Credit: Argos

Why Sainsbury's wants to buy Argos

The supermarket hasn't given up on its dream of creating a giant super-retailer.

by Jack Torrance
Last Updated: 22 Feb 2016

After Morrisons surprised the markets with a better-than-expected update yesterday, we’ve had similar news from its fellow supermarket chain Sainsbury’s this morning. While its same store sales in the 9 weeks to January 9 dipped by 0.4%, its total revenues were up by 0.8% over the same period.

It’s hard to say if investors were pleased with that. Sainsbury’s share price has had a bumpy time this morning, opening down on yesterday before shooting up, then down, then up, then down again. That likely reflects shareholder uncertainty about Sainsbury’s proposed plan to buy Argos and Homebase owner Home Retail Group (HRG), which was announced last week.

The plan was rejected by HRG’s board, but it seems clear that Sainsbury’s boss Mike Coupe isn’t going to give up without a fight. Though he declined to confirm whether a second bid is in the offing this morning, the supermarket has just published a colourful Powerpoint presentation outlining in detail why it thinks the deal would make sense.

‘Customer expectations are changing,’ its opening gambit reads. ‘They want a huge variety of products and they want them quickly.’

The idea is that by combining Sainsbury’s massive grocery business with Argos’s big range of virtually everything else, the two retailers can become one all-consuming behemoth, capable of providing consumers with almost all the things they could ever wish to buy – from lemons to lampshades, power tools and Peppa Pig toys. Coupe said this morning that the businesses would have a combined non-food revenue of around £6bn, bigger than John Lewis and Amazon’s UK business.

The two retailers currently have around 2100 stores between them, approximately one third of which belong to Argos. The plan is to shift some of those Argos stores inside nearby branches of Sainsbury’s. That would save money currently being spent on rent and allow the supermarket to make better use of its excess space. Two fifths of the nation’s consumers have shopped at both Sainsbury’s and Argos at least once in the last year, the presentation claims, so slamming the two stores together could make sense.

The plan is also about logistics. Argos has been beefing up its delivery service in recent years and launched a same-day delivery option in the run-up to Christmas. Sainsbury’s is more focused on delivering large volumes to stores. The presentation says the deal would ‘[combine] delivery networks for fast, flexible and reliable delivery to store or to home for food, clothing and general merchandise.’

Until recently, Homebase had been the big elephant in the room. The DIY and gardening chain has always seemed like the neglected sibling at HRG and Sainsbury’s presentation was very heavily focused on its plans for Argos – Homebase barely gets a mention.

Coupe told analysts he didn’t want to elaborate on the ‘sensitive’ issue, and this evening we found out exactly what he meant when HRG announced it was in advanced talks to sell Homebase to Australian retail giant Wesfarmers. If the deal goes ahead, it could pave the way for Sainsbury's to make another move.  

Making a merger work is no mean feat. One of this scale would be a big challenge to pull off, no matter how complimentary the two businesses may seem. But Mike Coupe seems to be undeterred. The next few weeks could be very interesting indeed.

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