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Why Sainsbury’s is Acquiring Home Retail Group

February 3, 2016
Jannie Cahill
Written By
Jannie Cahill

This week UK supermarket chain Sainsbury’s announced it had agreed to buy Argos-owner Home Retail Group for £1.3 billion, creating the UK’s largest general merchandise retail business.

The rationale behind the move? UK consumers are increasingly choosing to shop online, or make smaller ‘top up’ grocery trips from convenience stores. Coupled with the rapid growth of discounters Aldi and Lidl threatening the traditional grocers, the UK supermarket sector has never been so competitive.

According to Sainsbury’s Chief Executive Mike Coupe: “Our customers want us to offer more choice, that choice to be faster than ever, driven by the rise of mobile phones and digital technology”.

However, much speculation behind the deal has focused on the growing threat of Amazon as it sets its sights on the lucrative online grocery market: in recent months the e-retailer has tested a chilled and frozen foods service and rolled out Amazon Pantry – its next day grocery delivery service. More recently, the rumour mill has gone into overdrive with reports that Amazon is eyeing a bid for pureplay online grocer Ocado, although this has since been discounted by Ocado CEO Tim Steiner.

Through this acquisition, Sainsbury’s would have access to the jewel in Home Retail Group’s crown – Argos and its highly prized delivery network and IT system, helping the supermarket to take on Amazon in the fast-growing online grocery market. Just ahead of Black Friday 2015, Argos launched a same-day delivery service as well as a ‘pick up in-store within 60 seconds’ promise for all click-and-collect shoppers.

Commenting on the announcement, Profitero’s VP Strategy and Insight Keith Anderson said: “Retail as a business model depends on growth, and mainstream supermarket operators in many mature markets are facing challenging headwinds including decelerating population growth, diminishing household size, and increasing price competition. By contrast, eCommerce is growing at 3-4x the rate of traditional retail, making it an attractive channel for investment.

“As hypermarket operators such as Sainsbury’s and Amazon are both aware, there is synergy between high-velocity everyday essentials like FMCG and higher-margin discretionary goods like electronics. A blended range can have positive impacts on both trip frequency (online and offline) and margin mix.

“Acquisitions of experienced eCommerce operators like Home Retail Group and Argos yield immediate topline growth and market share; technology capabilities; and talent. Argos is a clear leader in omnichannel retailing, with expertise in both online fulfillment and logistics and integrating stores into a complete retail offering.”

As we mentioned in a previous post, expect to see lots of change and continued developments within the UK online grocery sector this year. With this latest announcement, 2016 is already off to a very busy start.

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