If there's a question mark over the future of cheap food, the grocers don't seem to be taking much notice. Asda and Tesco have set out their stalls to match the hard discounters' low prices, albeit with more frills. And, ironically perhaps, one discounter has decided to meet them in the middle - by adding a few frills.

Over the past year, Netto Foodstores has been working hard to differentiate itself from its fellow hard discounters - and demonstrate it can compete with the big four not just on price, but also quality and range. As well as overhauling its stores to make them look more like standard supermarkets, it has embarked on an ambitious expansion plan and started upping its SKU count from 1,100 to 1,400.

It's all part of Netto's bid to transform itself from a discounter to a full-service grocery retailer, says MD Richard Lancaster, in his first interview since taking up the reins at the UK division of the Danish chain last January. And there's more to come, he promises. But with competition from the big four intensifying, he knows he's got his work cut out.

Asda and Tesco have piled on the pressure of late, Asda pledging last year to learn from the hard discounters and Tesco this week price-matching Lidl and Aldi on more than 2,000 lines and launching 300 new 'no frills' Lidl-style products, with 200 more to follow.

While the discounters may be seen as a threat, discounting is clearly seen as an opportunity and it's not hard to see why. Despite initial predictions that the hard discounters would fail to take off in the UK because of their late entry to the market and the pre-emptive "soft discounting" strikes from the big four, they have steadily built their market share and now account for 5% of the total grocery market, according to Nielsen. Netto, the third-biggest player with just a 0.8% share of the market, has until now been considered the least threatening of the three. That could be about to change.

Lancaster, who joined Netto from Sainsbury's, believes the retailer can break through the £1bn sales barrier in the UK by 2010 (from £627m in December 2006). As part of an aggressive expansion programme, he plans to open 25 new stores a year starting from this month.

Despite the challenges involved, he is looking for stores and sites that are fit for purpose rather than relying as par for the course on secondary or even tertiary sites. He certainly has the clout behind him to make it happen. Netto owner AP Moller-Maersk Group has given Lancaster's plans its blessing - and financial backing.

"There is a significant amount of capital investment being made by the parent company," says Lancaster, but, he adds, a change in culture at the retailer is just as core to his ambitions. "Internally, Netto was thought of as a discounter but now we think of the business as a supermarket, which provides more opportunities," he says, chiefly in the areas of format, merchandising and product range.

Netto has already embarked on a major refurbishment programme of its 180-plus stores in a bid to emulate the format of a standard supermarket. As part of a rolling programme that will see up to 20 stores revamped each year, stores are being given new lighting, flooring, shelving and refrigeration. "Our new-look stores are more akin to other supermarkets, with new product flow systems, new signage and point-of-sale materials," says Lancaster.

The strategy is already paying off. New PoS materials began to appear in stores last May, with coloured shelf-edge 'barkers' replacing the basic white paper labels that had previously been used to highlight in-store offers. So effective were some of them that they resulted in sales uplifts of 15% to 20%, claims Lancaster.

Improved category signage has also been introduced, with supplier-branded materials now positioned directly over relevant fixtures.

Further initiatives in the pipeline include a food-to go offer, which has been successfully trialled in nine out-of-town stores and is now poised for rollout. Tobacco, greetings cards and etopup will be evaluated once a trial has been completed.

"We believe that if you go to the stores now then you'll be pleased, but if you go in six months' time then you'll be delighted by what you find," says Lancaster.

Netto has always boasted a higher percentage of branded goods than its hard discounter rivals - at about a third of its range - but now it plans to increase its total SKU count further to 1,400.

The key is to offer width not depth, says Lancaster. Eighty new products have already been added: 20 chilled and 60 ambient. The same numbers will be added during phase two of the rollout this year, with Lancaster hinting at further activity in chilled.

Lancaster has also stepped up its programme of benchmarking products in terms of quality and price against standard rather than value equivalents at the major grocers, an initiative kicked off by predecessor Claus Waedeled.

"A large proportion of our products were where they needed to be in terms of quality but there was not the rigour to constantly test them and update the recipes," he explains. "We now have total confidence in all our products."

The next step is to upgrade the labelling on all Netto own label products, he says. "We've got the quality of the product right, so getting the presentation of products right is next. We'll step up the pace in 2008."

Of course all this will put a strain on its distribution network, but Netto is expanding it to cope with the anticipated growth in its estate with a new distribution warehouse planned for March 2009 near Warrington in

Cheshire.

This year is already shaping up to be an important one for Lancaster, who admits Christmas was a bit of a distraction, albeit a welcome one. "By the time we fully understood the business and had plans in place, Christmas arrived," he says. "Now we have lots of schemes ready to go."

His "low prices with frills"vision is certainly bold. But if he can pull it off, it won't just be the other discounters that need to watch out.nRichard Lancaster

Lancaster left Sainsbury's, where he was in charge of trading and marketing for Sainsbury's Local, on 20 October 2006

He was appointed first British Netto Foodstores UK MD on 2 January 2007

He has put in place plans for 25 new stores per year from January 2008

He also plans to grow Netto's branded range and increase the total number of SKUs from 1,100 to 1,400

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