Can Argos switch from shops to box?

As Argos readies its home-shopping channel, one potential competitor is in administration and others have closed. Amanda Wilkinson looks at the prospects

Argos is to enter the UK home-shopping market, just as the sector is set for a radical overhaul. The chain will be the first traditional high street retailer to launch an own-branded home-shopping channel in the UK (MW last week).

Argos will enter a cluttered market. The UK has more than 20 home-shopping channels and industry insiders say it is ready for a shake-up. Already this year, the loss-making Littlewoods-Granada joint venture Shop! TV has closed and Home Shopping Europe’s UK TV and website shopping channel was put up for sale last week, after going into administration. Other, more content-driven channels – Taste, owned by Sainsbury’s and Carlton Communications and Wellbeing, owned by Boots and Granada – have also closed in the past year. Industry observers say the loss-making channels failed to drive sales or build brand awareness, as they did not bear the retailers’ names and were based on a flawed model. The channels had high production costs and overheads, and were dependent on advertising revenue.

Richard Burrell, director of digital media for QVC, the UK’s first home-shopping channel, which went on air in 1993, believes that “more fallout” is inevitable, as there are just too many channels.

Richard Hyman, chairman of retail analyst Verdict Research, is sceptical about the market in general and about Argos’s chances of success: “The jury is out on home shopping. QVC has made it work, but it has taken a long time to do so. Littlewoods is a similar business to Argos, and ran Shop! for years, but that eventually closed.”

Even if the Argos channel is a success, Hyman fears that the retailer may cannibalise its own customers.

Argos is not the only well-known brand to have decided to launch an own-brand shopping channel.

Thomas Cook launched a home-shopping channel on digital satellite last December, with the intention of building brand loyalty and driving sales through its call centre, website and high street travel agents. The company has recognised that holiday shopping channels, such as TV Travel Shop, account for almost three per cent of the travel market – or 1 million passengers.

Mark Cullen, chief executive of digital TV specialist Enteraction TV, which is working with Thomas Cook TV, believes that other branded retailers will follow the holiday company and Argos. They will replace the early entrants, which operated in a similar fashion to market traders, piling products high and selling them cheap.

He says: “The answer is not going to be constant sales. Shopping channels are going to have to do more to entice and entertain audiences in order to sell to them. UK retailers are looking with interest at this as they increasingly seek ways to reach groups of cash-rich, time-poor consumers.”

In-store video and mail order specialist JML, which is launching a 24-hour shopping channel later this year, is another company keen to enter the market.

Commercial director Pete Mills says that “content is king” and those companies such as JML, which are able to create their own, are well-placed to take a share of the market.

Echoing Burrell, he says that there will be “massive fallout” and that difficult times lie ahead for those shopping channels that rely on supplied content – often non-exclusive and in relatively short supply.

Fewer “infomercials” are being made in the US, as the American home-shopping market has gone into decline, and Mills says that as a consequence consumers are over-exposed to the same content, leading to fewer overall sales.

Under Government regulations, BSkyB has to allocate a place on its electronic programme guide to any company that has the capability to launch a channel on digital satellite. The overall estimated annual cost of putting out a channel and uplinking it to satellite is about £700,000. Terms of carriage on cable platforms NTL and Telewest Broadband are open to negotiation. Production costs vary considerably, depending on the type of shopping channel – infomercial-based or live.

But for those channels that are a success the rewards can be great: QVC, which buys up goods on a sale-or-return basis and uses live presenters to offer them to viewers, moved into operating profit in 1997. The channel recorded a sales peak of £198.3m in 1999, with an operating profit of £23.3m (source: QVC/Mintel Retail Intelligence 2002). Sales for 2000 slipped to £197.6m, but QVC claimed that earnings before interest, depreciation and tax grew from £13m to £17.3m. According to Mintel, QVC was hit by increased competition from grocery superstores in low-margin electrical goods. It turned to clothing and beauty products, which generate lower sales but are more profitable.

When it comes to electrical goods, QVC’s problem is unlikely to affect Argos, which already competes on the high street in this market. However the company, which is expected to use infomercials supplied by product manufacturers, may find like Littlewoods that what sells well in a catalogue does not necessarily sell on TV.

Best Direct managing director Simon Tempest says: “Not every product sells well using an infomercial. To succeed, they generally have to be multifunctional and highly demonstrable. That is where Shop! fell down.”

Argos will have already learned some of this from its home-shopping experiment on Sky’s interactive TV (iTV) platform, which was pulled in January.

Forrester Research senior analyst Rebecca Ulph believes that Sky’s “walled garden” was not the right environment for Argos as it was static and could not be used to demonstrate a product. She adds: “Argos has products that appeal to the demographic groups that use home shopping, whereas iTV shoppers tend to have higher incomes and levels of education.”

The Argos name will certainly act as a draw to those that are used to home shopping, but whether, buried among more than 300 digital satellite channels, it will attract other viewers, is open to debate.

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