Netto’s plan to re-enter the UK market in a joint venture with Sainsbury’s is relatively low risk, but could still prove difficult.

Netto’s plan to re-enter the UK market in a joint venture with Sainsbury’s is relatively low risk, but could still prove difficult.

The announcement last week that Dansk and Sainsbury’s were planning on bringing Netto back to UK shores after a four year hiatus initially seems like a canny move by both firms. The rise of discounters has eroded the share of mid-market retail and, with Sainsbury’s starting to feel the bite, it opens up another avenue to take on the likes of Aldi and Lidl.

A small beginning

The most notable positive about the venture is low exposure of the initial investment. Dansk and Sainsbury’s are committing just £12.5m each to a rollout of just 15 stores over the next 12-18 months. Even with anticipated losses of £5-10m as Netto beds in again, the figures are a drop in the ocean compared to the hundreds of millions committed to price cuts by the big four grocers.

For Sainsbury’s there is an added bonus. Strategy under Justin King lay in differentiating in terms of quality or sustainability rather than price to drive up Sainsbury’s retail brand. A damaging price war could undermine this. By operating a separate and independent discounter Sainsbury’s can have its cake and eat it: competing on price without sullying brand.

Former glories

Netto’s previous incarnation in the UK was also hardly a failure. By the time it sold up in 2010 it had 193 UK stores with a £778m price tag highlighting how modest the current commitment is. The sale was also one of convenience, quite literally. Asda used the deal to knock out a competitor and extend its convenience offering in one fell swoop.

Since Netto left the UK the rise of discount retail has been stratospheric. Aldi and Lidl now boast market shares of 4.7% and 3.6% respectively, up from 3% and 2.4% in 2010, when Netto’s market share was less than 1%. Any doubt about the future of discounters in 2010 (when observers talked of a natural 5-6% ceiling on market share) has long since evaporated.

No guarantees

But none of this guarantees success for Netto. The break-up in 2010 may have benefitted Asda but Morrisons , Iceland and Co-Op all acquired Netto stores with little to show for it.

Even more worrying was the failure of 20 stores bought by Haldanes and run under the Ugo brand. The venture‑which sought to replicate Netto offerings on a smaller scale (as Dansk and Sainsbury’s are now)‑went bankrupt and 18 of the stores were sold to Poundstretcher within a year or two.

During Netto’s four year absence discounters have expanded aggressively. High street pound stores have become ubiquitous and the £2.8bn IPO of B&M Bargains also brings Terry Leahy into the fold as a direct Netto competitor. Meanwhile Aldi and Lidl have distanced themselves from a “cheap and cheerful” image to present an aura of respectability and (relative) quality. Taking on these incumbents may be tough.

Bad timing?

Another challenge is one of timing. Mainstream retail now recognises the threat from discounters in the form of some swingeing price cuts. Netto is not just competing with discounters, but with the deeper pockets of Tesco, Asda and Morrisons.

Finally, seven years on from the economic crisis there are indications of a sustained recovery in consumer sentiment. In April the ONS reported a 6.9% year-on-year increase in sales volumes; the biggest jump since 2004. Although this fell back in May, and there is a long way to go before income recovery matches expectations, optimism is beginning to seep back into retail. Time will tell, but with incumbent discounters reigning supreme and the economic outlook improving, Netto’s re-entry may turn out as a case of too little too late.

  • Jon Copestake is chief retail analyst at the Economist Intelligence Unit