The retailer is overhauling its business model for the digital era.

For retailers, this Christmas will be a digital trading season like no other. A raft of product launches, such as tablets and e-readers from Amazon, Apple and Microsoft, mean that stockings will be stuffed full of techie product. But this year is also likely to be the most digital too in terms of consumer shopping habits.

Ecommerce, mobile shopping and multichannel options are expected to come to the fore as never before and retailers will battle not only to supply must-have product, but to sell over digital channels more than ever.

All retailers are modifying their business models. But for Argos, arguably one of the first generation of multichannel retailers, the shift in consumer behaviour will matter far beyond the festive season.

Argos of course aims to ship as much digital product as it can. But, vitally, it aims to overhaul its business model to become a “digital retail leader”, and everything it does from now on will be to support the establishment of a digital relationship with shoppers.

John Walden, the former Best Buy director who joined Argos as managing director early this year, unveiled his strategy for the retailer last week, when he revealed plans to make a decisive break with the past. Argos is to leave its catalogue business model behind. The famous big book will take a supporting role as the retailer embraces a comprehensive digital offer.

Accelerated change

Over five years, the intention is to reinvent the retailer on the back of a £300m investment, designed to retain and extend its powerful customer franchise. The plan has been put together on the assumption that the rate of market growth remains modest and that Argos generates sales of £4.5bn by 2018. In the year to February 25 the retailer achieved sales of £3.7bn, down 7.7% on the previous year.

Despite the fact that Argos has been through the mill during the downturn, when profits were decimated, Walden still starts with some potent advantages. More than 70% of households shop with the retailer at least once a year and, although Argos chiefs acknowledge it has not kept pace with changes in the wider retail market as ecommerce has grown, it nevertheless claims to be the second most-visited internet retailer in the UK, attracting 440 million web visits in the past 12 months. Argos also pioneered services such as click and collect – its Check & Reserve service accounted for 30% of total sales of £1.68bn in the first half to September 1.

But now Walden will accelerate change based on four strategic cornerstones: the repositioning of channels to make the retailer less catalogue-centric; greater product choice and faster fulfilment; an enhanced product offer that widens the retailer’s appeal; and operating on a more efficient cost base.

One of the first questions that Walden faced was where Argos’ 739-store estate fits into the equation. Some observers have argued that the portfolio is far bigger than necessary given the consumer move towards ecommerce, and that it is a costly millstone that will drag on success.

Walden, however, sees the Argos chain as a competitive advantage. As pure-play firms such as Amazon increasingly make use of physical distribution networks, such the option for customers to collect at shops, Argos is already there, Walden maintains.

“When online retailers are using networks of collection points, that says fulfilment is becoming a very big deal,” he argues. “We’ll supplement the digital offer with market-leading fulfilment. That means more product, available faster.”

The transformation means the famous catalogue will become less important

The transformation means the famous catalogue will become less important

He sees the role of the Argos stores changing so they primarily become collection points for customers who have already made their purchases online.

The famous laminated catalogue will disappear in store, along with the stubby pencils and order slips synonymous with the shops at present, to be replaced by technology such as web browsers. The retailer will introduce wi-fi in its shops and will shift towards digital catalogues. The ambition is to “create world-class digital experiences” including “full features, rich content and consistency across all devices”.

Walden is especially excited by the potential of mobile commerce. During the first half, mobile shopping accounted for 7% of the total at Argos, worth more than £100m and up from 3% in the comparable period last year.

“It’s just exploding,” says Walden, who sees no signs that the impact will lessen. “Mobile will have a more dramatic impact on retail in a short time than online did,” he asserts.

Such a transformation necessitates changes to the shops. “The roles of stores and the catalogue will change. They’ll be crafted to support the digital offer,” Walden says.

That, he maintains, is a strength not a weakness of the store network, which he says remains financially viable – certainly at present. “We’ve determined that the majority of stores are fit for purpose for the foreseeable future,” he says. “We have an estate that contributes cash and profits and gives us tremendous flexibility,” he argues. “We want to re-emphasise that local presence is a strategically important part of a digital future. We do need to reconfigure the stores a bit. The primary role is collection and customer service.”

He says that Argos stores’ rent and labour account for 10% of costs, compared with the 16% to 18% more typical among other retailers, but acknowledges that the portfolio has to be right.

