The news that British supermarket Sainsbury's has approached The Home Retail Group with a £1 billion bid to acquire Argos for its distribution capability comes on the back of the release of disappointing Christmas sales figures by the retailer.
The supermarket chain hopes that such an acquisition will enable it to compete better with online giants such as Amazon.
Sainsbury’s results will do nothing to convince shareholders to "stump up cash" for its proposed bid for the Home Retail Group's Argos business, commented Himanshu Pal, retail insights director at Kantar Retail. "While the takeover makes sense at a strategic level, these results show that there are more pressing needs for investment," he said.
"Not least of these is to fund a price war to defend and grow its market share." Asda has already announced a £500 million price investment on top of its £1 billion of cuts in November 2013 with other grocers expected to follow suit.
"In addition, shareholders will question the wisdom of investing £1 billion on a takeover of the Home Retail Group when the immediate threat is from discounters. Sainsbury’s partnership with Netto in the north of England has proved to be a successful alliance in the war against Aldi and Lidl and shareholders are more likely to push for more resources directed to that front in the form of new store openings."
Speaking on Sainsbury's bid approach to Argos owner Home Retail Group, Philip Benton, senior retailing analyst at Euromonitor International, said that as Sainsbury’s is currently the second biggest UK bricks-and-mortar retailer in terms of revenue behind Tesco, even if the takeover bid for Home Retail Group was successful it would still remain number two.
"With Amazon ramping up the pressure on UK supermarkets with the launch of its Pantry service in November and Amazon Fresh set for debut later this year, Sainsbury’s sees the acquisition as crucial in order to enhance its supply and delivery network."
In the spring of 2015, Sainsbury’s announced it had partnered with Argos to open 10 new Argos digital stores within existing Sainsbury’s supermarkets. "This will bring extra choice and convenience to Sainsbury’s and Argos’ customers who will have access to the combined ranges in the convenience of a Sainsbury's supermarket," it said at the time.
The Argos digital stores offers customers over 20,000 non-grocery products, which they can either buy instantly in store via tablets, or reserve online for collection. An extended range of around 40,000 products can also be ordered in store for home delivery.
The benefits of tapping into Home Retail Group’s online infrastructure are obvious, said Benton. "Euromonitor International is forecasting Food and Drink Internet Retailing to post a value CAGR - compound annual growth rate - of 7 per cent by 2020 so the online battleground is one that Sainsbury’s must seriously compete in if it wants to become the UK’s number one retailer."
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