Why Sainsbury Decided To Close Down Netto Stores – A Research Report

Research Objectives and Questions

Netto is a Danish discount store chain based off Copenhagen, Denmark. Through the course of its history it has been closed on two occasions in the UK, one in 2010 when it was sold to Asda and the other one when Sainsbury along with its partner Dansk Supermarked in 2016 terminated their trial project of three years to bring back Netto into the UK market as a means to compete with the emerging competitors Aldi and Lidl in the discounted retail sector.

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The decision to terminate the joint venture has rendered 300 of the 400 employees who worked for Netto UK at the time is a position of uncertainty regarding the job (Butler 2016). The reasons for the move at a time when Netto was reportedly meeting the set expectations are thus worth pondering. It begets the question of what may be the factors that drove the retail giant Sainsbury to abort their business venture. The paper utilizes a combination of quantitative and qualitative methods to answer the research question and objectives as laid down in the following sections.

This paper thus seeks to investigate and analyse the causes and motivation behind the decision taken by Sainsbury and Dansk Supermarked to close down all of Netto’s operations at all thirteen functioning outlets. The study is based on primary data and secondary data. Interviews on managers and survey of customers were done to obtain data and market data was collected through secondary sources to carry out the analysis (Zikmund, Babin, Carr and Griffin 2013).

The primary question being addressed through the research is to determine the reasons why Sainsbury decided to close business operations of its subsidiary Netto in UK in 2016. A question in relation to the primary research question includes whether the decision was impacted by long term considerations of business and the rationale behind it. Another point of consideration that is to be addressed is whether competitors Lidl and Aldi had an impact on this decision and how so.It also takes into consideration whether any other reason could have affected the decision or not and how.

The objective of the research is to determine whether the decision to terminated the joint venture by Sainsbury impacted the company in any positive way and whether they were successful after execution of the decision in improving business or not and the reasons why Netto had proved to be not worth further investments by the company. Additionally, the other objectives include creating an in depth understanding of how Netto failed to garner enough business to evolve to a much larger scale of business through the joint venture by its parent companies.

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Mixed Research Design

Analysis Method

The research had made use of information gathered as per the objectives laid down in the previous section. The analysis of the information for investigating the specified research questions has been done in two parts. First a quantitative approach of objectively reading the available information and understanding the underlying situation that may have drove Sainsbury to take the decision was conducted. A survey questionnaire design has been used to conduct a quantitative analysis of customer perception regarding Netto, that is to identify whether it was doing well enough as a business or not (Yin 2017 ). A comparison of figures with its main competitors in the discounter sector as well as figures representing customer reception and interest was also taken into account. Additionally, it was hypothesized that Netto could draw customer interest as well as competitors Aldi and Lidl. This hypothesis was also tested for validity using statistical techniques as per Anderson et al. (2016). This was then supplemented through an in depth contextual analysis of data on the basis of PESTLE concepts has been done using information collected via personal interviews with managerial personnel from Sainsbury and Dansk (Brinkmann 2014). This was then used to conduct thematic analysis to identify the various political, economic, socio-cultural, technological, legal and environmental factors that may have led to the decision to terminate the ongoing three year old joint venture between Sainsbury and Dansk to re-establish Netto as their child company in UK. Thus a mixed research design has been used for the purpose of this study (Collis  and Hussey  2013).

The research made use of information gathered through personal interviews of three managers who belong to the Sainsbury group and the Dansk Supermarked group. A semi-structured interview structure was followed and the questions have been provided in the Appendix section of the paper. A total of 45 responses were collected via an online survey questionnaire from people who have been customers of Netto UK when it was under Sainsbury and Dansk (Cadle, Paul and Turner  2013). Data on company performance was collected from secondary sources such as Kantar market data.

Quantitative Analysis

The results of the online customer survey questionnaire on customers of the discount retail chain in the UK, addressed how customer response garnered by Netto may have played a role in the formulation of the decision to discontinue Netto store chain in the UK. The as descriptive results of the survey are hence discussed (Peck, Olsen and Devore 2015).

