Netto effects: discounters boom in credit crunch

It’s 7.45am on a Thursday morning and already there is a crowd gathering outside Netto’s new store at Tamworth in Staffordshire. The opening day offers that have tempted those at the front of the queue range from£19.99 for a 12ft paddling pool to a 10kg bag of Basmati rice for £9.99.

As the crowd grows, waiting shoppers are entertained by Bubbles the clown and his sidekick Scottie the Dog. By the time the doors open at 8.30am, there are about 100 people clamouring to get inside.

The Tamworth store, on the site of a former Kwik Save, welcomed more than 7,000 shoppers on its opening day. And it’s not difficult to see why – a leaflet drop in the local area not only spread news about the special offers available on opening day, but also compared the prices of 18 typical weekly shopping items from Netto’s Coventry store with the nearby Asda store. For those items, Netto claimed to be more than£10 cheaper than Asda.

Netto UK managing director Richard Lancaster beams as shoppers eagerly push their trolleys around the aisles. He believes Netto will always win on price. “I like the fact that the agenda’s about price. When it’s about price, we win,” he says.

Danish supermarket Netto, along with rival discount supermarkets Aldi and Lidl, is enjoying something of a renaissance in the UK as a result of the credit crunch. According to the latest TNS Worldpanel figures, the discounters now control a 5.9 per cent share of the total grocery market and are the fastest growing retailers in the sector.

Lancaster believes Netto has only realised a fraction of its potential in the UK. “When Netto first came to the UK, our parent company thought every country should operate the same,” he explains. “The stores were stark and barren and, while this format is acceptable on the continent, it is not acceptable here.”

Since Netto’s 1990 UK debut, it has grown to 187 stores and Lancaster, who moved to Netto in January last year from Sainsbury’s convenience business, was the first British managing director for the UK.

He was given licence to adapt the UK business to the market and, using Tamworth as an example, he says now he would “stack this look and feel against any supermarket in the country”.

He says his challenge is to re-badge Netto as a value supermarket, not a discounter. “The discount brand seemed to constrain the company and was almost an excuse for how things were,” he says. “So while we will always be about price, we needed to step up a notch to encourage new customers through the door.”

The in-store environment has changed dramatically since Lancaster came on board. For instance, the first aisle that shoppers arrive at had always stocked household goods traditionally and, in line with every other supermarket in the UK, Lancaster swapped it for fruit and vegetables.

Netto has also introduced more signage in stores, as well as chilled cabinets for the fresh fruit and vegetables. “Chilled cabinets are a real challenge for a discounter because it’s another cost to the business,” says Lancaster. “But it’s the right thing to do. Does every other supermarket in the UK offer this? Yes, they do. So we’ve got to do it.”

New lease of life

Lancaster has also overhauled the product range and introduced new lines. The grocer now carries tobacco, greetings cards, e-top ups at the checkout and is testing a Food to Go range in 10 stores, which includes sandwiches and soft drinks.

“Previously the thinking about tobacco was that we shouldn’t stock it because we couldn’t do it at a value price,” says Lancaster. “But if customers want to buy tobacco as well as groceries, they aren’t going to stop the car twice.”

The product range has increased from 1,100 to 1,400 in the past year and another 100 chill lines will be launched next year. “We needed to extend the chill range to introduce basics such as fresh pasta and sauces that shoppers just expect to see in every supermarket.”

The section of the store that has remained the same is the special offers aisle. About 180 products are on offer each week, with drops on a Monday and a Thursday. These products are promoted via leaflets and Lancaster says this aisle is what makes Netto unique. “These shelves get stripped every week,” he says. “And the prices are not just the usual 10 per cent below the average that Netto offers, they are massively discounted.”

The quality of the products has also been addressed. “When I joined the business there wasn’t the right rigour behind the product testing,” he says. “So I made sure that each of the private-label products were taste tested against one of the big four grocers’ standard priced private-label products. If it didn’t match or beat that product, we had it re-formulated. So we are selling what matches another supermarket’s standard range at what would be their entry price.”

While the product range and store environment may match that of any other supermarket, Lancaster admits that the grocer still has some way to go in changing consumers’ perception of the brand.

This year the brand’s logo changed as it ditched the Scottie dog emblem. Scotties, explains Lancaster, are revered in Denmark because they are the Danish version of the British royal family’s Corgis, but the emblem “lacked relevance in the UK”.

Next month, under the strapline “Save without compromise”, Netto will launch a series of ads pitching it as “Everyone’s great value supermarket”. Lancaster says: “We are challenging shoppers not to change what they like, but just where they buy it. We believe that, if customers try us, they will stay with us in the long term.”

Yet, while Netto has a strong expansion plan – 20 stores this year and 25 next year – it has a way to go before it catches up with its discount rivals Lidl and Aldi. The latter, which has 430 UK stores, has pledged to open a store a week until it hits its 1,050 target. Lidl is set to open its 500th UK store in November.

“We have a very ambitious parent company and my job is to be sufficiently profitable to grab the lion’s share of the investment for expansion over the coming years, which this year is going well because we are very close to double-digit sales growth in our first half,” says Lancaster.

He is also unfazed by Aldi and Lidl’s growth plans. “The more discount stores there are in the UK, the more acceptable it will be for consumers to shop there, so it’s great that the likes of Aldi are doing well, because the whole sector will benefit,” he explains.

Lancaster likens the growth in discounters to the renaissance in cider. “When Magners cider was launched, the whole cider industry benefited and it was suddenly trendy again to drink cider,” he says.

Lancaster believes Netto has the edge over its discount competitors on price. The grocer researched its customers this year and, when they were asked which other supermarket Netto was similar to, they answered Aldi and Lidl because they were all “foreign”. Yet when asked if they would shop at Aldi and Lidl, Lancaster says they replied: “There’s no chance, they’re too expensive.”

Price will remain top of the agenda at Netto. Last month, Netto launched a promotion cutting the price of one in every 15 products, which Lancaster regards as “permanent”, although the lines may vary.

And, like all grocers, Netto has been affected by food price inflation, but he says it is working hard on efficiencies in the supply chain to keep prices low.

“Our shopper is time rich, cash poor,” he explains. “So if the price of a product goes up by a penny, they will notice. They’re extremely savvy and have the time to shop around to find out if the price of that product has gone up elsewhere. When they see we are still the lowest, they will come back and buy from us.”

The grocer has also switched its focus to single-price markdowns instead of multi-price deals. Lancaster recalls one day when he worked in a Netto store for one of its Keep in Touch programmes and he saw one customer shopping with a calculator.

The customer was looking at Müller Yoghurts, which carried a multi-buy offer of two packs for£5, but the customer didn’t have the money in that week’s shopping budget to buy the yoghurts.

“It really made us think about the mix of multi-buy and single-price offers,” says Lancaster. “For some shoppers it’s down to the last penny each week so we need to cater for these customers too.”

Lancaster believes that Netto’s price points will stand the grocer in good stead in the consumer downturn, which he envisages will remain tough for another 18 months. “We don’t think any retailer booms in the downturn but we expect to be insulated because of our value. Our upturn will come when the economy recovers. Then, all those shoppers that have tried us will stay with us and our core shoppers will have a bit more cash to spend, so that will be our boom time.”

The rise of the discount supermarket has by no means reached its crescendo and, if Netto can encourage shoppers through the doors, it could well steal some customers from the big grocers for the long term.