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In the News

In Search of Synergy: Sainsbury's Buys into Argos' E-commerce Capabilities

What is the core strategic rationale for Sainsbury's £1.3bn takeover of Home Retail Group (the parent company of Argos)? E-commerce and Economics of Scale are the answer.

There is a quite compelling argument that the businesses best-placed to exploit the opportunities of e-commerce are the biggest, best-resourced firms. Those firms who already have deep-seated experience of, and expertise in building e-commerce revenues, often as part of a multichannel distribution strategy.

Sainsbury's £1.3bn takeover of Argos adds evidence to that argument. 

In order to remain competitive in the hostile retail market, Sainsbury's needs greater scale and breadth. It needs a much stronger non-food offer to complement its traditional strength in food retailing.

In short, Sainsbury's wants to be able to take on the likes of M&S and John Lewis in multichannel retailing, whilst being better able to defend against the growing presence of Amazon in both non-food and food sectors.

Strategic Rationale for the Takeover

In its statement to the Stock Market relating to the takeover, Sainsbury's has highlighted the following reasons for buying Home Retail Group. 

"The combination is an opportunity to bring together two of the UK’s leading retail businesses, with complementary product offers, focused on delivering quality products and services at fair prices, through an integrated, multi-channel proposition. Specifically, the combination of Home Retail Group and Sainsbury’s will:

  • Create a food and non-food retailer of choice for customers, building on the strong heritages of both businesses whose brands are renowned for trust, quality, value and customer service;
  • Deliver profitable sales growth by offering customers the right combination of location, range, speed and flexibility, across a wide range of products;
  • Bring together multi-channel capabilities including digital, store and delivery networks to provide fast, flexible and reliable product fulfilment to store or to home across a wide range of food and non-food products;
  • Optimise the use of their combined retail space. The combined entity will have attractively located stores across the UK, with an enhanced supply and delivery network and a strong presence across food and grocery, clothing, homewares, toys, stationery, electricals, furniture and other general merchandise;
  • Create a financial services proposition that will provide a wider range of customer-centric services including credit cards, loans, deposits, insurance and ATMs; and
  • Deliver significant revenue and cost synergy potential

Synergies between Sainsbury's and Argos

Sainsbury's has announced the potential for what it estimates to be £120m of annual synergies arising from the takeover.

These are set out in a brief summary of the strategic rationale for the deal which you can access here from the Sainsbury's website (PDF).

The synergies split into three areas:

Argos concessions (£60 million)

arising from (i) cost savings generated from the relocation of certain existing Argos stores into concessions in Sainsbury’s stores, and (ii) revenue gains from new concessions within Sainsbury’s stores, including but not limited to cross-selling opportunities and the expansion of Click and Collect desks.

Cost Synergies from Administration (£40 million)

Cost synergies generated by removing duplication and overlap from both central and support functions at Sainsbury’s and Home Retail Group, together with procurement benefits resulting from the Combined Group’s scale.

Other Revenue Synergies (£20 million)

Principally from the sale of Sainsbury’s clothing, homewares and seasonal and leisure ranges through the existing Argos network.

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