Flexible scope

The intention is to shut about 50 stores and relocate 25 over the next five years, and Walden points out that there will be scope to modify the estate further if necessary. Over the next five years, 235 lease renewals or break clauses will come up and by the end of that time, 75% will be on lease terms of five years or less.

“As leases expire we’ll have the opportunity to renegotiate lease terms and make them more flexible,” observes Walden. “We’ll have an estate that gives us tremendous flexibility that others don’t have.”

The retailer said last week that the key to Argos’ advantage in fulfilment will be a hub-and-spoke distribution model, utilising the stores, which will enable “market-leading immediacy of fulfilment”. Trials will begin in January to test the approach from operational and customer perspectives. Walden will also seek to extend Argos’ appeal by enhancing the product range. Although Argos has such a wide customer demographic, the retailer has traditionally been skewed towards the less well-off.

Alden wants to woo more affluent consumers and, along with improved fulfilment options, will adapt the range accordingly by differentiating Argos through exclusive brands – which also has the advantage that consumers will not be able to do price comparisons – and by improving quality to meet higher expectations.

Argos, which already sells brands such as Chad Valley, Habitat and Bush, intends to double the penetration of exclusive brands so that they account for a third of total sales by 2018.

And much of the investment planned to revitalise Argos will be spent on infrastructure, traditionally a field in which Argos led but which it admits it has fallen behind rivals on.

Multichannel consistency

In last week’s update Argos reported: “Building a contemporary multichannel IT infrastructure is a key component. The new IT infrastructure will ensure the consistency of applications and data across the many interfaces with the customer.

“Another important part of the digital infrastructure will be the ability to collect customer data on a large scale. By tracking customer interactions across channels, Argos will be able to provide customers with personalised offers, a significant improvement from its current approach.”

While welcoming Walden’s vision, independent analyst Nick Bubb believes that the financial target Argos has set is ambitious, and asks whether it is achievable.

He says: “To grow sales to £4.5bn will need the economy to gently recover over the next five years, even though interest rates will have to rise significantly in due course. It will also need there to be no change in the current dynamics of the market, even though the competition is not standing still. And it will need perfect execution, even though Argos has a big IT systems change to get through and a lot of investment to shift its distribution focus.

“It does start with the advantage of a decent supply chain and delivery network, so the plan is not completely without hope of success, and the ambition to change and adapt to the digital world is admirable, but it is a big ask for Argos to avoid joining the ranks of the retail dinosaurs.”

Espirito Santo analyst Caroline Gulliver says: “John Walden gave a confident presentation on his five-year turnaround strategy. In essence we think the continued focus on improving Argos’ multichannel capabilities, through technology and logistics investment, is credible.

“However, we think Walden’s £4.5bn sales and approximate 5% operating margin target for Argos by full-year 2018 is too ambitious. We expect the competition to also invest in these growth channels and thus we forecast Argos will reach sales of £4.3bn and a 3.4% operating margin.”

Walden, however, is certain there is an opportunity that Argos is well placed to seize. “Argos is a unique business at a unique time in retailing,” he maintains. Over the next five years, he is determined to demonstrate the truth of his conviction.

He argues: “Every retailer says they’re a digital retailer. There’s a big difference between saying ‘we’ve got the channels’ and saying ‘we’re going to be a digital business, period’. Everything will support a digital relationship with our customers.”

If he succeeds, a brave new Argos will emerge.

WALDEN’S FIVE-YEAR PLAN FOR ARGOS

Now

  • Relaunch of Argos website
  • Launch of tablet app
  • New mobile site
  • One-click Check & Reserve, online and mobile
  • Net reduction of 12 stores
  • Closed infrastructure

Year 1

  • New mobile and tablet apps, including digital catalogue
  • Fast-track store collection
  • Improved customer service
  • Improved availability

Year 2

  • Hub and spoke – same day/next day
  • Express large item delivery
  • Launch of exclusive new brands
  • 12 million registered customers

Year 3

  • Digital sales and traffic growth exceeds market
  • Fully expanded product range

Year 4

  • 75% of sales digitally led
  • 50% of catalogue cost reinvested
  • Completion of digital analytics and dynamic trading systems

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