Results of Online Customer Survey Questionnaire

The customer survey of Netto, conducted through online questionnaires revealed that Netto had a mean customer rating for its customer service of 3.44 on a scale of 1 to 5. The following figure shows that mode was found to be 4. So as far as customer service was concerned Netto was found to have good ratings.

Figure 1

40%of the respondents who have been to Netto and responded to the online survey said that they did not find that Netto’s inventory met all their needs. 31.11% said that Netto met their needs on some occasions but on others their inventory fell short of the requirements that they had and 28.89% of the respondents responded positively that Netto had been able to meet all their requirements in their visit to its stores. The following figure shows the situation as described.

Figure 2

Again, looking at the frequency of visit to a Netto store by a customer, it was observed that among the respondents of the survey, 33.33% reported that they made visits to a Netto store with a frequency of less than once a month. 24.44% visited a Netto store once a month, 22.22% visited a store twice a month and 20% visited a Netto store more than twice in a typical month. Thus it was seen that Netto lagged in the aspect of intensity of visits by a typical customer.

Figure 3

Netto ranked sixth as per customer preference score in comparison to other existing discount retail chains such as Wilko, TJ Morris, Lidl, Aldi and Farmfoods as per the customer preference scores reported for the same among the survey questionnaire responses. The average preference score for Netto was found to be 2.91 is comparison to Wilko which was ranked first with a score of 3.71, TJ Morris which had a score of 3.51, Lidl which had a score of 3.31, Aldi which had a score of 3.44, Farmfoods had a score of 3.42. Figure 4 shows the comparison in scores.

Figure 4

Finally, Netto was found to have an average overall rating of 5.822 and mode of the ratings score was observed to be 5. Thus although Netto does not have bad ratings, its ratings were not found to be exceptional either and with such stiff competition and Netto already lagging behind, as suggested by figure 4, the need for investment to bring it back as a tough competitor is supported. Figure 5 shows the ratings that Netto received in the survey.

Comparative Market Change Data for Sainsbury, Aldi, and Lidl

Figure 5

The percentage change in growth of 2016 and 2017 compared to corresponding previous year for Sainsbury, Aldi and Lidl shows that , Aldi and Lidl have maintained high market  growth rate in the UK whereas Sainsbury has lost market share in UK as per Kantar market data. Thus the competitors of Sainsbury have continued to acquire market whereas Netto failed to make a dent in their progress and prove to offer significant competition. The following figure 6 gives the comparative market change data for the three companies between May of 2015, 2016 and 2017.

Figure 6

(Source:  Kantar World panel , 2018)

The conjecture that Netto could invoke equal customer preference as its main competitors Aldi and Lidl was put to the test. The null and alternatives are hence defined.

  • H01 : Customer preference score for Netto is equal to Aldi

Versus

H11: Customer preference score for Netto is less than Aldi

Using t-test the null was rejected at 5% level of significance (Peck, Olsen and Devore, 2015). Thus the conjecture that Netto was as successful in terms of customer preference to Aldi ought to be rejected.

  • H02 : Customer preference score for Netto is equal to Lidl

Versus

H12: Customer preference score for Netto is less than Lidl

Using t-test the null was rejected at 5% level of significance (Peck, Olsen and Devore, 2015). Thus the conjecture that Netto was as successful as Lidl in terms of customer preference ought to be rejected.

The analysis of the interview transcripts of the managers from Dansk Supermarked Group and Sainsbury tried to address the factors that could have driven the partner companies to terminate their joint venture and close down all Netto stores in the UK, using a PESTLE framework. Three themes were identified, namely, the Challenges faced, Netto’s performance, and Future Plans.

