Few stories in retail come completely out of the blue, but last week’s £778m takeover of Netto’s UK business by Asda took everyone by surprise.
It’s a lot of money for a 0.7% share of the UK grocery market, and it’s not just the price that makes sense for Netto’s Danish parent. Despite having built up a chain of 193 stores, Netto has never really made its mark on the UK grocery market in the way that fellow hard discounters Aldi and Lidl have.
The stores, which are extremely modest affairs, aren’t in the best locations and will need serious money spending on them to get them up to Asda standards. Netto doesn’t have national coverage either and there are huge swathes of the UK like Scotland and the Southwest where it has no presence at all.
What the deal does do is give a kick-start to Asda’s drive to get into smaller supermarkets. With the retailer having missed out on the opportunity to acquire this type of store created by the sale of Somerfield, Netto was the best opportunity to gain scale in a sector it is eager to make a mark in.
The challenge now will be to come up with a format that is compelling for lower-income shoppers within what are much smaller stores than Asda’s existing portfolio. Asda thinks it can dramatically increase the number of SKUs it can get into the stores, which will be a good start, but its track record in format development is mixed - remember Asda Essentials or the George standalone stores? Its operating model will require work to adapt to the new format, but that shouldn’t be an insurmountable challenge for an organisation of its sophistication.
Like the other hard discounters, Netto built its store estate by opening in places the big grocers didn’t want to be, and while Asda will be confident it can significantly grow sales in the stores it has bought, as it stands the deal doesn’t put clear daylight between Asda and Sainsbury’s in the grocery stakes. Put simply, it’s not going to change the game.
But it’s a start and a sign of real intent that Asda is serious about its ambitions of being clear number two in food and, more ominously for rivals, number one in non-food. The deal shows that Walmart is willing to back Asda to achieve these goals, and so the chances are that the Netto deal could just be the warm-up act for the blockbuster acquisition Asda needs if it is to fulfil its non-food ambitions.