Talk around the Sainsbury’s-Asda merger has mainly focused, unsurprisingly, on grocery but it will also create a general merchandise giant.

Asda Sainsbury's GM

Tu, Habitat, Argos and George

Sainsbury’s boss Mike Coupe said today that the new group would be a “very significant player” in general merchandise and clothing.

The first ever supermarket clothing range, George at Asda, holds the number-two spot in clothing market share by volume, while the Sainsbury’s Tu range sits at number six. In homewares, Argos holds fifth spot, Asda eighth and Sainsbury’s 10th, according to Retail Economics.

The combined strength of Sainsbury’s and Asda, together with Argos’ prowess in the digital and general merchandise arena, is a significant deal even without the main grocery arms.

So, what does the merger mean for clothing and general merchandise?

Argos

First off, Argos is set to grow significantly as it opens in Asda branches. Sainsbury’s believes that £500m synergies will be created each year through buying benefits and the opening of new Argos branches inside Asda stores.

“What really hasn’t got as much attention as I think is warranted yet is Argos,” says Retail Economics chief executive Richard Lim. “This merger is a really significant growth opportunity for the business.

“The big winner in this deal would be the Argos part of the business, which will gain wider access to a bigger pool of customers through Asda’s stores”

Richard Perks, Mintel

“For me, a really important part of the deal is that this tie-up will give them huge UK coverage. Sainsbury’s has higher penetration in the south and Northern Ireland and Asda in the north, Scotland and Wales so that overall coverage is really complementary.”

 Mintel director of retail research Richard Perks agrees: ”The big winner in this deal would be the Argos part of the business, which will gain wider access to a bigger pool of customers through Asda’s stores.”

While Argos will reap the benefits of a store portfolio with heavy nationwide coverage, the two grocers will also gain Argos’ digital and logistics expertise.

Argos’ Fast Track delivery proposition and its hub-and-spoke model make it the only retailer able to deliver to 90% of UK postcodes within four hours.

That offer is becoming more and more popular with consumers: Fast Track home deliveries grew 28% last year, while Fast Track in-store collections shot up 45%.

Mintel senior retail analyst Nick Carroll says that Argos will also be the new group’s “best defence against the increasing pressure that all of the big four supermarkets are facing from online players, notably Amazon.

“It is one of the few retailers that match Amazon for its online excellence, and its wider physical footprint is only likely to strengthen its position.”

Sourcing

General merchandise plays an important role for all grocers, with one third of supermarket shoppers saying the range influences where they shop, according to Mintel.

Argos, Asda Home, George, Habitat and Tu offer a huge range of product targeting a wide consumer base but, Carroll adds, as with the wider deal, “much of the success of this merger in terms of GM will come from how effectively the combined leadership can draw out synergies for the combined operations”.

At least £500m of synergies have been identified across the group, which largely made up of buying benefits as well as the additional sales from opening Argos in Asda stores.

In buying, Walmart’s global sourcing power will play a key role.

Coupe said today that Walmart’s buying scale could “bring significantly lower prices” to both general merchandise and clothing.

Depending on exactly how significant those lower prices turn out to be, the new group could put value and middle-market competition on the back foot.

Competitors including M&S, Next and Primark, as well as the newer discount chains such as Pep&Co, could find their market share under threat.

“There could be a really powerful multi-product, multichannel proposition, which can utilise stores as distribution and pick-up points”

Richard Lim, Retail Economics 

On a granular level, Retail Week Prospect analyst Gurmukh Bhamra believes that the retailers could collaborate to streamline supply chains to achieve further efficiencies.

“Retailers are searching for minute changes to make their supply chain more efficient,” he says. “Sainsbury’s and Asda could collaborate on this by sharing details on lead times of factories for specific products.

“In turn, this would reduce long-term production costs by finding a cheaper supplier for future seasons. This solution could be a trump card for either retailer to tackle common supplier issues, such as delays in shipping or inability to meet demand.”

That buying power and sourcing efficiency, together with Argos’ logistical expertise, could create a general merchandise powerhouse.

“There could be a really powerful multi-product, multichannel proposition, which can utilise stores as distribution and pick-up points,” Lim asserts.

Clothing

Tu and George are both billion-pound businesses, which, help to set the grocers apart from discounters Aldi and Lidl.

While the two businesses could benefit from behind-the-scenes synergies, just as with their parent businesses, they serve very different customers.

“There is crossover, but they’ve got to keep the two separate brands because if it all became George or Tu, it would divide any brand equity they have bought up”

Maureen Hinton, Global Data

Global Data group research director Maureen Hinton believes that the two brands will need to be marketed completely separately.

“They have different customer groups so you can’t just target them all with the same offer,” she says.

“There is some crossover, but I think they’ve really got to keep the two separate brands because if it all became George or Tu, it would divide any brand equity they have built up.”

Mintel research shows that, while 36% of consumers purchased clothing from both George and Tu last year, they mainly attract different customers. George’s customers tend to be younger and less affluent than Tu’s.

“While Tu has been increasing its focus on higher-quality, more premium garments, George is very much focused on low-priced clothing,” says Carroll.

“In part, this is why Sainsbury’s has been vocal in its assurance that the two businesses will retain their independence and identity, but it will be interesting to see if Tu can benefit from Walmart’s international sourcing network in the same way George has.”

Similarly, George - like Tu - could be sold on Argos and benefit from its superior logistics. Lim says this would seem a “sensible thing to do”.

“The George part of the business is significant for Asda,” he says. “So it would seem like a logical step to integrate the clothing business into Argos.”

Making more clothing available via Argos should also drive cross-category purchasing for the retailer.

While the headlines will no doubt be dominated by talk of Britain’s largest grocer, the potential of its general merchandise division shouldn’t be underestimated.