Feeling the Amazon heat? Sainsbury’s makes case for Argos takeover

Profile picture for user ddpreez By Derek du Preez January 12, 2016
Summary:
The supermarket chain had a strong Christmas, but it wants to expand its multi-channel and online capabilities. Sainsbury's thinks that Argos could be a good fit.

Sainsbury's
It used to be the case that the big four supermarkets only had to worry about eyeing each other up over the Christmas period, waiting to see who beat who and who in their results.

But as we all know, times are changing, and it’s no longer safe to assume that a traditional supermarket business is going to be the one that eats into your market share. It could in fact be that small west-coast internet company, Amazon, that starts to make a dent in your sales. Even though you’ve made significant investments digital and your online sales are on the up.

Multi-channel, logistics and customer choice have never been more important and supermarkets are finding it difficult to scale up quickly on their own. Which might be why Sainsbury’s, one of the UK’s largest supermarket brands, has revealed that it has approached Home Retail Group (the owners of Argos) about a possible takeover.

Why Argos? Because it has the footprint, it has pretty decent multi-channel capabilities and the two companies share a similar customer base. It gets Sainsbury’s there quicker than it could on its own.

If the takeover goes ahead, will it be a threat to Amazon? I’m not convinced.

Christmas results

My colleague Stuart noted yesterday how some of the big names in retail in the UK saw solid performance over the Christmas period, with the likes of Debenhams seeing online sales grow by 12.1% and House of Fraser’s soar by 22% over the festive season.

We even saw this morning that Morrisons, which has struggled for the past few years, increase its online sales over the Christmas trading period by 100%, pushing its share price up.

Sainsbury’s was no different, with the supermarket claiming that it had a record period with online grocery sales growing nearly 10% and orders by 15%. Sainsbury’s said it delivered over 289,000 online orders in just one week during the quarter.

Sainsbury’s also boasted that its Christmas advertising campaign - Mog’s Christmas Calamity - which is increasingly becoming a competitive branding exercise with the other supermarket’s, nearly reached 37 million online views.

Mike Coupe, Chief Executive, said:

We have traded well during the festive period in a highly competitive market. Our stores delivered excellent levels of service and availability and we launched several new seasonal products and range improvements. As a result we have seen our market share grow in the quarter.

The Argos pitch

However, more interesting than its Christmas trading numbers, Sainsbury’s also took today as an opportunity to discuss its approach to Home Retail Group (which owns Argos) about a potential takeover and laid out its pitch for why it makes sense for both customers and shareholders.

The company released an online presentation, which does also state that “there can be no certainty that this will result in a formal offer, nor as to the terms of any such offer”.
But from looking at the presentation, it’s clear why Sainsbury’s wants to do this and why it feels like it is a necessary opportunity. The presentation states:

Customer expectations are changing; they want a huge variety of products and they want them quickly, online and mobile, in-store, home delivered or click & collect.

Our experience shows that the more a customer shops with us across multiple categories and channels, the more we capture of their overall food and grocery spend.

Argos has a pretty strong track record when it comes to its investments (or partnerships) in multi-channel options for customers. What was once essentially a catalogues business has now transformed into an online retailer, which gives the option for customers to buy online, collect in store and even does same-day deliveries.

Argos has also made investments in equipping its stores with new technology, such as replacing catalogues with iPads, and it has experimented with digital store formats.

It is this experience, capability, reach, as well as Argos’ product offering, that Sainsbury’s is keen to tap into.

However, it’s worth noting that Argos’ performance in recent quarters has been a bit sketchy to say the least. Profit warnings and poorer than expected sales have led to claims that Argos could be the next high street company to suffer as a result of the likes of Amazon - claims that the company has rejected.

But can Sainsbury’s and Argos together take on the Amazon behemoth? Sainsbury’s seems to

Argo_390
think so (although without mentioning Amazon explicitly).

Sainsbury’s said the acquisition of Home Retail Group would:

  •  Accelerate its strategy and create a leading multi-channel retailer for food and non-food products
  •  Would enhance its existing general merchandising ranges by brining more great products and services at fair prices to the combined group’s customers
  •  Home Retail Group’s strong multi-channel capabilities and infrastructure would step change our ability to meet our customers’ needs for further flexibility and choice (online and mobile, home delivery and click & collect).
  • Both businesses share a similar culture with colleagues focused on delivering excellent customer service at all touch points.

You can see the thinking - with Amazon announcing Prime, which in certain locations allows customers to get products delivered within an hour to their door, and it’s expansion into grocery delivery - Sainsbury’s wants to rival the online company by tapping into Argos’ product range and logistics.

If Sainsbury’s bought Argos, both Amazon and the ‘new Sainsbury’s’ would have a diverse product portfolio and fairly decent online, multi-channel capabilities.

However, Sainsbury’s would still have a fairly large physical footprint. Is that a good thing? It depends. On the one hand it’s a costa that Amazon will either not have or will be investing elsewhere (such as logistics), whilst on the other hand it’s an alternative choice for customers. Plenty of customers still like to shop in-store…

These slides from the presentation sums up Sainsbury’s ambitions:

Screen Shot 2016-01-13 at 11.29.12

Screen Shot 2016-01-13 at 11.29.30

My take

An unsurprising move by Sainsbury’s, an acquisition certainly makes sense on paper. Will it be able to beat Amazon in the UK market? I’m not so sure.

Integration of Sainsbury’s and Argos’ capabilities would have to be excellent to make the customer experience consistent. And the price point would have to be lower too..

Amazon’s logistics are the best out there. If it can extend its ability to deliver what you want, to your door, within an hour or two, I fear it may have the edge.