In a surprise move, Sainsbury’s has reacted to the continued growth of discount retailers in the UK with a venture to bring the Netto banner back to the country. Sainsbury’s and Netto owner Dansk Supermarked will launch a clutch of stores on a trial basis but Netto, which struggled on its previous visit to the UK, faces even stronger competitors now. Dean Best reports.

“We will win the future by being a better us not a poorer them.”

Sainsbury’s outgoing CEO Justin King was on typically bullish form last month as he fielded questions about the rise of the discounters in the UK grocery market.

The likes of Aldi and Lidl gained market share from the UK’s Big Four food retailers during the downturn and, even as the country’s economy shows sign of improvement, the German giants continue to make inroads.

King was speaking after Sainsbury’s reported its annual results, figures that included consensus-beating profits but like-for-like sales that inched up 0.2%. Sainsbury’s share price slipped on the day, with investors reacting to concerns the retailer had refused to publicly commit to join its major rivals in trying to stem the discounter tide by cutting prices.

The Sainsbury’s boss shrugged off these anxieties, insisting price cuts made by rivals were more about “PR” and “sabre rattling” than a shift in the competitive landscape. “We will respond to what people actually do. Our price position remains as competitive as ever.”

Six weeks later, Sainsbury’s announced another form of response. On Friday, Sainsbury’s announced a venture with Danish retailer Dansk Supermarked to bring the Netto discount chain back to the UK.

The Netto banner disappeared from the UK after Asda bought the local business from Dansk Supermarked in 2010 and rebranded the stores.

However, Sainsbury’s and Dansk Supermarked will, on a trial basis, open 15 Netto stores in the north of England by the end of 2015.

Mike Coupe, Sainsbury’s commercial director and the executive set to replace King as CEO, said there could be a “new, long-term growth opportunity” for the retailer if the trial is a success.

A regional trial of just over a dozen stores is a tentative move, Sainsbury’s testing the water by seeing if the return of a brand that fared less well than Aldi and Lidi in the UK pays off.

However, the if-you-can’t-beat-them-join-them initiative was, in the main, welcomed in the City.

“This is material and value-creating; a strategic masterstroke,” Sanford Bernstein analyst Bruno Monteyne said today (24 June). “Material as it has potential to add 2% growth CAGR in the next six years or 1.7% market share on top of the 16.5% Sainsbury’s has already. This will be the only UK retailer having access to all three growth channels of the UK: online, convenience and now discount stores.”

Mike Dennis, an analyst at Cantor Fitzgerald, said the venture was “a smart move” and one Sainsbury’s rivals “must be wondering why they did not move on sooner”.

“Sainsbury’s has had the vision to take share rather than have share taken from itself by another competitor. Through this transaction Sainsbury’s has again taken a lead on its rivals by engaging in the higher growth potential within the discount channel in a low-cost strategic deal,” Dennis said.

Whether the Netto stores will have potential in the UK is another matter. Sainsbury’s and Dansk Supermarked insisted the new stores would “represent a complete departure” from the old outlets, with, for example, in-house bakery, which is a nod to the moves Aldi and Lidl have made in recent years to invest in fresh food.

Shore Capital analyst Darren Shirley was more cautious about the venture, saying the venture was “potentially astute”, helping the more upmarket Sainsbury’s play in a part of the market into which it would struggle to stretch its own brand.

However, Shirley did note Netto had become a “poor cousin” to Aldi and Lidl and was returning at something of a disadvantage to its larger German rivals. “Whilst we do not believe that it is a broken brand in the UK, it is probably fair to say that it is not one that will be immediately batting from the front foot,” Shirley said.

The new Netto’s fresh food offer will be a wise move as that has been one way Aldi and Lidl have retained the interest of more affluent consumers as the UK economy has improved.

Nevertheless, the continued success of Netto’s German rivals – plus the investment the general value retailers have made in grocery – indicates the level of competition in the channel.

A trial, after all, is just that; should Sainsbury’s and Dansk Supermarked decide the move has not worked there will unlikely be a major impact on the UK grocer’s financials.

However, should the venture not pay off, Sainsbury’s will have to think again about how to combat a trend seemingly not going away.