Why overseas growth is crucial to the UK retail sector’s success

You’ll forgive me for saying that I’m on something of a roll. Having last week trumpeted my prediction that the pharmaceuticals market could see a merger worth in excess of 100bn – a prediction subsequently vindicated by SmithKline Beecham’s move on Glaxo Wellcome – I now have the opportunity to remind you that last month I foresaw significant consolidation in the British retail market.

I couldn’t have hoped for a better manifestation of proof than last week’s 1.7bn hostile takeover bid from home-shopping group Great Universal Stores for catalogue retailer Argos. Here is a paradigm for a retail industry that has shivered through a bitter Christmas market and whose participants now eye the warming braziers of others’ earnings potential.

There are, of course, only so many hands that can be warmed around the dwindling coals – some will talk of economies of scale – but it amounts to shoving some cash into the hands of incumbent shareholders and telling them to go and buy themselves a cup of tea elsewhere.

Argos is a story of the hopes of industry dashed on the rocks of economy. Less poetically, it ran out of road, or, more particularly, high street.

Argos catalogues flop onto the doormats of 14 million homes. That’s two-thirds of all British households. Given that there must still be a few British households left that might balk at purchasing jewellery, petticoats or stereos through a grille in a warehouse on the strength of a catalogue number entered on a ticket, I’d have thought that the Argos market must be close to saturation in this country.

A nice additional contributor to earnings for GUS, nonetheless, and cheap to boot since its shares have almost halved to less than 400p over the past 12 months in the wake of three profit warnings.

However, the bid has obviously put life back into the shares – they closed last week at 628p, a 60p premium over the GUS offer and something of a temptation to shareholders to sell in the market.

The economies of scale that GUS could bring to bear would undoubtedly liberate the earnings potential of Argos. But only up to a point. Saturation of the home market means the company would sooner or later have to seek its destiny abroad. In this context, it is interesting to note that this week Argos opens its first overseas ventures in the shape of four stores in Holland.

To my mind, it is this kind of overseas development strategy that holds the key to growth, and consequently will dictate success or failure for the UK retail rationalisation that the GUS bid for Argos represents.

Fears of domestic market saturation have demonstrably prescribed British retailers’ foreign policy already. Our major food retailers are a visible case in point.

Tesco’s French lesson has been hard learned. Late last year, the superstore chain that has got so much else right in its domestic market over recent years, decided to pull out of France by selling its l04-store Catteau chain to French retailer Promodès for some 225m.

But one burnt finger doesn’t make for a misguided policy. Tesco’s withdrawal from France had more to do with its failure to acquire rival hypermarket Docks de France and suitable market penetration than with any sense of folly in its overseas expansion. The company has around 100 stores in the emergent economies of middle Europe and has indicated its desire to develop more, from Budapest to Warsaw.

Meanwhile, Tesco’s arch rival is also flexing its cosmopolitan muscle. Intriguingly, Sainsbury’s appeared in last weekend’s Sunday Telegraph in a story about how it is returning to its roots by making a “comeback” on Britain’s high streets with a new convenience store format, with the focus on fresh produce (yes, that old chestnut). Monday’s Daily Telegraph then splashed a story on how Sainsbury’s is poised to sink some 2bn in acquisitions in the US over the next five years.

I suspect both stories are true, insofar as there is no inherent conradiction between getting the domestic market right while concurrently developing markets overseas. Those who believed that problems in the UK market would restrict expansion in the US have missed the point. You can’t afford to stand still in international retail markets just because the UK situation needs attention.

Doubtless Lord Wolfson, chairman of GUS, has an eye for the potential international development of Argos, of which the Dutch experiment must be only an early symptom. The American market demonstrates that the key to future development of home shopping is in direct sales and home delivery. Wolfson must have a mind to develop into that market through the leverage that Argos could provide.

After years of developmental neglect, GUS needs to move onto the international stage and, if its bid succeeds, then we can expect Argos to play its role in that strategy.

But the story of this bid is a wider one than that. It demonstrates that the period of British retail consolidation that we are about to embark on is not only, or even primarily, about the pressures of the UK economy and market. It is about international presence and opportunity.

Growth opportunities in mature markets, such as the UK retail scene, are bound to lie in foreign climes.