20th Jun 2014 11:37
LONDON (Alliance News) - J Sainsbury PLC Friday moved to capture a share of the growing UK discount grocery sector, and fight back against the recent success of German discounters Aldi and Lidl, by creating a joint venture with Danish international discount grocery retailer Netto in the UK.
Sainsbury's, the UK's third-largest supermarket chain by market share, said the joint venture will initially trial 15 stores in the north of England by the end of 2015, starting this Autumn, and then roll out across the UK if the trial is successful.
"The UK discount market likely to double over the next five years, and we want a piece of that market... The Netto joint venture brings a quick entry route to that market," Sainsbury's Incoming Chief Executive Mike Coupe told journalists in a call Friday.
The UK grocery sector has been dominated by four big players in recent decades. However, since the financial crisis, shopper habits have been changing and those players -Tesco PLC, Sainsbury's, Wal-Mart Inc-owned Asda, and Wm Morrison Supermarkets PLC - have been losing market share to the likes of Aldi and Lidl at the bottom end of the market, and Waitrose and Marks & Spencer Group PLC at the premium end.
Sainsbury's decision to take a slice of the discount market is in contrast to its rivals, which have responded to the loss of market share to discounters by initiating one of the deepest price wars in the sector for many years.
"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," said incoming Sainsbury's Chief Executive Mike Coupe.
The new joint venture will have to overcome consumer wariness about the Netto brand.
Netto, who's parent company is Dansk Supermarked, had stores in the UK up until 2010, when it departed after achieving little success, and sold all its stores to Asda for just under GBP780 million. Asda then sold off some of the Netto stores due to competition laws to other retailers including Morrisons.
However, Netto's failed attempt in the UK discount sector was prior to the recent surge in the popularity of Aldi and Lidl, and Sainsbury's said the new Netto stores will be completely different from the previous format.
"The new Netto stores really do represent a new store format (from those) which left the UK in 2010," Per Bank, chief executive of Dansk Supermarked told journalists.
Bank said the new stores will have a completely different layout, an in-store bakery and a "compelling range suited to the British market", having increased its product offering by 80% to 2,100 products, including both food and a non-food offering.
"We will be toe-to-toe with Aldi and Lidl, and will bring a Scandinavian twist," said Bank.
Five of the stores will be opened before Christmas, and will be roughly the size of a typical Aldi or Lidl store, at around 11,000 square feet.
Sainsbury's said the location of the initial 15 stores will be focused on the M62 motorway corridor, which includes cities Manchester, Liverpool, Leeds, and the home of Bradford-based Morrisons.
Sainsbury's said it has been in talks with Dansk Supermarked for the past year. Both companies said that the joint venture will operate as a completely separate business.
Both Sainsbury's and Netto will each initially invest GBP12.5 million into the joint venture. Given start-up costs, Sainsbury's said they will each incur a post-tax loss in the region of GBP5 million to GBP10 million up to March 31, 2015.
Coupe emphasised that Sainsbury's will not be slowing down its own expansion plans in the north of England.
"I fully anticipate that we will continue to develop stores where appropriate in the North. This is a distinct sector of the market, so it is as well as, not instead of," said Coupe.
"In the UK the retail sector is growing very rapidly. The discount sector in the UK is less mature that it is in Denmark and now is a better time than any," Bank added.
J Sainsbury shares were trading 0.2% lower at 320.83 pence Friday.
By Rowena Harris-Doughty; [email protected]; @rharrisdoughty
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