was 0.8%, giving Asda a total of 17% against Sainsbury’s 16.6%.

“Asda is already number two when you include non-food sales but now also takes that spot for pure food,” said Kantar Worldpanel research director Ed Garner. “The Netto deal is a surprise land grab and, while it isn’t a stunning store estate, it may have been the last possible play to secure a block of properties.”

Asda’s ambition to be the “clear number two” in food was set out at the Walmart analysts’ event in April. At that time Andy Clarke, now Asda’s chief executive, said the grocer wanted a chain of 100 smaller supermarkets - sized between 8,000 sq ft and 25,000 sq ft - within five years.

Asda chief financial officer Judith McKenna said of the Netto deal: “This is one of the building blocks towards achieving our ambitions and shows that we are confident in our small supermarket strategy.”

Shore Capital analyst Clive Black said: “Asda has been slow in diversifying its format base, but the Netto deal is a step in the right direction.” Black said the Somerfield portfolio - which was snapped up by the Co-op last year - did not interest Asda at the time because it could not run smaller shops and, in terms of land, Asda “messed up in not securing Safeway”. He added: “Asda has never got back from the time of Safeway in 2004,” he said. “If they had bought Safeway instead of Morrisons, we would be talking about the big three, not the big four.”

McKenna admitted that Asda had needed to perfect its smaller format. “The Essentials format didn’t work, but we learnt a lot, and kept working at it until we got it right, which is shown in stores such as Pontefract,” she said, referring to Asda’s model small supermarket.

The grocer set up a small supermarkets division at the end of last year, headed by Karen Hubbard, who had experience of convenience retailing at BP.

Netto’s shops are mainly in secondary locations, but most see the fit with Asda. Oriel Securities analyst Jonathan Pritchard said Netto’s shops turn over less than £500 a sq ft and “there is major potential to increase these sales densities”.

Asda will increase the SKU count in the stores, and apply its same-price-in-all-stores policy. “Areas with lower incomes are right up Asda’s street with its Every Day Low Pricing policy so it is a very successful real estate buy,” said Planet Retail global research director Bryan Roberts.

Collins Stewart analyst Greg Lawless said: “This deal makes Asda multi-format but it’s not a game changer because the stores don’t overlap much with Tesco or Sainsbury’s. It’s a step in the right direction but Asda still needs to address areas such as range and service.”

Turning Netto into Asda

Netto’s stores are expected to be converted to Asda by the middle of 2011. Asda will increase store staff numbers from 14 per shop to 26, and up the SKU count from 1,800 to 10,000.

The existing Netto stores carry a smattering of non-food. Asda will put in a small range of George clothing, plus non-food items such as homewares.

A click-and-collect option will also be available for all products.

Asda plans to include fresh food, with a food to go area too, while Netto was mostly focused on ambient food.

It aims to trade all the stores, but it may be forced to offload between 20 and 40 by the OFT. Until the deal is approved, Netto’s shops will run under the existing management.

“We’re confident customers will be able to do a full weekly shop, as well as a top-up shop, and that we will attract both Netto shoppers and a wider catchment with our offer,” said Asda chief financial officer Judith McKenna.