Another week and another big retailer launches an attempt to steal Argos’s clothes. This time, Wal-Mart-owned Asda is the one dressing itself in Argos’s garb.
Asda chief executive Andy Bond explicitly put Argos in his sights last week as he revealed plans to build fledgling business Asda Direct into a powerful multichannel player (Retail Week, last week). The retailer follows in the footsteps of Tesco, whose Direct business has now been running for just over a year and Woolworths, which has made its Big Red Book catalogue a centrepiece of its retail recovery push.
So, little more than a year since Argos parent Home Retail Group, led by chief executive Terry Duddy, was demerged from GUS, how vulnerable is Argos to new methods of attack by its competitors?
So far, rivals’ push into the catalogue store group’s territory has had little more impact than a flea biting an elephant. Argos, which has traded its unique format since the early 1970s, has huge competitive advantages. With 685 shops, the chain is the UK’s biggest general merchandise specialist and has market-leading positions in a host of categories, including toys, jewellery and sports and leisure equipment.
In the first half of its financial year, Argos notched up 4.7 per cent sales growth to£1.84 billion. That puts into perspective the£200 million revenue figure expected from Tesco Direct this year and the£100 million in two years that Asda hopes for. At the time of its interims, Duddy said that Tesco Direct had not had a significant impact on Argos to date.
Woolworths – whose Big Red Book is into its third edition – notched up a 93.2 per cent rise in multichannel sales in its first half, but that needs to be viewed in the context of an overall loss at the variety store group’s core retail business of£47.7 million.
Argos’s supporters point out that, despite its scale, the business accounts for only about 10 per cent of total UK general merchandise sales. There is plenty of room for Argos, Tesco, Asda and a host of others to thrive at the expense of smaller retailers, so the argument goes. But some analysts worry that the increasingly crowded market of combined catalogue, store and online retail operations may not remain the fiefdom of Argos indefinitely.
Snapping at Argos’s heels
Pali International analyst Nick Bubb, for instance, says: “Tesco Direct has a long way to go to make a dent in Argos’s growth, but Tesco will get it right given its scale and expertise in non-food. Certainly, Tesco Direct’s first catalogue was little more than a brochure, but the latest effort is more substantial and Argos cannot afford to be complacent.”
He adds: “Tesco has changed the management of Direct to bring it under the control of the big Tesco.com operation and has flagged that service desks in the new Homeplus non-food-only stores are particularly successful.”
Tesco, of course, came from nowhere to transform itself from a straightforward traditional grocer into a general merchandise giant. Competitors quickly learned to their cost that they could not afford to rest on their laurels when Tesco entered a market.
Verdict chairman Richard Hyman says that if Argos’s leadership is not already “profoundly worried” by Tesco Direct, then “they are making a grave error”. Tesco, he points out, is the UK’s biggest non-food retailer overall. In its last half-year, it generated UK non-food sales growth of 9.9 per cent to£3.9 billion.
He adds that Tesco Direct is firmly targeted at the Argos customer and that the catalogue store model adopted by Argos originated in the US, where it is now extinct. “The reason is that other retailers have succeeded in stealing their clothes,” he says.
“The UK is not the US, but the catalogue store format is quite vulnerable because it’s fundamentally about two things – price and convenience. Those are difficult, though not impossible, strategic platforms to defend.”
Verdict research has shown that the big grocers take£1 in every£10 spent on non-food in the UK already. The consultancy forecasts that the food groups’ sales in such categories will rise by more than a third by 2011, when they are likely to top£23 billion.
Broker Shore Capital is also convinced that the supermarkets’ general merchandise businesses – and Tesco in particular – will grow apace. Shore analyst Clive Black says: “In the near term, we do not expect Tesco Direct to be a material contributor to total UK activities. However, the web and satellite TV are strategic growth channels and Tesco is very well positioned to seize opportunities. We can see a case for Tesco Direct to be a material contributor to [Tesco’s] Retailing Services’ profitability in the medium term.”
But Argos retains a powerful armoury of its own and has distinct strengths that its highly regarded management team are determined to make the most of.
Home Retail highlights its purchasing, sourcing and supply chain scale, which it says delivers “better cost benefit and the ability to source exclusive products or obtain advantageous quantities of products that are in short supply”.
What’s more, shared infrastructure with stablemate DIY chain Homebase “supports their brand positions, reduces the overall operating costs and increases the speed with which each can develop profitable routes to growth”.
But, above all, Argos’s multichannel offer, which provides numerous access points for consumers, remains unparalleled. Shoppers can buy in stores, online – its web site is the second most-visited UK retail site – or over the phone and home delivery is well established.
No comparison
Argos’s operational expertise means that almost all of its stores carry 10,800 lines that customers can collect immediately. In the 252 Extra shops, the figure rises to 14,500. The latest catalogue carries 18,100 lines – a 9 per cent rise against last year’s total. That compares with 12,000 products sold online by Tesco Direct and 7,500 in its catalogue. By the end of this year, Tesco will have 125 Direct collection points in stores.
Asda’s operation is at an even earlier stage. At the moment, its range is limited to 4,200 products in categories such as electricals and toys and there are only five in-store collection facilities.
One senior retailer with experience of stores and multichannel observes: “The thing that Argos has got and remains in charge of is the sheer amount of choice per square foot – it’s an incredible intensity of choice in a small footprint.” Other retailers, he says, can only match this online “but there are still a huge number of customers who want to shop instantly on the high street and pay cash”.
He continues: “Argos has worked really hard to innovate in terms of how it sells to customers, with things like Check & Reserve. Because it has worked so hard, it hasn’t really been screwed by Tesco.”
Argos has also shown that it is able to stand up to rivals on price. Last week, Bond crowed that Asda was nearly 13 per cent cheaper than Argos on 50 popular products. Argos, however, has cut prices consistently. They have been reduced in each of its twice-yearly catalogues since 1999. In the present edition, prices of the 8,000 re-included lines were 5 per cent less than last year on average.
Hyman nevertheless maintains that Argos must adapt to protect its future prosperity. “The obvious thing is to get a few more strings to its competitive bow beyond convenience and price,” he says. “In order to do that, it has to change its business model – that’s not easy to do,” he says.
Argos has come a long way from its origins as a redeemer of Green Shield stamps to become a world-class business that is now also venturing overseas via a partnership in India. But what was once a unique model is now increasingly being pirated, as rivals seek to get in on the act. Imitation might be the sincerest form of flattery, but Argos’s directors will have to do all they can to stay ahead of the pack.
Argos: a snapshot
Store total: 685
Operating profit (six months to September 1):£99.5 million
Sales (six months to September 1):£1.84 billion
Number of customers served a year: 130 million
Proportion of population with an Argos catalogue at home: two thirds
Recent innovations: 3,300-line Home catalogue introduced in 253 stores; roomsets are being tested in four shops
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