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Wal-Mart’s ASDA To Acquire The UK’s Netto Stores: Will They Bring The Small-Store Concept To America?

Jim Prevor’s Perishable Pundit, June 11, 2010

We’ve written a great deal about Tesco’s Fresh & Easy and Wal-Mart, and we’ve written about Wal-Mart’s small store effort, Marketside, both here and here.

With Fresh & Easy hemorrhaging money and Marketside a bust — with expansion having been stopped — the big chains need a new vision for a small-store option.

Wal-Mart has done what big companies typically do best: it just bought such an option.

Its British subsidiary ASDA has announced that it is acquiring the British division of Netto, a small store chain — each unit is about 8,000 square feet — that is strong in Denmark and other European markets but an also-ran in the tough UK discounter market to Aldi and Lidl.

ASDA had missed the boat when Tesco had moved into small stores in the UK so, in a sense, the acquisition is just part of an effort to play catch-up. The stores will be managed differently than now… ASDA intends to almost double staff in each unit and the units will be rebranded under the ASDA name.

ASDA is paying what to American sensibilities sounds like the astonishingly high price of £4m or about $6 million per store.

This is testimony to how difficult it is to get locations in the UK. In fact, one should always take with a grain of salt the claims of how brilliant the British retail executives are compared to their American counterparts. In truth, they are protected against competition by British restrictions on building new stores. Since Wal-Mart bought ASDA, they desperately wanted to open more supercenters but that is an almost impossible thing to do on any scale in Britain. By controlling the supply of retail square footage available, Britain makes its retail executives look like geniuses.

So, in effect, Wal-Mart paid a lot of “key” money just to get the locations.

If it can operate these small stores profitably, it will probably try to bring them to America. The vision, however, is likely to be different than Tesco’s was in opening Fresh & Easy.

Wal-Mart would have two options:

One idea would be to look in America for areas that are also constrained when it comes to retail space — these are typically the most urbanized areas. Manhattan, the Loop in Chicago, Downtown San Francisco. This is where the market is in America for small box stores.

It is also where Wal-Mart has no square footage at all.

If this acquisition pans out, Wal-Mart could use this small store format to change that situation.

The second option would be to use the “new Netto” as Wal-Mart’s answer to Aldi As we mentioned in our piece Wal-Mart Swaps Strategy For Tactics. Wal-Mart is on the verge of losing a precious asset — its reputation for having consistently the lowest prices. Up to this moment Wal-Mart has not had an answer.

If the “new Netto” works, Wal-Mart has its answer and will go on a store opening whirl. Aldi currently has about a thousand stores in the US, it is easy to imagine Wal-Mart opening five times that number.

What is not clear is to what degree the new small store ASDA concept will be price competitive with Aldi and Lidl, if they can beat them in the UK, and make a decent profit doing it, they will be looking for small store locations.

We would recommend they open one in the parking lot of every Supercenter. Of course, if the new CEO sours on Fresh & Esay — Tesco may have many locations for sale!

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