Will Argos's flat numbers improve Sainsbury's chances of delivering a combined Amazon-killer?

Profile picture for user slauchlan By Stuart Lauchlan January 14, 2016
Summary:
Argos just handed in some flat numbers that must bring some cheer to the takeover ambitions of Sainsbury's CEO Mike Coupe. But can the grocery chain really take on Amazon?

 

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Sainsbury’s planned takeover of Argos (Argos just handed in some flat numbers that must bring some cheer to the takeover ambitions of Sainsbury's CEO Mike Coupe. But can the grocery chain really take on Amazon?) looks all the more likely after the latter turned in some flat results, albeit with a digital boost.

Argos, part of Home Retail Group, turned in a 2.2% drop in like-for-like sales, following a 13% reduction in traditional walk-in sales in December. The only upside was a 10% increase in digital sales.

Parent company Home Retail Group Chief Executive John Walden blames:

volatile trading patterns resulting from particularly strong sales during Black Friday week, a shift in consumer demand from both the weeks before and after Black Friday, growth in digital transactions, reduced store footfall particularly on the high streets, and the continuing effects of price deflation.

He pointed to increased digital investment as being central to a putative turnaround of the catalog chain. For example,he cited the firm’s new Fast Track same-day delivery service, introduced in the run-up to Christmas, as a case in point, arguing that it:

increases in digital sales, digital participation and home delivery.

It’s clear that digital transformation “reinventing Argos as a digital retail leader” is seen as the last roll of the dice. Walden admits:

I continue to believe that the capabilities being developed in the Argos Transformation Plan will position Argos as a retail leader in an increasingly digital future.

Although the internet is now central to most businesses, the market has both broad variation in digital standards and a shortage of sufficient digital leadership capability.

To that end, Argos has tried a number of initiatives, such as partnership with eBay to enable that firm’s customers to collect their online purchases in-store at Argos. It also trialled a new approach to Black Friday, shifting the focus away from a single weekend to Red, White and Blue weekends.

Naked ambition

But hanging over all this is the naked ambition on the part of Sainsbury’s to mount a takeover. The grocery chain wants to extend its general merchandise ranges and expand its investments in online and mobile, home delivery and click and collect services. It sees taking over Argos as key to that.

Argos’s value lies as much in its distribution capability which Sainsbury’s sees as closing the gap with Amazon. Mind you, that’s still a massive gap given that Amazon’s storefront offers 150 million products compared to 53,000 at Argos.

For its part, Home Retail Group rejected an approach from Sainsbury’s in November, which means that Sainsbury’s now has until 2 February under UK takeover rules to score a deal. The sticking point inevitably seems to be price, with Sainsbury’s rumoured £1 billion offer falling short of the £1.6 billion that Home Retail Group has in mind.

While Sainsbury’s insists it won’t over-pay, it’s clearly top of CEO Mike Coupe’s strategic priorities and he’s done a lot of thinking around the topic:

The main rationale for this deal is to accept and understand that our customers are changing very rapidly. Their expectations are changing very rapidly on customers, particularly through the use of mobile phones through digital technology, have a very different expectations for retail and like things this over the next period of time.

Coupe turned to the women in his life to illustrate his point:

My mother is 78 years old. She lives in rural Sussex. She sees grocery shopping as a social experience so she visits the shop pretty frequently. She buys relatively formal out the grocery and she likes to talk to lots of people when she does this.

If I characterize my daughter, she uses her iPhone, her mobile phone, as a remote control shopping device. She lives her life through her mobile phone. She characterizes the market that we are seeing develop over the next period of time. The use of this technology and the fact that a large number of transactions are precursored by somebody looking online and ultimately, even if they are buying in the shop, are researching the product that they are buying online.

It’s all about meeting the changing expectations of the customer community, he adds:

Our customers will expect us to deliver to them as and when they want. We use the words whenever and wherever they want. Whether it's in a big shop, whether it's in the small shop, whether it's online indeed, whether that online offer is either delivered to people's homes or increasingly through Click-and-Collect. It’s important to remember that around 50% of non-foods transactions online are actually Click-and-Collect transactions.

If Coupe gets his way over the Argos bid, then he has a clear picture of what will emerge:

We'd create a business that would sell around about 100,000 general merchandize products and non-food products. So that's about 50,000 all of those products and around 50,000 Sainsbury's products, which creates a significantly-scaled business in non-food. It would be one of the biggest non-food retailers in the UK, bigger than John Lewis, bigger than Amazon and bigger than M&S if you take their clothing and general merchandize business.

It would create a business that has unique capabilities across a wide range of channels whether that's in-store, online or mobile, and it would create a business that has a unique capability in terms of how products are delivered, whether that's through bricks and mortar on shelf through collections and through a home delivery. Of course all of the competitors I've mentioned have some capabilities in some of these areas, but none of them have all of the capabilities that I'm talking about.

A combined Sainsbury’s/Argos entity would also have 2,000 stores which would fuel the Click-and-Collect retail revolution, he adds:

It would offer the opportunity of multiple delivery options. [Customers] would see the ease of Clic-and-Collect, delivered to home or indeed ultimately potentially delivered on our grocery home delivery vans, with speed and with confidence with two trusted brands coming together

We'll be out for Click-and-Collect in the vast majority of our shops, not just our big shops but also our convenient shops. We believe virtually every store could have some kind of Click & Collect online presence and would allow customer to pick up products from those shops.

Our customers will demand of us that we will serve them through shops, conventionally through big shops, through retail shops, online deliver times, online delivery to a convenient location. That will be increasingly served through an interaction on digital and mobile technology.

But is this enough to compete seriously with Amazon? Coupe is keen not to focus too much on that particular rival, arguing:

Of course Amazon has some of these capabilities. Actually you could look at the other end of the spectrum, people like John Lewis have these capabilitie. I refer to the fact 35% of the John Lewis Click-and-Collect transactions was served through store, just to put some flavor on how you could see this playing out overtime. But if you take Amazon as an example, they wouldn’t have the 2,000 shops point of distribution that would facilitated through this transaction.

My take

Despite the horrendous problems I had with Argos delivery last year, I’d be sorry to see the brand disappear from the high street. Whether tethering to Sainsbury’s provides the power of two to keep afloat or just additional weight to speed up the drowning, remains to be seen.