FEATURES ONLINE BIG STORY Visit the website to read more practical features -week.com Can a relaunched Netto take on and Lidi?

Sainsbury's sent Shockwaves through the grocery sector last week when it revealed plans to tie up with Danish discounter Netto. By George MacDonald

our years after selling its 193 UK stores to for £778m, Dan• ish discounter Netto is back for a second bite at the market - this Ftime in partnership with Sainsbury's. Netto, owned by Dansk Super- marked, will make its reappearance by the end of this year and by the end of 2015 the plan is for 15 UK stores. The tie-up came as a bolt from the blue to a grocery retail industry in the Netto boss Per Bank ( left) and incoming Sainsbury's chief Mike Coupe ink the tie-up deal midst of seismic change, precipitated in part by the success in trie UK of Netto's hard discounting counterparts Aldi and , which have been growing apace. And it's that change which has con• vinced Netto and Sainsbury's chiefs there is an opportunity for tiiem in a disrupted market.

Discounter market growth Each sees the chance to take share in a growing market. The UK discount sec• tor is expected to double in value over the next five years to £20bn. Sainsbury's finance director John Rogers said he could envisage the mar• ket share of the discounters to reach 15% over the next five years compared with about 8% now. To claim their share of the growth, Sainsbury's and Netto bosses are put• ting their money - £12.5m apiece - into a format and approach they think will give them a distinct and appealing proposition. "No-one knows British customers

18 Retail Week June 27, 2014 www.retail-week.com Simon Burke defends the Co-op's ethical BIG STORY Retailer, p25 NETTO

WHAT THE ANALYSTS SAY

Dave McCarthy, HSBC The discounters have momentum in the UK, with lots of column inches and airtime given to their improving offer. That Sainsbury's is capitulating to this format ratherthan competing effectively will only add to that momentum, in ourview. We find this move by Sainsbury's perplexing, and it will help further highlight how expensive the are relative to the discounters. This was a problem in France for many years and it is only recently that the hypermarkets there have realised that the way to win is not by imitating the discounters with their own chains but by being more price-competitive.

Clive Black, Shore Capital Netto launched in customers visit Dansk We see this in 1981. AT A GLANCE Supermarked's stores combination as a It is the largest retail every day. potentially astute chain in , with one because it more than 450 stores. Netto launched in the possibly solves a Netto"k UK in 1990, with its particular problem The Danish translation UK headquarters for Sainsbury's. Its trademark black Scottie dog logo of Netto means 'net based in South Elmsall, Accordingly, we will be making a return to the UK price'. Netto said . It believe that Mike its prices will be The business reported operated a total of Coupe, Sainsbury's soon-to-be chief "transparent with a revenues of 56.9bn kroner 194 stores in the UK. executive, has shown a good focus on everyday low appreciation of the limitations and prices, with a refreshing The partnership virtues of Sainsbury's brand, and yet lack of multibuy offers". £6.1bn marks a return to UK engineered a potential mechanism to in 2013, up from 54.4bn kroner soil for the Danish gain access to the discount channel. Netto is the third-biggest (£5.8bn) the year before . It We see the trial as being potentially brand in Denmark, departed the country complementary to Sainsbury's core behind Ikea and in 2010 when it sold business. electronics retailer Profit its stores to Asda Elgiganten. for£778m. James An stead, before tax increased Barclays to 1.77bn kroner It is owned by Dansk The joint venture with The growth of the Supermarked, which £189m Sainsbury's will see the discount segment also owns three other opening of 15 Netto has prompted ^ in 20132013,, ui p from l.Slbn kroner Danish retail brands: stores by the end of questions as to (£141m) the year before. department store 2015. The first store is whether existing Sailing, supermarket expected to open later players might set It operates Fotex and hypermarket this year. up their own . discount chains. Both Netto's and This would not necessarily be difficult Dansk Supermarked is Sainsbury's initial from a practical perspective, but it could the largest retail m investment in the joint potentially confuse customers or muddy company in Denmark Dansk venture will be the main brand -especially if the existing and has a 34.9% market Supermarked 1,255 £12.5m. Each partner brand is in some ways transplanted into share. It operates more employs 42,500 stores across expects to incur a a . than 1,300 stores in people and is run four countries: post-tax loss of around Sainsbury's and Netto seem to be

four countries. ; m< ii« s - Denmark (453), £5m to £10m up to cognizant of those risks, with no apparent executive (346), March 31,2015. intention to feature the Sainsbury's brand More than two million ?SJ Bank (301) and SUZANNE BEARNE in the new Netto concept. Sweden (155) www.retail-week.com June 27, 2014 Retail Week 19 FEATURES ONLINE BIG STORY Visit the website to read more practical features NETTO retail-week.com

