Sainsbury goes deep discount

Sainsbury does deal with Netto to take on the discount supermarkets

Netto will open 15 UK stores by the end of 2015 in partnership with Sainsbury's, which like other major grocers is suffering from increased price competition

Artist's impression of Netto store (in partnership with Sainsbury's) Photograph: PR

Sainsbury's is fighting back against the rise of Aldi and Lidl in a new partnership with Netto which will see the Danish discount retailer return to the UK.

Four years after it sold off nearly 200 stores to Asda, Netto will open 15 UK stores by the end of 2015 with the first five planned for the north of England later this year. The companies said the partnership would combine Netto's low-cost operations with Sainsbury's knowledge in UK products and property. If the first batch of branches trade successfully, Netto stores will open across the country.

The partnership is a radical move by Sainsbury's to take on Aldi and Lidl, the German discounters that have eaten into the business of Britain's big foursupermarkets. Sainsbury's has said repeatedly that it will not join the supermarket price war threatened by price-cutting campaigns from Morrisons and Tesco, arguing that its superior values, such as fairtrade bananas, set it apart. Instead, incoming chief executive Mike Coupe is trying to carve out his own slice of the discount market.

Coupe, who takes over from Justin King as Sainbury's boss next month, said: "This joint venture provides a great opportunity for us to gain exposure to the high growth discount market for the first time in partnership with [parent company] Dansk Supermarked, whose expertise and values are a strong complement to our own.

"If successful, this trial has the potential to open up a new long term growth opportunity for us complementing our fast expanding convenience, online and non-food businesses, as well as our existing supermarket estate."

Dave McCarthy, an analyst at HSBC, said the major grocers were being beaten by discounters and pound stores because they were failing to invest sufficiently in cutting prices. He suggested Sainsbury's investment in the discount chain was therefore misplaced. "Sainsbury's has the attitude 'if you can't beat them join them', but to us this is a tacit admission its core model can't compete," he said.

After the longest recession since the second world war and years of falling living standards, British households are shopping around for value and buying more of their basic goods from Aldi and Lidl. Discounters are expected to see their share of the grocery market more than triple to about 15% in the next five years as a result. King has said the habit is now entrenched and that the supermarkets need to adapt to the new reality.

Sainsbury's has survived the march of the discounters better than Tesco and Morrisons but price competition helped sales fall for the second straight quarter after nine years of growth.

Netto struggled to make its mark in the UK on its last attempt, and in 2010 it sold its 193 stores to Asda for £778m. Per Bank, the former Tesco executive who is now head of Dansk, said the new stores would be completely different from the old format, selling fresh food, Danish breads and pastries baked at in-house bakeries with 2,100 products compared to just 1,200 before. The stores will also be bigger at just over 1,000 sq metres (11,000 sq feet) compared with 750 sq m before, enabling Netto to sell non-food goods including homewares and seasonal specials such as camping equipment.

"The UK discount sector is growing very rapidly and we believe now is the right time to be entering the UK market," he said. While Netto came up short against rivals Aldi and Lidl on it last venture into the UK, Bank said its revamped approach would be more successful. "We are competing toe-to-toe with (those discounters) in Poland, Sweden and Germany and we believe we have got a track record and can come back and make it better this time," he said.

Each company will put £12.5m into the joint venture. They expect start-up costs to incur a loss of £5m to £10m each of them in the year to March 2015.