British grocer J Sainsbury has teamed up with Denmark's Dansk Supermarked to bring the Netto brand back to the UK and take on fast-growing German discount chains Aldi and Lidl at their own game.
Sainsbury's and Denmark's largest retailer said on Friday they would spend an initial 25 million pounds ($43 million) setting up a joint venture that will open 15 Netto stores in the UK by the end of 2015.
The deal, which will see a first store open in northern England later this year, marks the first major strategic move of Sainsbury's chief executive designate Mike Coupe, who will succeed Justin King after next month's annual shareholder meeting.
The Netto stores will have a focus on fresh produce and meat, along with an in-house bakery offering fresh Danish breads and pastries. Products will be predominantly own-label, though there will be some brands.
If the trial is successful, Netto stores will be rolled out across the UK.
Sainsbury's, in common with Britain's other "big four" grocers - market leader Tesco, Wal-Mart's Asda and Morrisons - has been losing market share to Aldi and Lidl.
In response Tesco, Asda and Morrisons have said they are cutting prices while Sainsbury's has vowed to remain competitive, raising concerns among analysts of a possible price war hitting earnings across the sector.
The UK discount sector is worth about 10 billion pounds in annual sales, a figure forecast to double in the next five years, according to data from industry body IGD.
"You can clearly see the growth of the discount sector and we've been thinking about how we might combat that over a period of time," said Coupe.
"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," he said, adding talks with Dansk Supermarked started about a year ago.
Jon Copestake, retail analyst at the Economist Intelligence Unit, said the trial was relatively low-risk for Sainsbury's given the small amount of capital involved and allows the grocer to compete in the discount segment without undermining its own retail brand.
The Netto name left the UK market in 2010 after Asda purchased its 193 stores for 778 million pounds and converted them to the Asda brand.
"We are coming back with a much better Netto than we had last time," said Per Bank, CEO of Dansk Supermarket. He said the stores would have over 2,000 products versus 1,200 previously.
"We compete well against Aldi and Lidl in all the other markets where we are present (Denmark, Poland, Sweden and Germany)," he said.
Bank described the venture as "a perfect match", adding: "The Brits and Danes - they do work well together".
Netto UK will be a separate company with a management team led by Morten Moberg Nielsen, previously managing director of Netto International in Germany.
Sainsbury's and Dansk Supermarked will each initially invest 12.5 million pounds in the venture.
Taking account of start-up costs, both expect to incur a post-tax loss of about 5-10 million pounds up to March 31, 2015.
Shares in Sainsbury's were down 0.8 percent at 318.7 pence at 1140 GMT, valuing the business at 6.1 billion pounds.
