Asda’s purchase of Netto could be a wise move

Asda’s purchase of Netto was widely renowned as Asda attempting to buy market share to keep themselves ahead of a resurgent Sainsbury, the struggling Netto with a mere 0.7% of the market was an obvious choice for a sale when parent company Moller Maersk were looking to shed some business.

There was little criticism when Tesco and then Sainsbury’s aggressively expanded their convenience offering with the acquisition of T&S and Bells/Jacksons respectively, it was seen a logical next step for them to be able to expand their convenience offer, buying existing businesses with established customer numbers and sites makes the transition much easier.

Why then, does it seem that the Asda purchase of Netto’s estate (193 stores) for circa. £700m is seen as a high price to pay? It does work out at around £4m per store admittedly and Netto stores are not known for their glamorous locations but they do have a presence in areas that Asda will struggle to expand into, with planning regulations getting tighter and most of the land owned by Tesco(!) it’s becoming ever harder to find sites for superstores that Asda prefer to trade from.

Analysing the store estate that Netto have against existing Asda locations (about 35% of the way through) there are some that are clear overlaps so will have to be sold, but there are some that some 15 miles from the nearest Asda, these are stores that will offer Asda a real presence in a town they would otherwise not be represented in, not forgetting that these stores trading as Netto may take £50-£80k per week, chicken feed when the superstores will clear that (and then some) in a day but remembering but this is trading as Netto.

Asda have stated they will put more lines into the stores, possibly offer some George lines, click & collect and have the Asda experience, name and service to boot. Customers didn’t know what Netto stood for, they weren’t particularly cheap on everyday products and tended to focus on the non food specials that became not so special in comparison to Lidl and especially Aldi’s Mon / Thursday offer.

It also gives Asda a supermarket estate that they didn’t have before, they were looking to move into smaller stores but not convenience like JS Local and Tesco Express which open longer but typically charge 5-10p more on the everyday staples. This would go against the EDLP ethos that underpins Asda’s strategy and it’s not something that Asda wants to do, hence their delay in heading into the smaller store format.

Just because Netto made their estate worthy of a 0.7% market share with stores taking under £100k per week doesn’t mean Asda will be unable to achieve anything higher.

It’ll be interesting to see if Asda can maintain the availability and service in these smaller stores and there will be a lot of finding of feet in the early stages but I think these stores could prove to be goldmines in the areas where Asda would otherwise have no presence.

We’ll keep a close eye on developments here on our blog.

Our weekly retail insight email covers the latest events in the industry; store operations, market developments, future thoughts, store visits and new promotional packages are all covered. Every single week. Please visit our email retail insight page for further information around subscribing.

Grocery Insight provide market insight on the UK sector with a focus on individual retailers and the wider market too.

Our insight is useful to various stakeholders and due to our store based focus our insight can be delivered to suppliers to focus on growth opportunities, analysts and investors to assess the business performance and long term outlook and retailers themselves to assess best practice.