Should Sainsbury's join forces with Argos?
7th January 2016
As most are aware, Sainsbury’s have had a recent proposal takeover offer rejected for an Argos and Homebase takeover by the parent company Home Retail Group. Although this offer was rejected, under UK Law Sainsbury’s still have until 2nd February 2016 to decide whether to make this offer formal. Sainsbury’s are rumoured to be seriously considering their position as they believe that a takeover would make a lot of sense for customers and both firms. In my opinion, it is the only thing Sainsbury's had on their mind since inviting Argos into their stores, and HRG always hoped this offer would come.
In an official statement Sainsbury’s said this about the proposal offer: “The combination is an opportunity to bring together two of the UK’s leading retail businesses, with complementary product offers, focused on delivering quality products and services at fair prices, through an integrated, multi-channel proposition.”
My main issue with this, and why I suggested previously this would happen, is that the products are not really complementary, there is too much crossover in kitchenware, electrical's etc. Also, Tesco have been trying to provide a successful food and non-food offering for a while but have been failing to find the right balance. It will happen but is Sainsbury’s the appropriate choice as the next supermarket to try and capitalise on this gap? Can they make a true success of this multi-channel proposition?
Does the move make sense?
Firstly, Sainsbury’s have been trialling Argos in some of their stores and early reports suggests that a concrete partnership would boost sales, growth and opportunities for both firms. Looking at general customer feedback, many believe that having an Argos click and collect in their local Sainsbury’s would be a great idea.
Sainsbury’s has vast experience in the b2c sector and could use its expertise and capabilities to capitalise on any takeover with Argos/Homebase. In fact, Sainsbury’s co-founded Homebase and sold the chain in 2000 which means that they have experience in non-food offerings. Argos has also recently invested in transforming their online and delivery services. Sainsbury’s will benefit from these capabilities, especially when taking into account Amazon’s offerings of being able to deliver within one hour in some parts of the UK.
Customer’s in today’s market are expecting more from retail business and want a full multi-channel offering. By acquiring Argos, Sainsbury’s will be able to greatly expand their offering and attempt to take a step ahead of their competition. Also, Sainsbury’s will have the opportunity to expand their Sainsbury Local presence in standalone Argos chains.
Possible drawbacks
Argos is not a company that is breaking profit records or bringing in excellent sales figures and recent reports have not been impressive. By Sainsbury’s taking over the group, would they be more at risk of failures or give a breath of fresh air to Argos? Recently the share price of Sainsbury’s fell by 4% solely based on the news of the takeover, which does not show much market confidence in this planned move.
Technology wise, given the millions spent already by both business on (Sainsbury's mixing WCS for grocery and hybris for clothing, with Argos heavily reliant on WCS) multi-channel tech, there could be some huge (and costly) integration issues.
By acquiring Argos, Sainsbury’s by default will enter a battle with Amazon will not be an easy task. Amazon are constantly pushing the boundaries and innovating, which is something that Argos has been failing to do. If Sainsbury’s gets pulled into a war with Amazon the core business may suffer which means that opportunities may be missed and competition could take advantage. However, with Amazon looking to expand it’s offering into the UK grocery market, maybe this is the right time for a UK supermarket to step up there non-food offerings to match Amazon.
A big question would be around how Sainsbury’s would manage the standalone Argos stores. Would Sainsbury’s place a Sainsbury’s local in them, shut the store down or completely revamp it? There would have to be a robust strategy around this to avoid any pitfalls, both in terms of the physical presence and the integrated technology.
What Next?
The ball is firmly back in Sainsbury’s court, do they make a formal offer or don’t they? In my view it will come, it won't be what is required first time around but the offer will happen. Be sure there are many meetings taking place with Shareholders where cases for and against are being put forward. We will have to wait and see what the outcome is, but no one will be surprised if a formal offer presents itself by February 2nd.
