A new era for British retailing – What is behind the potential merger of Sainsbury’s and Argos

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In many ways the £1.3 billion merger between Sainsbury’s and Argos seems strange. The traditional supermarket retailer which has its origins in 1860s London and a retailer that grew out of providing non-food items in return for collecting what were known as ‘Green Shield Stamps’. However, once you dig down into the statistics you can see that there is a clear logic.

For starters, the combination will create an organisation that become a ‘juggernaut’ in that it will have 2,000 stores and sells 100,000 products. That puts it into the big league of British retailers.

However, as Tesco has discovered, size and complexity does not always give you the desired outcomes which, of course, is increased turnover and improved profit (the perennial benchmark of success on the high street).

Mike Coupe who is Sainsbury’s chief executive suggested that the increased size will be beneficial; his analogy to baking bigger cakes is interesting though – a statement indicating that there will be more choice through the use of increased digital and mobile phone technology that gives us a clear steer.

What seems clear is that Sainsbury’s is learning from both the mistakes made by others and, more pointedly, what Amazon has shown is possible.

What Sainsbury’s wants to achieve is, as some commentators observe, is an Amazon but with stores.

Every raft of data tells us that British shoppers buy online and like their goods delivered or to go to a local store to pick them up rather than going to the ‘cathedrals’ of consumerism that are the large stores which require driving to; something Marks and Spencer has been working on.

This merger will enable Sainsbury’s to gain competitive advantage in a landscape that is becoming ever more competitive due to the increase in market share by budget retailers whose influence has led to a ‘price war’ among supermarkets.

Though Argos has struggled in recent years it possesses a delivery network and IT systems that will give Sainsbury’s additional dynamic capability to compete. Significantly in 2012, Argos developed its mission to become “a digital retail leader” and if you make an online order before 6pm it will be delivered by 10pm the same day any day for £3.95. This is similar to the ‘Amazon Prime’ service.

And it is Amazon that is believed to offer the biggest threat to UK supermarkets due to its launch of a grocery delivery service through its UK ‘Pantry’ which allows its Prime customers who pay £79 a year, to shop for “everyday essentials like grocery, household, pet care items and more in everyday sizes.” The belief of analysts is that this service will be developed to include mainstream food items that will rival the supermarkets.

It is believed that the big supermarkets will have to spend even more on investment in online delivery.

But what is frightening for supermarkets is that even though they would prefer not to have to deliver due to the fact that it costs more than the charge – £20 as opposed to £3-£5 – they know that shoppers are fickle and will be likely to switch to whoever offers the best deal.

As Amazon has shown in the likes of books and electrical equipment, if you can differentiate yourself by price, people will buy your goods.

So the future of British retailing is altering once again and in ways that will result in better offers to customers. The trouble is that in the quest for dominance, there will be losses of jobs – Sainsbury’s will probably close at least 200 Argos stores in the short-term – with possibly reduced choice.

A generation ago we were used to what was then the ubiquitous ‘corner shop’. These disappeared due to the increased competition from the big supermarkets. It’s probably just progress that they are now being threatened by an even bigger corporate monster called Amazon.

Source: Dr Steve McCabe, Birmingham City University’s Business School

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