finished argos

The UK’s second biggest supermarket looks to have had its head turned after opening dozens of Argos concessions within larger Sainsbury’s stores over 2015.

And in a statement today, Sainsbury’s said that the move would produce “strong brand synergies” and bring together two trusted businesses.

Speaking to Marketing Week last year, Argos’ head of own brand Alyson Lockley hinted that due to the scheme’s success, the collaboration could evolve into something more.

“The Sainsbury’s concession is exciting as we feel we are at the stage where we are comparable to Sainsbury’s as a brand and are emulating their reach,” she said. “We have to do completely new things like this to make Argos as convenient as possible in both digital and high street retail.”

Sainsbury’s also has previous with Homebase, which is currently owned by Home Retail, having sold the home improvements retailer back in 2000 for a combined deal worth £969m.

Home Retail Group’s shares surged 25% immediately after the announcement, while Sainsbury’s fell 5%.

Under Takeover Panel rules, Sainsbury’s now has until 2 February to make a firm offer for Home Retail – which is currently worth around £1bn and operates 271 stores – or to walk away from the deal altogether.

Broadening brand appeal

And Bryan Roberts, insight director at TCC Global, fully expects Sainsbury’s to return with a second bid.

“The move isn’t risk free but if it made sense for Mike Coupe to bid two months ago then it will still make sense to do so again in January,” he says.

“Home Retail can offer Sainsbury’s its retail brands but also great product ranges. Stuff like Habitat would work nicely within Sainsbury’s stores while there will be seasonal opportunities when it comes to summer gardening and utilising Homebase ranges. Argos could also stock Sainsbury’s Tu clothing. In both directions there is a strong degree of mutual benefit.”

However, Mike Dennis, managing director of consumer insight at Cantor Fitzgerald, says Sainsbury’s will face plenty of competition. He says there are plenty of suitors and have been ever since Home Retail issued a profit warning back in October.

“I’m not so sure Sainsbury’s is the best fit for Home Retail or that confident in its bidding capabilities,” he explains. “Sainsbury’s has some of the smallest big store formats compared to Asda and Tesco, so I’d say Tesco would make much more sense for this sort of takeover. There are also plenty of foreign investors primed to bid, Sainsbury’s will have its work cut out.”

finished sains
Sainsbury’s had a bid rejected for Home Retail back in November

But Roberts is more confident in its chances. “If you look at the procurement, marketing, online and in-store opportunities here, this is not a bad idea and combining all the marketing would also be very compelling,” he adds.

“Sainsbury’s will look at how Waitrose and John Lewis operate and hope this can pan out in a similar fashion.”

Strengthening multi-channel

Home Retail Group is currently attempting to turn itself into a “click and collect” business where shoppers order online and pick up their items at its network of new digital branches.

Over the last few years the company has been rolling out a “hub and spoke” distribution network across the country, which means well over 20,000 products are now available for same day collection.

For the year ending February 28 2015, Argos’ mobile commerce revenue was up 38%, with sales through mobile devices hitting £1bn for the first time.

In acquiring Home Retail, Sainsbury’s will instantly take on its multichannel expertise and have more of a chance of standing up to the likes of Amazon according to Ray Gaul, VP of research and analytics at Kantar Retail.

“The speed of delivery is the big battle in the UK market right now, with Amazon drawing first blood by allowing 60 minute deliveries,” he explains.

“Clearly Argos and Sainsburys working together will keep them in the fight while also delivering more options and faster services to their combined customers.”

Gaul says it’s also a positive that Sainsbury’s and the Home Retail portfolio have “little overlap” in what they sell.

“Sainsbury’s is looking for an embedded supply chain they can then use to fast track their way into ecommerce and do a better job than they have been doing so far.”

Ray Gaul, VP of research and analytics at Kantar Retail.

Gaul adds: “You can also see this being used as an engagement tool. The Nectar loyalty card always had a strategy to use multiple brands across the platform, so this is the natural next step.”

Improving national coverage

In its letter to the stock market, Sainsbury’s has already hinted at a potential strategy should the move go ahead.

It reads: “We will bring together multi-channel capabilities and delivery networks for fast, flexible and reliable delivery to store or to home across a wide range of food and non-food products.

“We will also deliver revenue synergy potential through the ability to sell to each other’s customers, including the operation of Argos concessions within Sainsbury’s stores, and the sale of Sainsbury’s products and services through Argos’s network.”

And Roberts says the move will help Sainsbury’s to surpass services such as Tesco Direct and really gain grounds in non-food. In turn, this will lessen the impact of the ongoing battle within grocery retail, where all the big four supermarkets are losing sales to the discounters Aldi and Lidl, while seeing their profit margins erode.

He concludes: “While this will have a modest impact on its big four rivals, what it will do is make Sainsbury’s more of a destination shop and help it to retain shopper loyalty, which has been its biggest issue since the rise of the Aldi shopper.

“There are three main benefits here, one is on making more out of its space, one is procurement and the other is branding. If Sainsbury’s has all of Home Retail’s electrical sub-brands at its disposal then perhaps Tesco will start to worry.”