CASE Future-proofing business? Sainsbury acquires Argos EXAMPLE Duncan Angwin Market analysts were stunned when UK supermarket, common in the sector. Although its year-end operating Sainsbury, announced it was to acquire Argos, a UK profits were down 18 per cent to $720m, Sainsbury's general merchandiser for El.4bn (61.9bn, $2.1bn). Why share price remained buoyant to February 2016, whilst would the UK's second largest supermarket want to buy a the other big supermarket share prices had fallen dra company famous for its 'laminated book of dreams", its matically. The UK food market remained difficult as food plastic-coated product catalogue? Some analysts said it sales declined 1.6 per cent at the beginning of 2016 and made no strategic sense whatsoever. the continued pressures on supermarkets caused analysts to predict the Big Four might soon become the Big Three. Sainsbury n an attempt to reduce costs and woo customers, the supermarkets had embraced online shopping with mixed Sainsbury was the second largest of the big four super- "results. Morrison's online business had grown strongly, but markets in the UK with 1, 304 stores, 161,000 employees online purchases across the whole UK market accounted and E26bn (631.2bn, $39bn) of sales for the year to for just 5 per cent of total sales. People didn't like to December 2015. Sainsbury held 16.8 per cent of the pay delivery fees, delivery slots were inconvenient and the entire UK food retail market, with the UK's largest retailer food wasn't always fresh. Indeed for most supermarkets, Tesco holding 29 per cent, Morrison 11 per cent and online transactions were not profitable as they had all the Asda 17 per cent. In the run up to Christmas, only Sains- extra costs of picking the food, packing and delivering it. bury, with its relatively prosperous customers, showed Food items required different temperatures and items were sustained increase in sales in a sector which historically often fragile or bulky making the process more difficult had shown slow growth. Although the big four dominated and costly. Also setting up grocery online technology cost the industry, smaller deep discounters, Aldi and Lidl, had tens of millions of pounds and took years to return a profit been winning customers at a rapid rate. With sales up as on line only supermarket Ocado found out, making prof- 18.9 per cent and 15.1 per cent respectively, Aldi and its only after 15 years. Lidl had now captured 10 per cent of the market. Also Reflecting on how Sainsbury would continue to com- better off customers were turning to Marks & Spencer and pete CEO Mike Coupe remarked, We're opening one or Waitrose (5.2 per cent). By March 2016, the supermarket two stores a week for the next three years." He also sector had shown a 2 per cent fall in sales overall, year on agreed that 'Supermarkets had become too sterile, saying year, as customers spent less per average shopping trip. one size fits all is over. Each operator has to be different. The decline in sales had a mixed effect on the big In our case we have to be brilliant at being Sainsbury's." four. Tesco had experienced a sustained decline in sales Sainsbury has long had deeply embedded values and and a massive 55 per cent fall, to $345m, in half-year goals put in place by its previous outstanding CEO Justin profits to October 2015. However by early 2016, Tesco King. These defined the company's aims and standards of had begun to turn the comer, reducing a further fore- behaviour to all employees. In this paternalistic company. casted fall from 1.8 per cent to 0.8 per cent with renewed supported by excellent training and having won awards focus on price promotions, customer service and product for HR management, Sainsbury had an embedded ethos availability even after cutting the number of stores by 50. of quality throughout its operations that meant they could Morrison had also experienced a heavy fall in profits and concentrate on providing fresh food and great service, a reduction in sales, while Asda reported its worst sales with the best people in the business. Sainsbury is also performance in 20 years as a result of the bitter price working on customers being able to use their mobile war against the deep discounters and a resurging Tesco. phones to scan and pay. Electronic shopping lists are although managing to increase its operating profit. Sairs- there to encourage customers to buy cheaper, cater for bury's increase in sales, its narrowing of the gap between allergies and to keep a running total of what is spent. its prices and those of discounters and cutting back on What Sainsbury would not do, said Mike Coupe, is 'to use 1100 product lines, helped it maintain good performance technology for the sake of technology. It has to make the rather than relying on a heavy use of discount vouchers, customer experience better." 