Sainsbury’s sees online rise, but is propped up by Argos

SUMMARY:

Sainsbury’s food and groceries interests remain under pressure from the Aldis and the Amazons, but it’s picked up a useful counter-balance from its Argos acquisition.

It hasn’t been the best of months for grocery chain Sainsbury’s reputatation as an online retailers, despite a 20% year-on-year uptick from digital services.

But Sainsbury’s has had some questionable PR. The first was something that eventually troubles most e-tailers – an outage of service that resulted in a lot of customers on 4 March not receiving their orders. This was attributed to the inevitable “technical difficulties”.

The second incident was much more of a ‘shoot yourself in the foot’ moment when a customer went to the media with a story that Sainsbury’s had delivered her 53 item order in 23 bags, including one bag containing a solitary mango. In-store, that would cost a customer £1.15, but because of an online flat rate of 40p for bags, the over-bagging didn’t cost as much.

OK, it’s all a bit trivial in the wider scheme of things – and particularly when Amazon packaging can be excessive in the extreme. But in the increasingly competitive online grocery business, the more eco-sensitive customer might well regards this plastic bag bonanza as a factor in deciding which provider to use.

That said, Sainsbury’s CEO Mike Coupe insisted this week that he’s pleased with the wider progress of the firm’s online proposition:

We have grown our online grocery business by 20% over two years, 7% year on year in this [latest] quarter, so we’re pleased with that performance.

So in the previous quarter, online sales accounted for 18% of the company’s overall turnover, so you can see that the business is very rapidly moving in that direction.

That shows the way that the market is changing, he said, but repeated that he’s not going to set Sainsbury’s chasing marketshare too aggressively:

We’ve said consistently [that] we’re not going to chase volume for the sake of chasing volume. For us, it’s about building sustainable business which serves Sainsbury’s customers brilliantly well.

Some of this revolves around online content, he added:

Examples of that, we’ve now integrated our homemade recipe site with our grocery online site, so when you click on a recipe you can download the ingredients automatically into your shopping list.

But much of the strategy is still pinned on convenience and making life easier for customers, he said, both at Sainsbury’s and at Argos, now owned by the grocery chain. Coupe said:

Something like 25% of transactions are now amended or ordered using our online grocery app.And, of course, we shouldn’t forget that the Argos business itself is now pushing towards 60% initiated online or on mobile phone. So that business is to all intents and purposes an online business.

Argos in fact was responsible for counterbalancing a decline in Sainsbury’s sales. George Salmon, equity analyst at Hargreaves Lansdown, commented:

With Argos numbers again the highlight of results, Mr Coupe will no doubt feel vindicated in his decision so far. However, an uncertain outlook on the foods business means the champagne will have to stay on ice for a while yet.

According to recent numbers from Kantar Worldpanel, Sainsbury’s market share has slipped by 0.3 percentage points, leaving it with 16.5% of the market, behind Tesco on 27.9%, but ahead of Asda on 15.7%.

2017 will see further investment in the grocery chain’s digital and omni-channel capabilities, including an expansion of its same-day delivery offering. This was launched in three stores in the South-East lastJuly and expanded to 30 stores across the country by the end of December. Customers in the catchment area of these stores can order groceries for home delivery in the space of six hours for a fee of £5-£7 or choose click & collect within four hours for a £2 charge. Sainsbury’s also expects to have rolled out Click & Collect to 200 stores by the end of March

My take

Argos is vulnerable to the ongoing weakness in sterling and the fluctuating exchange rates since the Brexit vote last year. Coupe admits himself that making a long term success of the acquisition will make or break his career as CEO. With price pressure increasingly on Sainsbury’s as a result of the rise of Aldi and Lidl, getting the online proposition right is going to be essential. Argos brings with it much experience in multi-channel retailing, but how that’s mirrored across Sainsbury’s remains to be seen.

Image credit - Sainsbury's

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