Netto’s growth imperative

Scottie, the black dog in the logo of the Danish discounter Netto, plays the starring role in a funny web-postcard one can send via the Netto website. It shows Scottie mounting a similar dog with the message ‘A new Netto is on its way…We are working on it!’ Given Netto’s expansionist zeal as expressed by the country managers in its markets of operation, Scottie will not be left at peace in the near future.

“I was a little bit surprised coming here from Denmark six months ago, that Netto does not have a higher market share. People don’t seem to know what discounting is about. It’s totally different from other European countries. In Denmark we have a population of only five million people, but we have 339 Netto stores.”
PlanetRetail quotes the words that Claus Waeleded spoke in April 2004, when the managing director of Netto UK attended the opening of a new Netto store. During that occasion Waeleded unveiled an ambitious plan to provoke an explosion in the popularity of discount shopping in the UK. He foresaw a potential of 1,000 Netto stores in the UK and told the audience that Netto wanted to expand nationwide with an annual expansion rate of 20 stores for the years 2004 and 2005. Given the number of UK Netto stores at that time (136), the ambitious Danish discounter would have to maintain that pace for the next 44(!) years in order to reach the 1,000 store number.
More recently, in Poland Netto showed its expansionist ambitions as well. In November 2005 PlanetRetail quoted Netto’s country manager Slawomir Nitek as saying that “shareholders are satisfied with the company’s results and want to accelerate expansion in Poland.” This would mean a growth pace of 50 new stores per year and two new logistics centres by 2007. In February 2005 Thomas Hansen, deputy head of Netto’s Swedish operation, was quoted as saying that “We can be bigger here than in Denmark,” when he announced a revision of Netto’s targets. Instead of 100 new stores in the next five years, the new target was set at 125 to 150 additions to the – then – 59 Netto store base in Sweden, with an overall goal of 300 to 400 stores.

Opportunities for expansion
Claus Juel-Jensen, CEO of Netto’s parent company Dansk Supermarked, cools down the country managers’ heated ambitions. “We do not have a specific number of stores we want to open, but as many as possible when we can find suitable stores, meaning that we are interested in both new sites and existing stores,” Juel-Jensen says, when asked about the UK expansion plans. Also on other markets where Netto is represented or new markets for Netto, he diplomatically keeps a low profile. “We still have large potential in the countries we are working in, and will make a big effort to expand our market position in these countries. Considering new countries or the internationalisation of Dansk Supermarked’s other formats, I have no comments.”
According to the UK-based researcher IGD, finding suitable sites and stores is a major difficulty for Netto in the UK. Like Aldi and Lidl, Netto is prevented from acquiring stores from UK’s multiple retailers by the Competition Commission (CC), which has ruled that any store that retailers like Morrisons or Somerfield would like to sell, must be sold to ‘effective competition’. “The CC considers that the discounters are not effective competition due to their limited product range,” IGD comments. “In August 2005, Netto wrote to the CC in an attempt to have this ruling changed, and in the same month the retailer announced the appointment of two new property directors, providing a clear indication of its future intentions.”
Expanding its Danish supermarket (Føtex) or hypermarket (Bilka) formats abroad, would be a major strategic decision by Dansk Supermarked. Juel-Jensen is unwilling to comment on that option, which would provide Dansk with ‘effective competition’, at least in the UK. Up to now, Netto is Dansk Supermarked’s only multinational brand with operations in its domestic market Denmark, Germany (in a 75/25 joint venture with Edeka, which holds the minority stake), the UK, Poland and Sweden (in a 50/50 joint venture with ICA/Ahold).

Independent management
Within Dansk Supermarked, Netto is an independently managed subsidiary. Locally, the different management teams work on a similar strategic blueprint but there is a certain bandwidth for local fine-tuning. “Generally we have the same operational strategy in each market we do business,” says Nitek. “So what is visible for your observations in different markets is also characteristic for Poland. Maybe there is one difference: in Poland we don’t offer private label, because Polish customers have little confidence in such products.”
In the UK, however, where quality private label is understood by local customers, private label accounts for 85 per cent of Netto’s assortment. There, private label is the backbone of Netto’s positioning as a discounter. Especially in the UK, one can observe Netto’s strategic move away from being a pure price player. PlanetRetail describes this as “friendlier coloured and cleaner stores with wider isles, good wine offers and changing non-food article promotions to appeal to higher income groups.” Netto’s private label is also being upgraded in the UK. Maybe to such an extent that, in time, it might also suit customers in Poland.
As the Swedish market is not very hard-discount oriented, Netto sells mostly branded goods and fresh products. Still, Netto Sweden’s deputy head Thomas Hansen foresees a downward trend for food prices in Sweden, where inflation is relatively low and – unlike Denmark – hard discounters have not yet gained a major foothold. “Chains like ICA say that they will cut prices. The market is beginning to focus more and more on price, even in areas that have been a bit more expensive,” Planet Retail quoted him in February 2005.
In Denmark, as in the UK, Netto modernised its stores and added more fresh products in an attempt to move away from a low price, hard discount image. In its domestic market, Netto also introduced a remarkable hybrid under the Døgn Netto banner, which combines discount and convenience. Døgn Netto are limited assortment stores that are small in size and consequently can have longer opening hours. In Germany, Netto decided in 2004 to add a wide variety of regional products, thereby broadening its ranges. This appeals especially to consumers in eastern Germany, where most Netto stores are situated.
Juel-Jensen acknowledges that very restrictive cost management is part of Netto’s business model, but he does not fear that upgraded cost levels will hurt Netto’s business in the low margin discount sector. “We are orientating our assortment towards our customers and not towards a specific model,” he says. “Many customers visit our stores because of the low prices, but also because of the time they save as our stores are located in the vicinity of residential areas. The size of our stores is also a high priority for our customers as they can do the shopping fast. Netto is smart shopping!” Smart shopping is the payoff Netto uses when pointing out its new positioning away from lowest-price only.

