COMMENT: Sainbury’s Netto risk|Co-op’s canny deal

BRITAIN has long been known as a nation of shopkeepers, a phrase attributed to Napoleon but actually first used by the economist Adam Smith, writes Terry Murden

Sainsburys hopes a stand-alone business will give it a better chance of tackling discounters. Picture: Contributed

As the high street declines in favour of online alternatives it is perhaps more accurate to say we are a nation of shoppers, or more accurately still, a nation of discount shoppers.

Sainsbury’s chief executive designate Mike Coupe has put down an early marker by striking a deal to bring the discount chain Netto back to Britain in a move that has shaken the supermarket sector.

It opens up a new front in the price war with the German discounters Aldi and Lidl who have parked their tanks on the lawns of Britain’s big four and taken a significant slice of their market share.

Coupe’s swoop proves that the German challenge is being taken seriously and that it is not regarded as a fad that will pass once the austerity era is over. Middle-class and well-to-do shoppers no longer feel any stigma in being seen with the Aldi and Lidl carrier bags, rather they’re seen as some sort of badge of discretion. By extending their product ranges into quality products, these chains have appealed to shoppers who know that they can buy their Champagne and fresh salmon in these stores at a cheaper price than elsewhere.

So, if the wealthy are also up for a bargain there is no point – according to Coupe’s logic – in merely trying to compete on quality alone. It will, however, open up two distinct fronts in the grocery sector. Marks & Spencer and Waitrose will continue to appeal to the discerning shopper who puts innovative products and quality higher on their list than price. The others will be left to fight the price war, with Tesco and Sainsbury’s also trying to appeal to the top end of the market with their special ranges.

The Netto deal marks a step-change of sorts. It is an acknowledgement by Coupe, even before he gets his feet under outgoing Justin King’s desk, that Sainsbury’s cannot win the price battle through its current proposition. In the minds of its core middle-class customer it remains associated with quality and analysts rightly say it would be dangerous to dilute that offering too much.

Establishing a stand-alone business may give it a better chance of tackling the discounters head on. The Netto deal is a joint venture with the Danish retailer Dansk Supermarked, each of whom are injecting £12.5 million to open an initial 15 stores along the M62 corridor in Yorkshire and Lancashire.

It is not without risk. Some fear that it could impact adversely on Sainsbury’s among shoppers wondering why they are paying higher prices than those in Netto. There is also concern that by helping to build momentum in an already expanding discount sector Sainsbury’s is cutting off its nose to spite its face and undermining its core offering.

Netto faces the task of rebuilding from scratch. It left Britain four years ago when Aldi and Lidl were regarded as mere bargain basement upstarts with low-grade stores. A gear change from both has seen them make up ground with the leaders. Now the Schwarz Group, which owns Lidl, is poised to overtake Carrefour this year to become Europe’s biggest grocer by gross sales. That is some challenge.

Co-op deal looks canny after TSB shares debut

MAYBE former Cooperative group chief executive Peter Marks really did negotiate a terrific deal two years ago to buy what is now TSB Bank from Lloyds Banking Group. When he boasted that he had “taken the shirt off the back” of his rival Antonio Horta-Osorio, he clearly wasn’t joking.

Whatever else went wrong at the Co-op, the £750 million that Lloyds was prepared to take for a parcel of assets including 631 branches and the Cheltenham & Gloucester mortgage business was seen as a bargain even at the time. What a shame for the Co-op that the deal was aborted because of the underlying financial mess that later emerged at the group.

On Friday, following the flotation of TSB on the London Stock Exchange, the business was valued at almost twice the size of the Co-op’s offer, its shares rising more than 11 per cent on the first day of dealing to value it at £1.45 billion.

The puzzle for stock market watchers is why it proved so popular, given that bank shares have been untouchable since the 2008 crash. Much of that is explained by the dowry handed to the TSB by Lloyds in the form of a chunky book of mortgages and a £450m “gift” to build its own IT system. Perhaps most importantly, Lloyds has promised to pick up the tab should there be any legacy issues that need to be resolved.

That last pledge gives TSB a clean balance sheet and an untarnished reputation as far as the customer is concerned and sets it up as one of the new “challenger” banks alongside Tesco. It has also been deliberately over-capitalised in order for it to ramp up loans. Chief executive Paul Pester’s challenge will be to ensure he does not overdo the push for market share by lending inappropriately.

TSB came to market with promises of bonus shares for investors who stayed with it at least a year, though there is no prospect of a dividend in the short term. Even so, there will be hard luck stories at the Co-op, which clearly missed out on a bargain.

Twitter: @TerryMurden1