Sainsbury’s announced yesterday that it was ending its joint venture with Dansk Supermarked operating Netto stores in the UK. Following a comprehensive review, the two companies said that the 16 trial stores in the North of England will close during August.
The £25m Netto UK JV was launched in June 2014 with the aim gaining a foothold in the fast-growing discount sector, whilst providing learnings for Sainsbury’s to use within its own chain of stores to challenge Aldi and Lidl.
In a statement yesterday, Sainsbury’s said it made their decision to end the venture after assessing trading data, customer and operational insights, expansion costs, the evolving food retail market and long-term strategies for each business. Sainsbury’s is currently in the process of acquiring the Argos chain, a move that will take up considerable management and financial resources.
Mike Coupe, Chief Executive of Sainsbury’s, said the venture had helped his business learn a great deal about the discount grocery retail market. He added: “Since we first envisaged the trial, almost three years ago, the grocery sector has evolved significantly and we launched our strategy 18 months ago to address these changing dynamics.
“Against this backdrop, as planned, we carried out a detailed review with DSG on the future of Netto. To be successful over the long-term, Netto would need to grow at pace and scale, requiring significant investment and the rapid expansion of the store estate in a challenging property market. Consequently, we have made the difficult decision not to pursue the opportunity further and instead focus on our core business and on the opportunities we will have following our proposed acquisition of Home Retail Group.”
Per Bank, CEO of Dansk Supermarked Group, added: “Whilst we are pleased with the performance of the stores to date, it has become clear to both partners that the business requires greater scale over a short period of time to achieve long-term success. Reaching scale has been challenging due to appropriate site availability and therefore we decided together to end the joint venture and focus on other opportunities within our respective businesses.”
The current carrying value of the investment in the Netto JV within Sainsbury’s consolidated group accounts is £20m which will be written down to zero. Sainsbury’s is also expecting cash costs of around £10m to wind down the business.
Commenting on the move, Fraser McKevitt, head of retail and consumer insight at Kantar Worldpanel, said: “British consumers are eager and willing to shop with discount retailers but even with Sainsbury’s help, Netto couldn’t match the competition it faced from the likes of Aldi and Lidl. Operating in its ‘trial’ format prohibited Netto from achieving the economies of scale that have generated such success for its rivals.
“Aldi and Lidl have each had a rapid programme of new store openings matched with huge advertising and marketing spend to keep themselves front and centre in consumers’ minds. Despite a 20-year history predating this joint venture, Netto lacks this brand awareness and credibility in its latest incarnation, and any retailer looking to learn from this experiment should note that this isn’t something which can be achieved without significant investment.”