Could Sainsbury's Argos bid deliver for both brands?
A view from Daniel Farey-Jones

Could Sainsbury's Argos bid deliver for both brands?

Sainsbury's acquisition of Argos might solve the supermarket's problems, but there are questions over how the brands would ultimately come together, says Daniel Farey-Jones.

The supermarket has two options – assimilating the Argos business into Sainsbury’s, or defining the two brands separately

After initial resistance, shareholders in Argos’ parent ­company, Home Retail Group, look set to close the book on the catalogue retailer in return for at least £1.3bn from Britain’s second-biggest supermarket, should it see off competition from South African bidder Steinhoff.

It is a bold move by Sainsbury’s, not least because it has never swallowed anything as big as Argos. The acquisition would also take Sainsbury’s further out of its traditional food-retailing comfort zone.

This is why experts believe the Argos brand will be safe, possibly in the long term. "I’d be surprised if it weren’t still here in five years’ time," says Simon Hathaway, global chief retail officer of multi-discipline agency Cheil. Russ Lidstone, former chief executive of ad agency Havas, who has worked with Tesco, believes Argos will last "for the foreseeable future".

Strong distribution network

Their caution is supported by a study of the defensive reasons that ­Sainsbury’s has advanced for doing the deal. After reviewing its business last year under new chief executive Mike Coupe, it concluded that it had to pursue growth in higher-margin, non-food categories to compensate for a competitive grocery market. It also had to evolve to provide what customers wanted, however they wanted it.

Argos’ chief attraction is that it brings both, with a sophisticated distribution network designed to satisfy consumer ­demand for product availability and quick fulfilment.

And Sainsbury’s has learned from its previous problems in non-food, says Philip Dorrell, managing partner of retail consultancy Retail Remedy. "About four years ago Sainsbury’s rationalised its non-food range," he says. "It was worried that it had a very long tail and lots of products in its inventory that really weren’t selling. But with Argos it has a business that manages that tail ­extremely well and can offer a much broader range of products, with a greater churn than Sainsbury’s could ever achieve."

Two choices

The combination has solid business logic, but could the hidden cost be marketing muddle? As Lidstone says, Sainbury’s would be buying Argos for its operational and general retail capability, not because it necessarily wanted the Argos brand.

The supermarket has two options – assimilating the Argos business into Sainsbury’s, or defining the two brands separately.

Dissolving the Argos brand is a potential hurdle. In the short term, it’s in Sainsbury’s interest to highlight the Argos brand and the new ‘whatever you want, whenever you want’ promise it brings to the table. It would strongly indicate that Sainsbury’s understands changing consumer needs.

Argos has earned plaudits for the digital transformation it started in 2012. As a result, the Argos brand is effectively shorthand for ‘wherever, whenever’. The problem for Sainsbury’s is it might also be shorthand for "shabby old stores with downmarket customers".

Two factors mitigate this. First, the leases on many Argos stores end in the next few years, so the worst could be ditched comparatively cheaply. ­Second, Sainsbury’s already has insight into how its customers will react to the tie-up, because Argos has been putting digital stores into bigger Sainsbury’s outlets since last May.

But Dorrell argues that Sainsbury’s customers are unenthused about seeing Argos in its stores. He is also concerned that Argos customers might start believing that Sainsbury’s ownership is moving the brand away from their tastes.

For this reason, he expects Sainsbury’s to pursue a differentiated strategy. In spaces where the two brands touch, the Argos brand and range will be stretched more ­upmarket, but in the Argos store estate it will remain much the same as it is now.

Fending off Amazon

It is worth noting how fierce the marketing war in food retail is, as well as the threat of Amazon, which has been running UK trials of fresh- and frozen-food delivery. "The worry for some grocers is that Amazon may get its head around delivering fresh in ­volume," says Dorrell. "About 13% of the UK population shop for groceries online – how many will go over to Amazon? If Amazon were to buy Ocado, the situation becomes interesting."

Given that the deal hasn’t yet been done, neither Sainsbury’s nor Argos was willing to discuss its marketing plans. However, it is clear that the immediate challenge will be to create a structure that both allows each brand to hold its own focus, while refereeing their shared territory.

With rivals hoping that chaos will ensue, there is one more reason why the Argos brand might be set to hang around. Dorrell points out: "If Sainsbury’s kept the Argos brand and the acquisition didn’t work out, it would have a saleable entity."

If that’s how failure plays out, what would long-term success look like? Factors include the relative importance of Argos’ £4bn sales compared with Sainsbury’s £26bn, the issue of Argos’ dated store estate and the fact that Sainsbury’s long-term survival depends on defending its food position against Amazon and other internet retail trends.

Argos’ know-how and non-food range appears to be the elixir of longer life for Sainsbury’s. But will the Argos brand turn out to be just the container it currently comes in?