365CHAPTER 11 MERGERS, ACQUISITIONS AND ALLIANCES Acquired firm level of autonomy Low High LOW Intensive care Preservation Knowledge transfer Re orientation Absorption Sym blocks High Figure 11.3 Post-acquisition integration matrix Source: D.N. Angwin and M. Meadows, 'New integration strategies for post acquisition management', Long Range Planning vol 48, no. 4 (2015], pp. 236-51, with permission from Elsevier.Buy Ally DIY High Fast Fast Slow urgency' Share Failures Failures High losses uncertainty potentially and retain likely saleable unsaleable buy option Soft Culture and Culture capabilities valuation and control Cultural important problems problems consistency Highly Avoid buying Ally just with Develop in modular whole relevant new venture capabilities company partner unit unit Figure 11.6 Buy, ally or DIY matrix 359CHAPTER 11 MERGERS, ACQUISITIONS AND ALLIANCES A new threat Home Retail Group, the owners of Argos, had been While the supermarkets remained locked in a price turning the subsidiary around by making it into a digi- tal retailer, where the customer offering is as compel- war with no end in sight, struggling with margins and competing on protecting their profitability with supply ling on small screens as big screens, where the transition chain, logistics and store closure programmes, a new between devices and stores is seamless and everything threat loomed. Amazon had just launched Pantry - a promised online is delivered. Order something from Argos next day delivery service which charged by the box. It before 6pm and it is delivered by 10pm that same day, was available to Amazon Prime Members for 179 a year. any day of the week, for $3.95. By March 2016, only 20 Although it currently only offered household essentials it per cent of its stores had been transformed into places was anticipated to be the precursor of a full grocery ser- where customers used ipads to choose their products vice - something it already offered in some parts of the rather than laminated catalogues. However, 95 digital USA. A step towards this aim occurred in February 2016 concessions had been introduced into Home Retail Group when a deal was struck with Morrison allowing Amazon subsidiary, Homebase, a home improvement retailer, and customers to order hundreds of fresh and frozen food ten into Sainsbury and these had helped bolster Argos' overall sales, with growth rates of 5 per cent and 3.1 products online. This could herald a big threat to the other supermarkets as Amazon had the capacity to offer per cent, respectively, faster than other Argos stores. The fast track delivery service saw an 80 per cent increase a vast range of products. However, alliances in the food in home delivery sales, and just before Christmas 2015 retail industry were fairly infrequent and often problem- atic. The alliance between Waitrose and online retailer online sales overtook store sales and accounted for 62 Ocado dissolved when they ended up in direct competi- per cent of Argos' revenues. Most high street retailers tion with each other, with Ocado claiming only a third of averaged 35 per cent revenues. its sales came from Waitrose own-label products and 25 per cent from the products of other suppliers. Ocado's The deal later agreement with Morrison was then renegotiated for- By the time Sainsbury had purchased Home Retail Group, lowing the latter's tie up with Amazon. having seen off a South Africa competitor bid, the final price was El.4bn, a premium of 73 per cent. Homebase was Argos disposed of immediately, leaving Argos, and cash on Home Retail Group's balance sheet and buy-now-pay-later Argos Famous for its telephone directory-sized laminated cat loans to be folded into the loan book in Sainsbury's Bank. alogues listing over 60,000 products, Argos is the UK's The enlarged Sainsbury would offer 100,000 products largest general, non-food, merchandise retailer. With 840 from 2000 stores, with $28bn of sales and weekly visits stores in the UK and Ireland and 30,000 employees in from 25 million shoppers. In terms of general merchan- 2016, it was the leading multi-channel retailer, allowing dise and clothes, Argos' E4bn and Sainsbury's E2bn sales purchases of its products from a store, by website as was larger than John Lewis, Marks & Spencer and even 'click-and-collect', by telephone and catalogue ordering. Amazon UK (85.3bn of sales 2015). Mike Coupe said Argos's just in-time logistics operations enabled local We can bake a bigger cake and do a better job for our stores to offer a wide range of products without having customers than we can do as separate businesses' and to keep a permanent stock of inventory. It also owned a "Our customers want us to offer more choice, that choice number of discount stores in France and Poland and had to be faster than ever, driven by the rise of mobile phones recently opened 50 Pep & Co stores in the UK under the and digital technology." banner 'spend a little, get a lot'. Approximately half of Realising the savings and benefits of the acquisition Argos stores leases were due for renewal over the next would cost $140m