Sainsbury takes fight to discounters with Netto store opening

By Neil Maidment

LEEDS England (Reuters) - British supermarket operator J Sainsbury Plc's (SBRY.L) answer to discounters Aldi and Lidl was unveiled on Thursday, with the opening of its first Netto-branded store in northern England tasked to win over thrifty shoppers.

Like the UK's other big players Tesco (TSCO.L), Asda and Morrison (MRW.L), Sainsbury is enduring a squeeze on sales as cost-conscious customers switch allegiance to the straightforward, cheap offers of the German discounters.

Potential responses to the exodus range from improved service to fewer promotions, but Sainsbury has gone further, teaming up with Denmark's Dansk Supermarked to bring the latter's Netto brand back to Britain on trial and potentially take on cheaper rivals at their own game.

The decision, Mike Coupe's first major strategic move since succeeding Justin King as Sainsbury chief executive in July, will be scrutinised all the more after the group last month posted a third straight fall in quarterly sales, cut its annual sales forecast and put its dividend under review.

Coupe, a 30-year grocery industry veteran, has said market conditions were the most challenging he has seen.

With Sainsbury holding a relatively upmarket position in the "big four" but still losing sales to the discounters, the Netto tie-up is a chance to steal a march on rivals and capture sales in an otherwise problematic channel, analysts say.

Sainsbury and Dansk Supermarked, Denmark's largest retailer whose Netto brand is present in five countries, have each pumped 12.5 million pounds into the venture with a view to winning a slice of a 10 billion pound UK discount sector that is forecast to double in value in five years.

"We have to go head to head with the discounters," Dansk Supermarked CEO Per Bank said at the opening of the first Netto outlet in Leeds. "Whoever we (Netto) take customers from, whether our parent companies or elsewhere, it doesn't matter to us," he said, surrounded by offers ranging from a bag of apples for 50 pence to a bottle of wine at 2.99 pounds.

MUTUAL BENEFIT

The prospect of Sainsbury eating into its own sales has been raised by some analysts, but Bank said there was more demand than supply for discount stores, meaning it could take share from the likes of Lidl and Aldi, as well as smaller players.

Bank added that at Netto sites shared with a Sainsbury store, both could benefit, attracting customers who perhaps visit Sainsbury but shop at discounters for certain products.

Latest industry data from Kantar showed Aldi and Lidl sales were up 27.3 and 18.1 percent respectively in the 12 weeks to Oct. 12, versus falls for Tesco, Morrison and Sainsbury.

The market shares of Aldi and Lidl stand at 4.8 and 3.5 percent respectively, compared with 16.1 percent for Sainsbury, which is battling with Asda, part of Wal-Mart Stores Inc (WMT.N), to be Britain's No.2 grocer behind Tesco.

The Netto store in Leeds, a city with four Lidls and six Aldis, will stock predominantly own-label products, will have a focus on fresh produce and meat and will house a bakery.

Like Aldi and Lidl, cheaply priced staple British products at the Leeds store - the first of 15 planned in a northern England-based trial - were stacked on crates in no-frills fashion alongside seasonal offers such as Christmas trees.

Instead of Lidl's German beers and frankfurters, shoppers will encounter Scandinavian offerings such as pastries, red herring in curry sauce and "Kat" and "Hund" pet food, alongside UK-focused own-brand products specially developed by Netto.

Thursday's opening marks a return to the UK for the Netto name, better known in the north until it disappeared in 2010 after Asda bought its 193 stores and converted them.

Bank said the new stores would be a "complete departure" from their past, with a larger selection of products, more UK industry insight and better stores in more promising locations.

All of the 10,000-11,000 square foot trial stores are due to open by the end of 2015, with a decision on a UK-wide rollout likely to come around August if the move proves successful.

"We will definitely get to a decision fast," Bank said. "We really are confident that we will start the rollout."

(Editing by David Holmes)