Opinion: Sainsbury's Home Retail bid will progress, but questions remain

It seems any ‘back to the future’ jokes and puns that we had for the Sainsbury’s deal for Home Retail Group should be quietly binned. The rationale for the bid, released today, suggested that Homebase – previously owned by Sainsbury’s – doesn’t really have a future if things progress.

And the bid certainly looks like progressing, given that all the talk on the analysts’ call this morning surrounded the potential acquisition, its rationale and the prospects for Argos and Homebase in the ‘new world’.

Keeping an eye on Amazon Fresh

It is clear that Sainsbury’s has one eye on the growth of Amazon and the etailer’s seemingly inevitable destination to operating food under the Amazon Fresh banner in London. Given the relative success in New York, a move into London seems likely given the similarity with the densely populated centres.

This will concern Sainsbury’s, given Amazon’s strength in the capital and its embryonic click-and-collect model for groceries too.

“Sainsbury’s has one eye on the growth of Amazon and the etailer’s seemingly inevitable destination to operating food under the ‘Amazon Fresh’ banner in London.”

Steve Dresser, Grocery Insight

The march by Amazon on non-food has changed the market. It’s now a huge market online, with physical sales and stores suffering. Tesco particularly has been affected, but has a successful online business selling the same wares.

New store ’space swaps’

Sainsbury’s is relatively late to the non-food party, with former boss Justin King heralding a move into non-food proper in 2005. Since then, the grocer has grown the category well and its latest store transformations see a ‘space swap’ with food space given over to general merchandise.

While Sainsbury’s doesn’t have an oversized portfolio like Tesco, some of its larger stores are lumbered with excess space. A recent partnership with Argos, which saw the retailer implant a small outlet into selected Sainsbury’s stores, bridged gaps where Argos didn’t have presence at a lower rent than an equivalent store on the high street.

Driving footfall to stores is the aim of the game for Sainsbury’s, with additional services like Argos proving popular.

One can presume that the initial partnership has gone well, given the interest that Sainsbury’s has – leading to a bid for the wider Home Retail Group in November.

Confusion and questions

The confusion came in January, as analysts struggled to understand the rationale behind bidding for the wider group. Indeed, there was little mention of Homebase, with the bid firmly centred on Argos. Sainsbury’s doesn’t look to have interest in Homebase and that’s understandable.

Sainsbury’s would be interested in the brands – Habitat particularly – but the stores don’t yield an interest given the space that some possess, alongside the DIY market which is saturated and difficult to execute well.

Price is all-important

The secondary question is what about those sites where Sainsbury’s and Homebase are jointly located? These stores represent a conundrum as space-hungry retailers – B&M, Home Bargains and other value fascias – are not what Sainsbury’s would like adjoining its stores. They would comfortably take away impulse and health and beauty sales in a heartbeat.

“Sainsbury’s boss Mike Coupe and chief financial officer John Rogers emphasised that it won’t pay over the odds for Home Retail Group. But how much is too much?”

Steve Dresser, Grocery Insight

Argos is lumbered with a huge rental bill, and adding Argos to the Sainsbury’s store is a potential masterstroke, resolving the cost base, driving footfall and increasing profitability. I wonder if some of the high street Argos stores could be suitable for a small-scale convenience offer, just like the 1,000 sq ft ‘micro’ store trial in Holborn.

Despite the potential advantages, Sainsbury’s boss Mike Coupe and chief financial officer John Rogers emphasised that it won’t pay over the odds for Home Retail Group. But how much is too much? The bid makes sense now, but if the price creeps up, it could make the economics unsuitable and that can only increase the pressure on Sainsbury’s and Coupe.

He has shown his revolutionary side with the partnership to bring back Netto to the UK. The bid for Home Retail Group shows he’s not one for letting the grass grow, but an accepted bid would only be the start of the journey for the enlarged business.

• Steve Dresser is director of Grocery Insight