of additional capital expenditure in four years. the first three years. In particular, integrating IT would Argos became vulnerable to a takeover approach after be important. Argos did not have appropriate IT and sup- it reported a fall in sales of 2.2 per cent during the crucial ply chain systems for different types of foods and would Xmas period in 2015. In particular, sales were challenged Sainsbury be prepared to adopt Argos' systems for non- in the highly competitive electronics market with decline food retail? If two systems remained, however, the Sains- in sales of video games consoles, computer tablets and bury customer loyalty Nectar cards for instance would not white goods, such as washing machines. As a result, Argos work for Argos products. Nevertheless, Sainsbury said it issued a profits warning and several market commentators would be able to achieve E140m annually in cost savings felt the company was in long-term structural decline. by 2019. 366FUTURE-PROOFING BUSINESS? SAINSBURY ACQUIRES ARGOS Not all smooth sailing? quality and optimum price." He also says, 'In the weird For a deal of this size the Competition Commission could world of the stock market, maybe this [deal] could put still object to the enlarged group being too dominant in them into play, but it shouldn't. Before this deal came the toy and electrical markets. If an investigation was along I was impressed by what I saw [of Sainsbury]." triggered, it might delay ownership and that could damage Maybe buying Argos is not future proofing Sainsbury? trading, and disposals might be needed to lessen Sains- Sources: www.argos.co.uljabout us A.Armstrong, 'Sainsbury's Argos take- bury's market dominance. overis as cheap as a Fisher Price boy set', The Telegraph, 2 February 2016; J. Bourke and M. How, 'Sainsbury's Argos deal dashed as billionaire makes Some analysts were openly sceptical about the deal, El.4bn rival bid', The Independent 20 February 2016; G. Hiscott, 'Sains- seeing Argos as a down-market brand, with stores hav- bury's takeover of Argos likely after drop in sales at high street chain', The ing a poor appearance and insolent, poorly trained staff Money, 14 January 2016, M. Lewis, "Opinion: How could Sainsbury's best integrate Argos' technology?" Retail Week, 12 February 2016, B. Marlow, depressing customers. Argos had also issued a profits "How merchandise could further derail El.Ibn "Argosbury" deal', The Tele. warning and was suffering a like-for-like decline in sales. graph, 20 February 2016, 5. Reid, Which store is top of the supermarket They worried that Sainsbury's management team could be performance league?' The News, 9 March 2016. distracted by the integration just when the supermarket sector was under huge strain. Also analysts remembered References the acquisition of Safeway by Morrison that hit major inte- 1. K. Hope, 'Why does Sainsbury's want to buy Argos?', BBC News, 1 gration problems in terms of brand and IT. Running two February 2016. 2. C. Blackhurst, 'Sainsbury's Mike Coupe: "I'm not especialy anxious IT systems in parallel heavily impacted on performance when things don't gowell", Management Today 30 June 2015. causing Morrisons to make its first ever loss. Morrisons' 3. C. Johnston, 'Sainsbury's to "future-proof"with El.3bn Argos deal', BBC systems were then retained, even though Safeway's sys- News, 2 February 2016. 4. A. Armstrong, Argos sales fall as Homebase enjoys a Christmas surge, tems were better, and did not scale well to the enlarged Telegraph, 14 January 2016. group, causing years of problems for subsequent CEOs. 5. J. Davey and K. Holton, 'Sainsbury's bets on Argos takeover for digital An analyst at Shore Capital said he was openly torn age, Business, 2 February, 2016 6. M Vandevelde, "Sainsbury's chief under pressure to deliver, FT.com, about the takeover. 'Buying synergies and central over- 21 February 2016. head savings seem relatively moderate to our minds and so the deal rests to a considerable degree upon revenue synergies, on which we are nervous." Mike Coupe has dismissed these concerns saying that: 'There's limited risk Questions from an execution point of view because it's largely about 1 Why did Sainsbury bid for Argos? property, a core strength of Sainsbury's." Yet independent retail veteran Richard Hyman 2 With reference to the post-acquisition remained sceptical: 'Sainsbury's and its rivals would be integration matrix (see Figure 11.3) consider better off focusing their attention on their core business: how Sainsbury might best integrate Argos? food. However unexciting and old fashioned it may seem 3 With reference to the 'buy, ally or DIY' matrix it's the products that matter. The delivery system is a (see Figure 11.6) consider whether the support act. There's no uniqueness there. No customer is acquisition of Argos is the best strategy for going to buy a delivery system. It's what is being delivered Sainsbury? which is the key. You've got to make sure it's the optimum 367