Can Argos survive by responding to all the changes in the retailing world?

Charles Darwin famously said: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” But can Argos survive by responding to all the changes in the retailing world?

Even Argos saw some like-for-like sales growth in electricals in Q2, thanks to the boom in tablets and e-readers, so going into today’s much-awaited strategic review by the new Argos MD John Walden there has been a bit more confidence about the business. 

That has unsettled a few of the many shorts of the parent group Home Retail, hence the recent rally in the share price over the 100p level, but there are still plenty of people betting that structural problems will swamp the Argos business in the end unless it starts to rapidly shrink its costly store overhead base.

In terms of that Darwin quote above, Argos certainly used to be one of the strongest of the retail species and it is still big in the sense that it remains a key player in UK general merchandise retailing. And it was intelligent enough to pioneer the whole click and collect multi-channel approach.

But all around the world, catalogue showroom businesses have, like the dinosaurs, become extinct, swamped by the growth of Amazon and the big supermarket chains in non-food categories. And Argos’ evolution into being an online retailer hasn’t stopped the inexorable decline in its profitability in recent years, so turning things around won’t be at all easy.

Argos has set out today a glittering future in 5 years where 75% of all its transactions come online, where upmarket consumers buy the key aspirational brands at Argos and where its chain of 700-750 stores become a powerful local focus for a “hub and spoke” distribution, collection and home delivery network.

What is not clear how, in making this big digital retailing transition, Argos loses its historical baggage of store overhead and catalogue costs. The news today that Argos is to de-emphasise its traditional big twice-a-year catalogue has hit the headlines and you don’t need to pay an expensive management consultant to work out that the old style catalogue has little relevance in an online ordering world. 

But, while Argos refused today to say what the catalogue costs every year in printing and production costs, they did make clear that printed brochures and the like still have a role to play in prompting customers and showcasing new products, so there is no big net saving envisaged here.

Nor do Argos think they need to significantly cut back the store estate partly because the rental cost of their “non-traditional” stores are lower than average for the retail sector and they are nearly all “profitable”, in some strange sense.

The golden path to the future of Argos set out today is, in fact, nothing really to do with costs or margins, but is all about good old-fashioned sales growth: Argos think they can generate an incremental £750m of sales a year to take them to their 5 year target of £4.5bn sales a year and that the operational leverage from that will drop through to the bottom-line to generate a c5% operating margin.

In relation to where the profitability of Argos is today that is certainly “ambitious”, to quote John Walden’s words, but is it “achievable”? Everybody should be cynical about such targets, much like Dixons still haven’t achieved their famous 3%-4% medium term margin target set out several years ago, because of the weak economy etc etc, despite the enduring strength of their Nordics business. 

In the case of Argos, to grow sales to £4.5bn will need the economy to gently recover over the next 5 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 also 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.

To be fair to Argos, 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.

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.