J Sainsbury Plc, the U.K.’s third-largest supermarket company, plans to enter the booming discount grocery market by bringing Netto stores back to Britain.
Sainsbury, which has focused on premium own-brand food to fend off incursions being made by German budget chains Aldi and Lidl, is joining forces with Netto’s Danish parent company Dansk Supermarked to open 15 stores by the end of 2015. The first Netto outlet is planned for the end of this year in the north of England, Sainsbury said today in a statement.
“You would not have dreamed up this combination in a million years,” said Bryan Roberts, an analyst at researcher Kantar Retail in London. “They make very unlikely bedfellows. At the same time, it makes sense, giving both of them access to the fastest growing segment of the market.”
Netto disappeared from the U.K. following the acquisition of its 193 stores in the country by Wal-Mart Stores Inc.’s Asda in 2010. Most of the outlets were converted into Asda supermarkets and others were sold to meet antitrust concerns. Netto has operations in Denmark, Sweden, Germany and Poland.
Sainsbury’s move comes in the wake of two quarters of same-store sales declines as Aldi and Lidl shake up the U.K. grocery market, prompting the likes of Tesco Plc, Asda and Wm Morrison Supermarkets Plc to cut prices. Sainsbury is matching some price cuts, though has stressed that its supermarkets will keep focusing on fresh produce and premium own-brand food.
Sainsbury and Dansk Supermarked will each invest an initial amount of 12.5 million pounds ($21.3 million) in the joint venture. The U.K. grocer expects to incur start-up losses of 5 million pounds to 10 million pounds through March 31, 2015.
That amounts to about 1 percent of Sainsbury’s pretax profit, according to Exane BNP Paribas analyst Andrew Gwynn.
“Short term, the deal is fairly neutral for Sainsbury, but does show shifting attitudes in the U.K.,” Gwynn wrote in a note. “It wasn’t long ago that the discounters’ growth was dismissed as a moment in time.”
Aldi and Lidl have taken almost two percentage points in market share from Britain’s big four supermarkets in the last year, Kantar Worldpanel said June 3. Their combined market share now stands at 8.3 percent, up from 6.5 percent a year ago.
“If successful, this trial has the potential to open up a new long-term growth opportunity for us, complementing our fast expanding convenience, online and non-food businesses, as well as our existing supermarket estate,” Mike Coupe, Sainsbury’s chief executive officer designate, said in the statement.
The two companies were in negotiations for about a year, and Netto will be run as a separate entity, said Coupe, who will take over from Justin King after Sainsbury’s annual shareholder meeting on July 9. Netto’s U.K. business will be led by Morten Moeberg Nielsen, former managing director for Germany.
The Netto returning to the U.K. will be “completely different to the one that left in 2010,” with a bigger range of 2,100 products compared with 1,200 products before, Dansk Managing Director Per Bank said.
The shops will offer “great fresh produce and meat” with U.K. sourcing help from Sainsbury, Bank said. An in-house bakery will feature fresh Danish breads and pastries. Five stores should be open by Christmas, Coupe told journalists today.
There is low risk that Netto sales will cannibalize Sainsbury revenue because there is little geographical overlap with the bulk of the U.K. grocer’s stores in the south and southeast, Sainsbury Finance Director John Rogers said.
Sainsbury reiterated on June 11 that it expects same-store sales growth to resume later this year after nine years of unbroken growth was ended with two quarters of decline.
Sainsbury shares traded down 0.8 percent at 318.7 pence at 12:40 p.m. in London. The stock has declined 13 percent in 12 months.