Focus on organic growth
The acquisition in 2001 of 27 soft discount Suma stores in Denmark is an exception to the rule that Netto prefers organic growth. In Germany, for instance, it seized the opportunity in 1990 as the availability of low priced real estate in the former East Germany allowed for rapid expansion. In 1992, Netto Germany established a joint venture with Spar AG to stimulate its expansion. Also in Sweden, Netto seeks expansion via a joint venture with a local partner (ICA). In the UK and Poland Netto operates without a local partner, looking for organic expansion both via new construction and buying or renting existing retail locations.
In order to prove the country managers’ growth ambitions right, it is of vital importance to Netto to secure additional locations in its markets. Given the problems raised in the UK by the Competition Commission, Netto will be keen on participating in new retail property development. According to IGD, Netto in the UK already acquired complete retail developments and leases space to other retailers.
In Poland, Netto aims for 30 new stores and a logistics centre in south Poland this year, and for 2007 a logistics centre in central Poland to spur further growth and expansion. IGD states that Netto may well have to target smaller towns in Poland with a population of some 5,000 to have less competition and lower site costs in order to meet its growth targets. Nitek however states that Netto will continue to look for plots of land in towns of at least 10,000 inhabitants.
In 2004, difficulties in finding suitable locations already played Netto false in Germany. There the discounter targets locations in towns with a minimum size of 4,000 inhabitants. Between 2000 and 2004 the store number increased from 167 to 233 and PlanetRetail forecasts a modest annual growth pace of some ten stores in the years to come. It expects a similar growth pace for Netto in its domestic market of Denmark, while the expected annual growth in the UK (25 stores), Sweden and Poland (30 stores) to be higher in the coming years.
Juel-Jensen is unwilling to comment on new markets of entry for Netto, but Norway, the Baltic states and the central European markets of Czechia, Slovakia and Hungary may well be on the agenda. Expansion in Norway was already planned by Dansk Supermarked’s joint venture with ICA in Sweden. Dansk Supermarked’s hypermarket banner Bilka would be used here, but these intentions were never put into practice.
Last year Lidl set up shop in all three of the Baltic States plus Denmark. In 2004, it opened its first discount store in Norway. In the central European states it has a longer history of rapid growth. Competition for Netto is therefore heating up and expansion of its still limited international presence is vital. If organic growth remains Netto’s primary growth vehicle, Scottie faces a tough schedule for the years to come.

Strengths
• Strength of discount format Netto - this has enabled the group to expand internationally, which to date has been limited to Germany, the UK, Poland and Sweden.
• Part of the AMS alliance – Dansk Supermarked is a member of the AMS marketing alliance and Agentrics (the new combination of WWRE and GNX). It is therefore relatively more open in its sourcing operations than Aldi and Lidl, which do not participate in any buying alliances. Netto has more independence from Dansk than the Føtex or Bilka formats and often operates independently in its sourcing operations. However, where beneficial, it can source jointly with Dansk or utilise the AMS or Agentrics.
• Strong domestic market position within Denmark – operates strong brands in several formats, from discount stores to supermarkets.
• Strong growth in European discounting channel using the Netto fascia.
• Owned by larger parent companies - the Dansk Supermarked operation itself is jointly owned by Maersk and F.Salling A/S, giving it more security.

Weaknesses
• Relative weakness of other formats, such as Føtex and Bilka.
• Limited international presence compared to other retailers.
• European operations focus on highly competitive discount sector.
• Key operations are focused in difficult and competitive trading markets (i.e. UK, Germany and Poland).

Opportunities
• Further international expansion using discount format Netto.
• Entry into central and eastern European markets.
• Differentiation of discount format to compete with Aldi and Lidl.
• Expansion of other formats within domestic market and perhaps even internationally.
• Own label development - Netto could benefit from developing its own label, allowing it to generate substantial margins and have stricter control over range.
• Product range extension - customers will rarely get everything they need in Netto stores due to Netto's limited product offering and range.

Threats
• Aggressive expansion of German discounters throughout Europe (especially Lidl, which is expanding in Poland and Sweden).
• Retailer consolidation - over recent years a number of large global retailers have emerged, who are developing their global and regional sourcing capabilities, including their store format offering and are making it harder for the discounters like Netto to lead on price.
Source: IGD