Keep Your Enemies Close…

Once I’d stopped laughing at Asda after Sainsbury’s announcing a joint venture with Netto a few weeks back, I started to applaud the move.

Amid the mass hysteria in the traditional mults over the relentless march of the discounters, I’ve been trying to look from a more pragmatic angle. Though clearly the economy and the continued squeeze on shopper’s spending power are driving people to the likes of Aldi and Lidl, the fact that they have become so much more accessible following a fast expansion in sites is also a big driver of their success.

A lot of trends have emerged which point to the increase in the number of Top Up missions. It makes sense really – lots more big shops through the internet coupled with an unprecedented number of grocery stores of all sizes on your doorstep.

In the context of my current job, I was amazed that none of the retailers I work with were considering proximity to the discounters as a way of understanding where the money was going. But when you look at it, even at a category level, there are some very interesting correlations which tie in nicely with the observations about shopper behavior.

For the analysis, I grouped together stores by format and whether or not they had a Lidl or Aldi in the same Postcode Sector as them. The results were fairly interesting, and in some cases, not that unexpected. Smaller stores in poorer areas were bearing the brunt of the impact and significantly overindexing in their share of sales decline. But what was interesting was that larger stores seemed in many cases to be benefitting from having a discounter neighbour. Perversely, it appears that the increased demand for discounters drives footfall to the larger mults who then get a benefit from a complimentary shop.

With this in mind, the announcement this week that the first two new-generation Netto stores will be using dead space in existing Sainsbury’s hypermarkets makes absolute sense. Having a double-reason to shop at the same location is a great idea – it enables “savvy shopping” while minimizing fuel costs. It will also be interesting to see how the Netto brand works in decent locations. At the heart of why I believe the Asda acquisition of Netto was so fundamentally flawed was the fact that the old Netto property portfolio had a dire location strategy. If you are a smaller store, you need easy access rather than being on a retail park, unless that retail park has a great anchor store that will draw in footfall.

That doesn't mean there isn't some risk to the core business - clearly a Netto on the doorstep will take some sales away from the host Sainsburys store, but this will tend to be across lower margin high volume grocery products. With the potential to attract non-Sainsburys shoppers to the site and therefore into the Sainsburys for less mass market products, as well as clothing and general merchandise, the upside should more than account for the downside.

We’ve seen a number of attempts by the old guard to counter Aldi and Lidl – be it competing with tertiary brands (Tesco), pulling the price lever so hard it breaks (Asda) or opening up an upmarket post-industrial format store (M Discount). None of these has really worked, so taking the discounters on at their own game but without damaging your core brand, could yet join them on the scrapheap. But, for some reason, my gut feel is that this is a runner.

And it gives me yet another reason to laugh at Andy Clarke.