Sainsbury’s ditch discount chain to focus on core
After several recent posts on Tesco focusing on its core business, here and here, today it is the turn of Sainsbury’s to take the headlines. CEO Mike Coupe announced that the company was closing its 16 Neto discount stores, abandoning a joint venture with the Danish Dansk supermarket group, as reported here.
Below are a few takeouts from this move by Sainsbury’s.
1. Focus on the core
On paper, you can see the logic in Sainsbury’s deciding back in 2014 to extend its brand portfolio with Neto as a way of fighting back against the discounters, Aldi and Liddl. After all, the dynamic discounter duo have driven double digit growth for several years, and now have a combined share of c.10% in the UK.
However, the challenge Sainsbury’s faced is the fragmentation of investment across the extended portfolio, both in terms of money and talent. As Mike Coupe commented, “To be successful over the long-term, Netto would require significant investment in a challenging market.” He has decided that a better ROI and ROT (return on talent) will come from concentrating on the core Sainsbury’s brand: “We have made the decision not to pursue the opportunity and instead focus on our core business.”
2. The perils of being a “follower brand”
Netto faced an uphill battle for profitable growth in the UK, given that it was the number three brand in the market with only 16 stories, up against Lidl with 629 stores and Aldi with 560 stores. To put this scale disadvantage into perspective, the planned annual new store openings for Aldi and Lidl combined of c. 110 are seven times the size of the entire Neto chain. And data from multiples categories shows that ROI is directly linked to relative market share (see below), meaning that Neto was probably struggling for financial viability. This is shown by Sainsbury’s decision to close down the business and write down the value to zero, rather than try and sell it.
A similar story happened at BA back in the late 90’s, when CEO Bob Ayling launched a low cost airline to compete head on with easyJet and Ryanair. After his departure in 2000 the company decided to sell Go. The business was sold to 3i in 2001 for £100 million, before being snapped up a couple of years later by easyJet.
The cases of Sainsbury’s and BA are examples of businesses who perhaps failed to accurately asses their “ability to win” when stretching beyond their core business. We often see this on brandgym projects. Marketing teams are much better at evaluating the “size of prize”, to do with the business opportunity, than they are the ability of their company to create a sustainable, profitable business. Ability to win when stretching is not just about the value proposition and product/service you develop. It also requires a fit in terms of culture and competence. Sainsibury’s and BA both made a costly and time consuming discovery that running a high quality service business with a sense of aspiration and premiumness is very different to running a low cost discount business.
In conclusion, Sainsbury’s decision to ditch their direct discount brand is another example of how to re-focus on your core business for brand success.