Panmure’s Michael Stewart’s thoughts on Sainsbury’s approach to Home Retail

PANMURE’S MICHEL STEWART makes the following observations about the Sainsbury approach to Home Retail – rejected out of hand – so far!

 

 

Sainsbury’s attempt to acquire Home Retail Group comes as a surprise to us; the timing of the announcement is indeed unusual with Sainsbury’s making an initial approach for Home Retail Group ahead of a critical and somewhat decisive trading period. From a theoretical standpoint we can see the benefits of the acquisition:

 

  • Sainsbury’s can improve their own sales densities and reduce the combined level of lease obligations over time through store rationalisation and a broadening of the product offering.
  • Combining delivery networks would provide cost synergies and enhance the delivery proposition of both retailers; this is critical at this moment in time with the delivery proposition been a key differentiator between retailers- particularly in the food, clothing and electronics. Consumers have grown to expect free next day delivery and going forward they will expect later cut-off points for next day delivery and an improved availability across a broader range of SKUS.
  • Revenue synergies would be realised if each of the companies successfully leverage one another’s existing customer base. We would expect an increase in the number of concessions within Sainsbury’s stores, and the sale of Sainsbury’s products and services through Argos’s network.

 

 

Aside from the obvious synergies that we would expect to be realised (head office, personnel etc.), one is  right to question this acquisition in reality and the resulting benefits. We think that revenue synergies could be difficult to realise as the ability to cross-selling products is no given, it will prove challenging. Would the typical Argos consumer purchase their groceries from Sainsbury’s? Probably not- we are not sure the demographics align. Why do Argos’s unique existing customers currently choose not to purchase their groceries from Sainsbury’s and at what ease can you persuade them to switch to you given the gravitation towards the discount retailers?  This feels like a desperate attempt on Sainbury’s behalf to grow its existing customer base and improve sale densities.

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