better than Sainsbury's and nobody kets, including the latter's German knows discounting better than Netto," homeland, and that the UK is less observes Per Bank, chief executive of mature than Germany from the dis• Dansk Supermarked. counters' perspective so there is plenty The new Netto shops, which will be of scope to make up ground. run as part of a standalone business He says: "If we did not profoundly with its own headquarters and distri• believe we could deliver, then we bution system, will be very different would not be introducing Netto to from their predecessors, according to the UK." Bank and Sainsbury's chief executive designate Mike Coupe. Northern launch The layout will be new and the The first of the new generation of Netto range will be transformed. The assort• stores, measuring about 11,000 sq ft, ment will be much larger - 2,100 will open in the north of . products compared with 1,200 - and That area was chosen because of there will be a focus on fresh food population density, its logistics infra• including meat and in-store Danish structure and the fact that there are bakeries. "Self-evidently, it will be suitable property opportunities. more compelling," says Coupe. Sainsbury's-branded products will not be sold in the shops, which New grocery appeal bury's operations in its three existing "DANSK will carry a high proportion of own- Despite Netto's limited impact in the channels - supermarkets, convenience BRINGS US label lines. "We thought long and UK previously, Bank and Coupe and online. EXPERIENCE hard but it's important it's positioned believe expectations of discount gro• "It's as well as, not instead of," he differently," Coupe says. cers have changed in the intervening says. "The bulk of supermarket shop• WE DIDN'T HAVE The venture's start-up costs are years and their model should appeal. ping is still in big supermarkets. AND GIVES expected to result in each retailer bear• Bank says: "We're coming back as a "It [discounting] is ultimately a dif• US QUICK ing a pre-tax loss of between £5m and much better Netto this time. It will be ferent sector. Dansk brings us experi• ENTRY TO THE £10m in the year to March 15, 2015. great value for money and a great shop• ence we didn't have and gives us quick MARKET" Coupe was reluctant to reveal when he ping experience. It will be easy to park, entry to the market. Mike Coupe, Sainsbury's hoped it would become profitable. easy to shop and easy to pay." "The Netto brand has resonance He says: "We're not going in to that. Coupe insists that the Netto deal was with customers. It's a great opportunity At the moment it's a trial. We wouldn't not a sign of panic in the face of Aldi for us to develop." be doing it if we didn't believe we and Lidl's rise. Instead he sees Although Netto chose in 2010 to could make money in the long term." discounting as a distinct growth chan• abandon Britain to rivals Aldi and Lidl, As Sainsbury's rivals such as belea• nel in which at the moment Sains• Bank claims the retailer is perfectly guered and attempt to bury's has no presence. capable of competing with the pair. adapt to shifting conditions precipi• He maintains that its presence will He says that Netto already holds its tated by the discounters, the competi• complement, not conflict with, Sains• own against Aldi in international mar- tion has just been ratcheted up again.

WILL THE TIE-UP WORK?

Financial Something shoppers than Netto owner Dansk Financial success is easy to need Supermarked. measure. Netto's track record in UK shoppers have been voting Sainsbury's business needs Denmark, Germany, Sweden and with their feet. Discounters are will transform over time. Poland is pretty good on this front. growing and big out-of-town Today, the company is eager to The UK start-up needs to contain supermarkets are not. find new ways to grow revenue. the costs of property, supply chain, In Denmark, 2012 Brandz In the future, the focus may return staff and energy to about 16% to data shows that Netto shoppers to profit optimisation or portfolio 17% of revenues. say they love the store - a 5 % synergy. The fact that Sainsbury's already bonding score, which is rare Over time, it is likely that has a supply chain in place and in the world of grocery - more Dansk's and Sainsbury's needs efficient operations with suppliers than any other supermarket or may transform in ways that can is a bonus here. discount store including Lidl. create disagreements on where Whether Netto The fact that Netto already has a Netto is more brand-friendly the Netto UK initiative fits in the and Sainsbury's profitable formula in four other and better at fresh than most overall business portfolio. countries is also a bonus. Testing 15 discounters. A review of successful will succeed is stores to get the model right on a long-term joint ventures in grocery this week's hot limited investment is a good sign. Assessment It will work retail is difficult to create. Just question, says The fact that both companies have have a look at the adulterous Kantar director deep pockets and are looking Management discipline fall-out from the Waitrose-Ocado- of retail Ray Gaul long-term would also indicate this is On paper, this is a 50-50 Morrisons love affair and you can a business that will grow over time. relationship. However, given see some danger here. Assessment It will work initial statements it appears Assessment Danger ahead Sainsbury's has more at risk here

20 Retail Week June 27, 2014 www.retail-week.com