White goods market could be fertile ground for superstores

And so the rationalisation of the British retail market rolls on. Hard on the heels of Great Universal Stores’ 1.7bn hostile takeover bid for catalogue retailer Argos comes the altogether friendlier proposal from Somerfield to throw a line to struggling Kwik Save with a 1.26bn all-paper merger – though those of us who are less polite may call it a takeover.

Attention will now turn to the likes of Iceland and Budgens, which cannot survive exposure to the icy waters of the British retail ocean much longer without room being made in someone’s lifeboat soon.

I have already written about the urgent need for British retailers, in mature or saturated domestic markets, to turn their attentions to foreign operations in order to deliver earnings growth. Just because Tesco had its fingers burned in France doesn’t mean that there won’t be such opportunities to exploit in underdeveloped markets in central Europe and developed, but fragmented, markets such as the United States.

But what of the home markets? Rationalisation, or consolidation as it is more positively termed, is all very well, but it will hardly deliver long-term growth if, in the UK, we are pushing at the envelope of grocery expansion. There is, after all, a limited amount of groceries that the British can consume.

Historically, J Sainsbury recognised this immutable fact and led the foray into quality, fresh produce. There was a good deal of slack to be taken up in the British diet in this respect, and the superstores have made a significant contribution to the nation’ s health and their own earnings through the provision of more cosmopolitan fare.

More recently, J Sainsbury has aggressively modified what it offers. Its threat to the retail banks in financial services is the most obvious recent symptom of that. So too is its return to the high street from out-of-town sites with local mini-stores, a sort of cross between Menzies and Pret A Manger.

There are interesting market mixtures at work here. J Sainsbury is adding value to grocery lines by turning them into breakfast, lunch and dinner, plus expanding product lines with news agencies and the like. It is also re-establishing a neglected line of contact with consumers in town centres.

All this focuses attention on potential new areas of development for the big chains, making the current buoyancy of the UK white goods market particularly interesting to note.

According to the Association of Manufacturers of Domestic Appliances, Britain’s white goods industry last year recorded its best growth since the consumer boom of the late Eighties. Apparently, sales to UK consumers (including vacuum cleaners) rose by 9.4 per cent in volume and by 7.3 per cent in value during 1997.

I gather that the trend of volume growth outstripping value is attributed to intense market competition and falling components prices. I find it remarkable that, with a relatively low overheads burden, Argos should have found life so difficult over the past year, given its white goods presence. But I suppose that one business’ competitive advantage is another’s competitive threat. Maybe it is the job of GUS, if it succeeds in its bid, to turn the competitive threat in white goods to its competitive advantage.

Now, there are text book reasons why the grocery superstore chains should eschew the white goods market. Product distribution and stock management are costly. The cost of unit-space at the point of sale is prohibitively high for those used to the fast turnover of comestibles. The addition of value-added services, such as the financial, makes much more sense at the level of retail space management alone.

But there must be opportunities for the intrepid in this market. Economies of scale, purchasing muscle, out-of-town space availabilities all conspire to put white goods within the market reach of the superstores. It is not beyond the bounds of reason that a Tesco or a J Sainsbury could succeed where Argos has failed.

J Sainsbury is probably the better positioned. With its Homebase “house and garden” centres and Texas stores now fully integrated with Homebase, its DIY interests teeter on the borders of white goods.

As I say, financial services take up less space and offer better margins. And undoubtedly, it is cheaper to develop retail space for fast-moving products that are a logical adjunct to out-of-town food shopping, such as petrol.

But that is not to say that white goods are any more illogical a purchase at grocery (or DIY) superstores in the consumer mind than are banking services. If you buy fresh produce at a superstore, it isn’t beyond the realms of consumer imagination to buy the fridge to put it in at the same location.

There will, I am sure, be good reasons why the superstores have left the white goods market undeveloped so far, some of which I have touched on above.But it must rankle that white goods prices have fallen to intensely competitive levels, while volumes have risen.

On paper, this is home territory for the superstores. Recent developments demonstrate that they don’t lack the imagination to penetrate new markets – it remains to be seen whether it can be applied to this one.

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