The announcement on 27 May that Asda was buying Netto’s 193 stores for £778m came as something as a surprise. There had been no rumours, no speculation, and no indication that the Denmark-based discount supermarket chain was up for sale.
However, the deal – the biggest since Asda, which has 377 stores, was acquired by Walmart in 1999 – did not escape the attention of the Office of Fair Trading, which called in the purchase.
Stories surfaced in August that the OFT had made a decision to force Asda to sell 30 of the Netto sites. While the market believes this could be the case, the OFT is not making its decision until 22 September.
But Asda has already stated that any Netto stores it keeps will be trading under an Asda fascia by the middle of 2011.
Netto’s former owner is Dansk Supermarked, which is the largest and most profitable retail company in Denmark. It has more than 1,300 stores in five countries, employing 43,000 people.
Nick Agarwal, Asda’s strategic communications director, says that the potential sale of Netto came to the attention of Asda because “our aspirations to grow our supermarkets division matched Dansk’s aspiration to concentrate their growth efforts elsewhere in Europe”.
Given the ambitious expansion plans announced by Tesco, which in April revealed plans to open 2.4m sq ft of space in the UK this year through new stores and extensions to existing shops; and Sainsbury’s, which is seeking to increase its store space by 15% by March 2011, why did they not target Netto?
Meeting size criteria
Angela Keane, retail analyst at Henderson Global Investors Real Estate, says: “Being around 8,000 sq ft, a lot of the Netto units would have met Tesco’s criteria for their Express brand, so it is a good question as to idea for why they wouldn’t have looked at them.”
Both Tesco and Sainsbury’s remain tight-lipped about their thoughts on the Asda-Netto deal, and whether they have missed the boat on snapping up the discount chain for themselves.
A Tesco spokesman merely quipped: “Tesco does not comment on rumour or speculation,” while a Sainsbury’s spokesman offered: “We have our own store expansion plans, and I’m not sure we would want to comment on anyone else’s.”
But while the deal may have been a surprise, one commentator says that Tesco and Sainsbury’s would have known that Asda was buying Netto. “They all know what each other is up to,” he says.
The feeling in the market is that Tesco and Sainsbury’s didn’t want to go for Netto because, as Tom Edson, head of food store investment with Jones Lang LaSalle, points out: “Sainsbury’s and Tesco are both well-advanced on an aggressive and successful expansion campaign.
“Their pipeline of small, or convenience, stores will be relatively well-progressed on a trading format, which is now tried and tested and works. It would be no surprise if Asda is developing an even smaller format to the traditional Netto, which will attempt to address this issue.”
Clearly, two of the main winners in the Asda buyout of Netto are its nearest discount supermarket rivals, Aldi and Lidl, which have seen a discount supermarket competitor being wiped off the map. Neither would comment on the deal. As for future expansion plans, a Lidl spokewoman says: “Lidl will consider all opportunities on a site-by-site basis, and continue to expand where it makes commercial sense to do so.” Aldi would not comment.
In reality, Netto, with 193 stores, was never in the same expansion league as Aldi (around 500 stores), or Lidl (550 stores). One reason suggested for Netto’s lack of growth is that the chain was too focused on the lower end of the demographic scale, while Aldi and Lidl targeted a broader range of shoppers. Aldi’s advertising highlights freshness and value, whereas Netto’s is more “coupon” and flyer related.
Taken at face value, it would be easy to see that the deal could provide a way for Asda to expand quickly. The Leeds-based company is sitting in second place in the supermarket rankings behind Tesco, and just ahead of Sainsbury’s.
Closing the gap
David Thompson, retail director for the northern region at DTZ, believes that the acquisition of Netto moves Asda “into the smaller store section of the market, an area they traditionally did not compete in, enabling them to close the gap on the market leader Tesco”.
It also helps to self-guard Asda’s position as number two in the supermarket hierarchy. This is a position it needs to hold on to, especially as Sainsbury’s chief Justin King stated in the summer that Sainsbury’s will add approximately 1.2m sq ft of new store space to its estate this year which, as JLL’s Edson points out, is comparable with the space gained by Asda from the Netto acquisition.
