Netto Can Help J Sainsbury plc Fight The Discounters

Like peers Tesco and Morrisons, Sainsbury’s (LSE: SBRY) (NASDAQOTH: JSAIY.US) position within the UK grocery sector has come under threat by the rise of the discounters, Aldi and Lidl.

However, unlike Tesco and Morrisons, Sainsbury’s has decided to beat the discounters at their own game. Management has decided to enter into a joint venture with Danish discount chain Netto.

Taking action Sainsbury's

Sainsbury’s used to be the darling of the UK retail industry. The company’s growth, until recently, seemed unstoppable with sales jumping every quarter for nine consecutive years. Unfortunately, the company’s astonishing rise, came to a sudden halt last year.

This year the slide continued with the company reporting the like-for-like sales excluding fuel, in the 12 weeks to the 7th of June, were 1.1% lower when compared with the same quarter a year earlier.

What’s more, within the same trading update, the company revealed Kantar Worldpanel sales data, which showed that the company’s share of the UK grocery market fell to 16.5% from 16.7% in the year earlier period.

So, to combat sliding sales, Sainsbury’s has attempted to silence critics by bringing Danish discount chain Netto back to the UK.

Making a return 

Netto has only recently disappeared from the UK. The chain was bought by Asda during 2010. However, Asda only purchased Netto’s property and not the brand name, so the company is free to make a return. 

The two companies will spend £12.5m to start the venture, with five stores due to open by the end of the year. In total, it is expected that 15 Netto-branded stores will open within the north of England, where Sainsbury’s is historically under-represented.

Cautious optimism 

For Sainsbury’s, this deal marks the end to two years of negotiations and management is upbeat about the joint venture’s future prospects. 

In addition, the City has expressed cautious optimism towards the deal. It would seem as if analysts believe that the venture is a good thing, although many want to see results before they express their full support.  

Nevertheless, Sainsbury’s needs to compete with the discounters and this venture will allow the company to do just that. Further, the deal will allow Sainsbury’s to compete without sacrificing quality in existing stores; a point of view held by some City analysts:

“Sainsbury’s is very good at quality and Netto is dedicated to value. Too often, traditional supermarkets are trying to have a single store where they try to be all things to all men. So what Sainsbury’s is doing is very clever.”

Foolish summary

So in summary, Sainsbury’s is entering into a joint venture with Danish discounter Netto in an attempt to profit from the UK love of discount supermarkets. The deal has been received with cautious optimism, although we will have to wait and see if the tie-up is a success.  

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Rupert owns shares in Morrisons and Tesco. The Motley Fool owns shares in Tesco.