Netto is Wal-Marts biggest expansion in Europe since ill-fated German move

Netto is Wal-Mart's biggest expansion in Europe since ill-fated German move

That Asda, the UK arm of Wal-Mart and the country's second-largest retailer, is keen to open smaller stores is well-known throughout the industry.

That Asda would buy the UK stores of discount chain Netto to help it achieve that goal may not have been quite what some had in mind.

Yesterday, Netto's owner Dansk Supermarked, itself a part of shipping giant A.P. Moller-Maersk, announced the sale of its UK business some 20 years after the retail chain first entered the UK.

Wal-Mart agreed to pay GBP778m for the business, which comprises over 190 stores, and the retail behemoth plans to convert all the Netto outlets to the Asda banner by the middle of next year.

For Dansk and Netto, the deal gives the business the chance to focus on its four markets on the European continent - Sweden, Denmark, Germany and Poland.

Netto MD Claus Juel-Jensen told just-food that European consumers had taken to the chain's "limited-range" model better than shoppers in the UK, where the business, he claimed, was also hampered by the regulations and cost of opening new stores.

For Asda, the deal gives it a chance to gain ground on rivals Tesco, Sainsbury's and Morrisons, which, to varying degrees, have opened smaller stores and expanded in the convenience channel in recent years.

Asda believes future growth in the UK's fiercely-competitive grocery sector will come from smaller stores. And the retailer is frantically looking for growth after seeing sales growth lag its rivals.

On Tuesday, retail analysts Kantar Worldpanel said Asda was the only one of the UK's Big Four multiples to see its market share fall in the 12 weeks to 16 May.

Asda continued to "feel the pinch", Kantar said, with its communications director Ed Garner arguing that the retailer's new boss Andy Clarke would focus on "restoring the clarity" of its Every Day Low Prices strategy and reviewing its "range rationalisation".

The retailer is bidding to bolster its reputation for value with the launch of its Price Guarantee and by eschewing what former chief executive Andy Bond describes as the "phoney price wars" battled out by its rivals.

However, Asda is also bidding to bolster its estate of smaller stores. And, according to Verdict Retail consulting director Neil Saunders, the Netto deal enables Asda to expand its estate quickly.

"Overall the move by Asda is a sensible one," Saunders tells just-food. "Primarily, it is driven by adding a large quantity of space in a very short space of time. This is critical as, due to its inflexible approach to store formats, Asda has traditionally lagged behind other grocers in terms of expansion - which has ultimately cost it market share growth."

Of course, squeezing Asda's full offer into Netto's stores will prove a challenge but it is a challenge that the retailer has to accept in order to make up ground on its rivals.

And, as Saunders points out, the deal, which remains subject to regulatory approval, will take Asda ahead of Sainsbury's and make it the UK's number two food retail.

"Key to success is how smaller stores are merchandised and optimised in terms of what is stocked. Moving from a full offer to a cut down one will not be without its problems," Saunders explains.

However, he adds: "Overall, the deal is a good one. It will make Asda a clear number two in food retail and will give it a growth platform in the convenience or neighbourhood market, which has been growing strongly over recent years."

Nevertheless, for some in the City, the price Asda has agreed to pay for the Netto stores has raised eyebrows.

"On basic multiples, it looks an expensive deal," RBS retail analyst Justin Scarborough wrote in a note to clients. "Paying GBP500 per sq ft may seem quite low but sales densities are just greater than GBP9 per sq ft. UK majors do GBP20 to GBP26 per sq ft."

Asda, however, is confident it can make a financial success of the transaction. "This is a small transaction by Wal-Mart standards and we would not have embarked on this transaction without being confident that we'll make a return on our investment," a spokesperson told just-food yesterday.

The last time Wal-Mart made such a sizeable investment in Europe was when it entered the German market in 1998 - and then left eight years later.

Wal-Mart and Asda will be hoping it has rather more success with Netto.