So, was the acquisition made because Asda feared loosing its number-two slot – once other product lines such as toiletries are counted – to Sainsbury’s in regard to market share? Not at all, says Asda’s Nick Agarwal: “We don’t judge our business by short-term, supermarket pop charts, especially those that don’t cover the full range of what we offer customers, such as clothing and our other non-food businesses.”
Agarwal points out in April, Asda outlined its long-term aspiration to be number one on non-food sales and a clear number two on food.
He says: “There are specific building blocks, such as growth from our new formats in smaller stores, non-food (Asda Living) and our growing dot.com business, which will help us get towards those longer-term aspirations.
Agarwal says: “Netto was a good opportunity for us to increase the number of smaller stores in our supermarkets division. We have 26 smaller stores in that operating division, and we’ve been working for some time on a format that delivers a full weekly shop for customers in a smaller footprint. As we told analysts back in April, we’ve been pleased with the reaction from customers to what we’re offering in our smaller stores and have plans to grow that part of our business.”
Clearly, increasing the amount of stores is important to Asda, but there remains a question over the geographical location of the Netto outlets. The large number of the discount chain’s stores are located in the north of England – which is already the Asda heartland. So, does this mean that Asda will have saturated the market in the North?
Again, Agarwal disagrees. “Netto has stores across England and North Wales, not just the north of England, but in any event, Netto has a 0.7% share of the UK grocery market, so it presents a good opportunity for Asda to grow its smaller store portfolio and bring Asda to many new communities in the UK.”
Agarwal says that with the average Netto store at just over 8,000 sq ft, “they will fit very well into our existing supermarkets division which already has stores of that size”.
“These will not be convenience stores like the ‘local’ or ‘express’ stores run by our competitors, but stores that enable customers to do a full weekly shop at the same prices available at other Asda stores across the UK. They will have the Asda name over the door.”
With Asda now waiting for the official OFT decision, the market will be watching with interest to see how well Netto actually integrates with the rest of the Asda portfolio.
The great discount supermarket takeover that never happened
Only 18 months ago, at the height of the recession, the sector was bracing itself for a tidal wave of new budget supermarket openings. Aldi, Lidl and Netto all announced great expansion plans. While they did indeed increase the number of their stores, the UK was not, as predicted, taken over by the discount supermarkets.
Industry commentators give their reasons why:
Ian Parish, head of retail agency, BNP Paribas RE
“There is no doubt that the budget operators have had an affect on UK food retailing. But, the big four operators (Sainsbury’s, Asda, Morrisons and Tesco) have responded well and very effectively with price cuts, improved value ranges, special offers and just by their sheer critical mass. Also, when the discount operators first arrived here, they did have problems with ranges – especially the European-owned retailers (Lidl and Aldi and Netto] as some of their product lines were brands that the UK consumer didn’t recognise and the actual number of lines was considerably smaller than their UK counterparts.”
Andrew Birtwistle, director, out-of-town retail, Savills
“Unlike on the Continent, UK food shopping has a certain snob factor attached to it, with customers attracted to the fancier shopping environments provided by the big five. To combat the advance of the discounters, they became increasingly price-focused. In the past 18 months, we have seen the price gap narrow between the discounters and the value orientated of the big five retailers. However, the discounters are here to stay, despite these short-term issue.”
Grant Woollard, director, GL Hearn
“Tales of ‘discounters’ taking over were always wide of the mark. While they have increased in number, they depend on the main food retailers, as their customers will usually carry out a ‘two-stop’ shop due to their limited range. More importantly, the main food retailers carry low-cost lines themselves, which gives a wider choice under one roof. The success of the discounters demonstrates how dynamic, flexible and competitive the UK food retail market is.”
Marcus Wood, director, investment retail warehousing & leisure, DTZ
“The mainstream supermarkets have been particularly savvy in cutting prices. When the recession hit, many of the mainstream supermarkets aggressively slashed prices on products in order to compete with the budget supermarkets. This price-cutting, combined with an overall higher ad spend and more hard-line self-promotion than the budget supermarkets, has given these supermarkets a significant edge.
