It’s no surprise to see the big retailers react to the market’s changing dynamics in the last few months on a strategic level. We have seen Sainsbury’s make an offer for Home Retail Group, the owner of Argos, and the retailer made another offer just before the February 2 deadline after its first bid was rejected. I think this merger makes complete sense but comes with risks. Sainsbury’s has trialled Argos kiosks within some of its stores, which it claims achieved good success. It also claims that 40% of UK households shop at both Argos and Sainsbury’s, so a tie up could be natural to both brands.
But let’s face facts; there are three core motivations behind this deal.
First, the food sector is in a structural decline thanks to budget chains such as Aldi and Lidl grabbing market share. This has forced the largest supermarkets to cut prices, pressuring margins like never before. As such, to see the sort of growth numbers its shareholders have been used to years ago, Sainsbury’s needs to boost non-food sales. The win-win scenario would be a return to marrying non-food sales with food sales. This is where Argos comes in.
Second, Argos attracts budget shoppers looking for a bargain – the exact same shoppers that are likely to have switched to Aldi or Lidl in recent years. Sainsbury’s will want to use Argos to re-channel this footfall back to its stores.
And third, to combat the emergence of Amazon into the online grocery sector – a move the US giant has confirmed it will rapidly expand this year.
View this presentation from Sainsbury’s on how it plans to “accelerate its strategy for growth”.
Meanwhile, in December, rumours swirled that Amazon could make an offer for Ocado, intensifying competition within the sector even further and perhaps pressurising Sainsbury’s to make the higher offer required for it to buy Home Retail Group.
No offer has been forthcoming as yet and there remains deep scepticism whether an offer will ever appear. In fact, whilst Ocado share prices rose some 14% on rumours of a potential bid, hedge funds have heavily shorted the stock, betting that prices will fall should it be confirmed Amazon has no intention of a bid.
Some 17% of Ocado’s shares are now borrowed, meaning investors are betting against its share price rising by short selling. That is higher than 15% before rumours emerged of Amazon’s interest.
So, clearly the market is showing doubts as to whether a bid will emerge and if there is confirmation that nothing is afoot, Ocado’s share prices could suffer sharp declines.
Overall, UK retail sales for December plunged the most since September 2014 as mild weather dampened the demand for clothing and early discounting boosted spending in the previous month.
However, this is contradictory to some individual companies’ reports; with supermarkets Tesco, Sainsbury’s and Morrisons all publishing strong results over the festive period, bringing some much needed seasonal cheer to their shareholders.
Having said that, the continuing growth in market share for German counterparts Aldi and Lidl – who took a combined 10% of Christmas food shopping – epitomises the continued shift in the supermarket landscape with the traditional Big Four (the aforementioned, plus Asda) ceding an increasingly large share of sales to the discounters.
Whatever happens, one thing is for certain and that is the traditional UK grocers must continue to adapt their strategies to survive.