Comment: It's a long road to scale, but Netto has made a good start in Leeds

When the Netto/Sainsbury’s joint venture was revealed, I had to pull the car over while driving to fully understand what had been announced.

It was so leftfield that literally no-one saw it coming. It was a remarkable strategical decision taken by Sainsbury’s, which is as far away from a discounter as you can get within the mass market.

This is perhaps part of the appeal to Sainsbury’s, discounters are here to stay within the UK market and their growth has been unprecedented.

“There weren’t many tears shed when Asda bought the stores in 2010”

Steve Dresser, Grocery Insight

It makes sense for Sainsbury’s to want to be within the channel, particularly with its exposure to the discounters and the willingness for Dansk Supermarked to find a suitable UK partner.

Why lose 100% to Aldi and Lidl when you can lose just 50% to Netto?

The previous Netto wasn’t a great retailer, it didn’t run great stores. Poor locations, poor store environment and poor product quality meant there weren’t many tears shed when Asda bought the stores in 2010.

A lot has changed in that time, the discount channel is growing and Aldi and Lidl have found a sweet spot with ‘cheeky’ PR and a focus on low-price, high-quality products.

The discounters have tweaked their offers to maintain momentum, adding chiller space for fresh produce, ranging loose fruit and vegetables, focusing on premium ranges and even adding organic vegetables.

Favourable market conditions

In a strange way, having four years away from the UK benefits Netto, allowing it to gain a second-mover advantage.

It can capitalise on trends around expanded fresh space, enhancing premium and bringing in Danish lines like the discounters have with their German range. Benefiting from their competitors’ hard work.

With the market conditions favouring a new discounter entrant, Sainsbury’s has been able to leverage its expertise within property, helped by the abundance of space on retail parks and also being able to lease space both nearby and inside Sainsbury’s stores.

This will be a major benefit for Netto; store location is crucial anywhere in the world, but particularly in the UK.

There is a concern that the poor customer perception of Netto will be an issue, but customers will struggle to remember the old Danish discounter. While the flooring, store fit-out and mascot are familiar, there is massive progress on range, quality and differential elements such as the bakery.

It’s a long old road to 500 stores needed for scale, but Netto has made a very solid start in Leeds.

Steve Dresser, director, Grocery Insight