Clive Black: Sainsbury's – thank goodness for Argos

It has allowed management, with a few rinky-dinks such as the £69m restructuring charge, to deliver largely in-line results at half-time and to retain full-year guidance.

We were genuinely torn on the Argos acquisition by Sainsbury’s when it was taking place. Was this a broken brand, a busted flush? Or was it an inspired move to take a label that was effective in some respects but burdened by an unsustainable cost base in its form at the time?

To be fair to Mike Coupe and John Rogers, they were bold and took a view that tested our resolve but won us over – most notably with the visibility of the Argos cost synergies.

“The CMA investigation is a massive one and it has the feel of a 15-round boxing match”

Over two years later, thank goodness for Argos. Who would have thought that would be a claim?

At Sainsbury’s, we see a bank where the investment in capital and operating expenses has delivered a risible return, while Sainsbury’s supermarkets, its core, underperforms the market.

That supermarket underperformance is a real concern because the long, hot summer of 2018 should have been Sainsbury’s time. When the British want to buy fresh foods, Sainsbury’s should be in a prime position.

However, what is clear is that Sainsbury’s is underperforming the food market – one that traditionally it would reasonably be expected to do better in.

If we strip out convenience stores and online then performance within its supermarkets is all the more worrying.

More to the point, Sainsbury’s only reports performance to September – and we believe that since then trade has had an even tougher time.

As such there is relief that Sainsbury’s reiterates current profit guidance, rinky-dinks clearly highlighted. But the sustainability of underlying profit growth feels like running through treacle and, without Argos, the group would be going backwards.

Temple of Doom

All of which brings me nicely on to the proposed merger with Asda. Just like Brexit, I cannot call this process, but it has an Indiana Jones and the Temple of Doom feel.

The Competition and Markets Authority’s investigation is a massive one – a challenge for this far-from-esteemed organisation, I should add – and it has the feel of a 15-round boxing match. After two rounds, I feel Sainsbury’s-Asda is down on points, but there is a lot of punching to come.

For choice, while bizarre, I can see Sainsbury’s-Asda gaining clearance but the remedies could be a deal-breaker. If those remedies are delivered, then the really tough job of integrating two businesses that do a lot of the same things, but in very different ways, comes to the fore.

Coupe is bold and gained credit with Argos, but not with the bank. How the merger will be written up will define his legacy as a CEO.

Some years ago we characterised Sainsbury’s as Shakespearian tragedy of Wagnerian length. A decade on, the characterisation stands.

“Good food used to cost less at Sainsbury’s. A business that was a world leader is too often a follower”

The great Lord Sainsbury must look at some stores with dismay, as management seemingly appears to be trying to cut itself to growth.

Once Argos is stripped out of the Sainsbury’s financial equation, the group’s investment thesis appears all the more worrying, which may explain the drive to merge with a far-from-complementary competitor.

Good food used to cost less at Sainsbury’s. A business that was a world leader is too often a follower. The future of this business should be defined by its core grocery activity.

However, it is more likely than not, in the medium-to-long term, to be around the success, or otherwise, of its engagement with Asda.

In this respect, there are worry lines for both.