The managers whom were interviewed all maintained that despite the fact that the sales of the Netto stores during the trial business was satisfactory and in line with the projected sales and expected targets, concerns about the large scale implementation and subsequent comparative success of Netto with respect to its key competitors such as Aldi and Lidl are what drove the company management to terminate future operations. The two groups had joined hands to counter these two upcoming companies in the discount retail store market. Manager C from Dansk Supermarked said that despite having experience in the discount store market, Netto had not been able to achieve the brand value and brand recognition as Aldi and Lidl had achieved. He added that, “Aldi and Lidl have each had a rapid programme of new store openings matched with huge advertising and marketing spend to keep themselves front and centre in consumers’ minds” ,  and said that  a venture to rival these companies would call for huge investments especially since the brand recognition aspect did not work out. Thus, economically there lies a major issue.Netto’s revival in the UK market also faced a number of other challenges ranging from Environmental as well as Socio-cultural reasons. Referring to the theme, Challenges, acquiring property for the physical outlets in the UK had served to be a key challenge as reported and accepted unanimously by all the managers. There had been 16 outlets all throughout the UK and for expansion of the retail chain, securing property in the challenging property market while following sustainable business plans seemed to clash with the other interests of the invested parties. Manager B from Sainsbury added that, “It has been seen that although there are many in the UK who are potential shoppers from discount stores, but the number of shoppers drawn through promotions is gradually declining year by year”. Thus with Lidl and Aldi already having established themselves and Netto’s key marketing strategy in Denmark being promotions which unfortunately is not being able to achieve the same kind of success, Netto would need a lot of effort to pull itself up as a strong competitor. Compounding that information with the future plans of Sainsbury, as addressed by the theme Future Plans, with its acquisition of Home retail group, and the implied scale of investment that would call for in its core business, Manager A from Sainsbury added that such a situation made for the task of investing in Netto to transforming the business to a large scale economy posed to be unfeasible and hence their decision to let the opportunity go. He also added that penetrating the discounter retail market was not the sole intention of Sainsbury and Dansk and that the venture served as a learning exercise to further develop operational efficacy in their own core business and this was also corroborated by Manager C from Dansk Supermarked as he said, “We have thoroughly enjoyed the collaboration with Sainsbury’s and will now apply key learnings and insights within our business to deliver added value for our customers and owners.” Manager B from Sainsbury thus summed up the decision to be the result of their review of the customer insights, trade data and high expansion costs.

Conclusion

Based on the findings of the qualitative and quantitative analysis of the relevant data, it can thus be concluded that the decision to close down Netto stores by Sainsbury and Dansk Supermarked was fuelled by Netto’s incapability of providing competition to the discount retailers Aldi and Lidl, in the format of trial business that it was being operated in and that the parties were not willing to invest more funds to the business venture that is required for Netto to get to a position where it could prove to be a significant competitor in the UK market. The reason for so, was determined to be, Sainsbury’s new deal with Home Retail Group which naturally required a lot of investment and thus possibly put strains on their funds, making Netto the proverbial sacrifice.

References

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2016. Statistics for business & economics. Nelson Education.

Brinkmann, S., 2014. Interview. In Encyclopedia of critical psychology (pp. 1008-1010). Springer New York.

Butler, S. (2016). Netto’s UK stores to close as Sainsbury’s calls time on joint venture. The Guardian. [online] Available at: https://www.theguardian.com/business/2016/jul/04/netto-uk-stores-to-close-as-sainsburys-calls-time-on-joint-venture [Accessed 16 Apr. 2018].

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Collis, J. and Hussey, R., 2013. Business research: A practical guide for undergraduate and postgraduate students. Palgrave macmillan.

 Kantar Worldpanel, 2018. Grocery Market Share – Kantar Worldpanel. [online] www.kantarworldpanel.com. Available at: https://www.kantarworldpanel.com/en/grocery-market-share/great-britain/range/19.07.15/13.08.17[.

Peck, R., Olsen, C. and Devore, J.L., 2015. Introduction to statistics and data analysis. Cengage Learning.

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Zikmund, W.G., Babin, B.J., Carr, J.C. and Griffin, M., 2013. Business research methods. Cengage Learning.