What the Argos-Sainsbury's deal means for the channel

PCR examines why Argos is valued so highly by Sainsbury's and what the ramifications could be for both going forward
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Economic instability was predicted in a post-Brexit world, but that hasn’t deterred Sainsbury’s from going ahead with its proposed acquisition of Argos parent Home Retail Group. Jonathan Easton examines why Argos is valued so highly by the supermarket chain and what the ramifications could be for both going forward.

As one of the largest retailers in the country with more than 700 stores, Argos has gone through big changes in recent years. 

The chain has undergone a digital transformation, moving away from the large catalogues and paper and pens, to in-store tablet screens and a focus on etail.

Now it’s caught the attention of J Sainsbury plc, with the supermarket giant set to acquire Argos’ parent company Home Retail Group for around £1.3 billion. A mammoth multi-faceted merchandising business will be created, but will it be enough to rival its competitors – and how will it change the market?

Speaking to one senior Argos manager off-the-record, PCR was assured that the core businesses of the companies would be kept separate, with Home Retail Group retaining its pre-existing headquarters in Milton Keynes. That is, of course, not without a watchful eye from Sainsbury’s, as the company has announced that it will promote its current CFO John Rogers to chief executive of Home Retail Group, upon the completion of the acquisition.

We were also assured – and this was made very clear – that the acquisition of Home Retail Group by Sainsbury’s is definitively not a merger of the two. In fact, our source went on to say that the acquisition is happening to facilitate the growth and modernisation of Argos that has been going on over the past few years, as a part of the ‘Argos Transformation Plan’. 

IS IT A GAMBLE?
The biggest question around the acquisition is: what will Sainsbury’s do with Argos moving forwards?

The Telegraph argues that the takeover deal will “leave the Sainsbury’s balance sheet more stretched, and its management with the task of delivering on a strategy that many in the City criticise, or freely admit that they do 
not understand”.

The most immediate plan, according to Sainsbury’s strategy, is to follow the example of the 15 concessions in Sainsbury’s stores and relocate 55 per cent of Argos’ High Street shops into the supermarkets. This would, in the words of Sainsbury’s chief exec Mike Coupe, allow the company to serve customers “whenever, wherever they want to shop”.

Equally as big an uncertainty is the scale of the deal in light of the EU referendum result. The likes of Dell, OnePlus and HTC have already raised their product prices, but Sainsbury’s remains undeterred. Coupe said: “I remain convinced by the strategic rationale of the deal. We believe that we can still deliver against the synergies and the execution that we’ve outlined, regardless of what economic conditions prevail.”

“The Sainsbury’s acquisition will facilitate the growth and modernisation of Argos.”

Likewise, new Argos chief exec John Rogers said: “It’s sensible to include a risk that captures the volatility of the economic environment. We’ve called Brexit out specifically because it’s something that’s very current in the economic backdrop.”

The acquisition of Argos will create a £6 billion general merchandise business – larger than that of John Lewis and Marks & Spencer. 

It’s the latest coming together of two big retail brands on the UK High Street, following the Dixons Carphone deal two years ago, and paves the way for further consolidation in the future.

ARGOS’ modernisation

You can see why Sainsbury’s is so interested in Argos. In recent years, Home Retail Group has been focused on bringing its antiquated image into the 21st Century. 

The in-store lumbering catalogues still exist, but tablets have been added to stores, allowing customers to browse products and check stock. There are still some ‘legacy’ stores around, however, where paper and pencil are still king.

Design wise, the stores have undergone a makeover. Gone are the tatty faux wooden floorboards and display cabinets of old, and in their place are sleek tiled floors and LED display boards. These not only display products, but also the members of staff that work in each individual store – and even the weather forecast. 

The 43-year-old brand has attempted to modernise its stores to the point that these hi-tech outlets are no longer simply stores, but rather ‘digital stores’. There are already store-in-stores at 15 Sainsbury’s supermarkets around the country (which had been open for a considerable time before any news of the proposed acquisition came about). There are even click-and-collect shops in London Underground stations. This all shows that Argos is serious about retail and growing its business – two good reasons why Sainsbury’s wants in. 

This innovation has always been a part of Argos, according to outgoing Home Retain Group chief exec John Walden, who stated in 2015: “Argos led the way with ‘click and collect’ 15 years ago”. 

Argos also offers a wider variety of shopping options for customers, says Walden. “Customers can continue to shop with us in the traditional ways if they choose to. But we believe Fast Track [Argos’ same-day delivery service] is the next big innovation and brings shopping into the digital age for customers, allowing them to get up to 20,000 products in their hands faster than ever before. 

“No other retailer can offer the breadth of products immediately or at that speed.”

While Amazon offers its similar Prime Now service to customers in certain catchment areas, it is only for those who are signed up to the company’s ubiquitous subscription model. This is a barrier which Argos does not present to shoppers. Argos is able to get customers what they want from over 20,000 items through the company’s ‘hub and spoke’ distribution model, introduced last year.

“Argos is arguably one of the strongest competitors to Amazon, and a valuable asset for Sainsbury’s.”

There are 150 larger ‘hub’ stores that can provide for those in its catchment area, effectively ensuring that whenever customers go to an Argos store, they will be able to have the item that they want within the same day. 

All of these efforts are to ensure that Argos is, as stated by Walden in the company’s annual trading statement, “a retail leader in an increasingly digital future”.

Through its click-and-collect stores and speedy delivery, Argos is – according to the employee I spoke to – ahead of its competitors and has the likes of Amazon playing catch up. This makes it arguably one of the strongest competitors to Amazon, and a valuable new asset for Sainsbury’s.

That is at the heart of why Argos is valued so highly by Sainsbury’s: Argos has, according to some, a great shot at effectively competing with other etailers. 

Writing for The Spectator, Ogilvy Group UK vice-chairman Rory Sutherland says: “Soon, I suspect, online shoppers will notice that the supposed convenience of having stuff delivered to your home is not very convenient at all, and the click-and-collect model pioneered by Argos will become the new normal.”

Sainsbury’s strategy going forward will be interesting to follow as both companies change and grow. 

The modernisation that Argos has already undertaken will undoubtedly give it hope that it can continue to thrive as consumer habits evolve going forward.

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