Sales at the catalogue chain are falling, but an ICM poll for Retail Week shows customers have confidence in the model. Tim Danaher reports
This is a market issue, not an Argos issue. No question about it.” Chief executive Terry Duddy could hardly have been more emphatic when discussing the trading update that prompted a 14% fall in Home Retail Group’s shares last week.
The City hadn’t had high expectations, but the 9.6% like-for-like fall at Argos was even worse than the most pessimistic observers of the company had expected, and a robust performance by sister DIY chain Homebase wasn’t enough to save the shares from a severe marking down.
Since joining Home Retail’s predecessor GUS 13 years ago, Duddy has established Argos as pioneer of multichannel retailing, and himself as one of the most respected retailers in the business. But is he right that the poor trading says more about the market, or does it show that the market has moved away from Argos - a model that exists nowhere else in world retailing?
There’s no doubt that Argos has found itself in the eye of the storm as its core consumers rein in their spending. Research this week from analyst CACI showed that blue collar shoppers in what it called the “squeezed middle” are being hit hardest by the downturn in the economy - in many respects the typical Argos customer.
However, the City has marked down Home Retail particularly harshly not just because of the exposure of Argos to the hardest-hit consumer groups in the UK but, at group level, because Home Retail is exposed to the domestic market alone.
The catalogue showroom is now a peculiarly UK phenomenon and, having pulled back after a disastrous attempt to move into India, Home Retail is the largest non-food group to have no international operations to mitigate problems in the UK.
But Duddy has come out fighting. And an exclusive ICM poll for Retail Week shows that not only have two thirds of the 2,005 shoppers surveyed bought something from Argos in the past year, but that consumers are buying in to its multichannel proposition and believe it still offers a better range of products than supermarkets.
Duddy argues that the poor performance at Argos was largely owing to the consumer electronics market - sales were down 20% in the period and contributed to three-quarters of the decline. In certain categories, such as video games, iPods and televisions, the decline was even greater.
Strip that out the decline in electronics and like-for-likes would have been down a far more respectable 2.5% or so, Duddy tells Retail Week, with bigger-ticket items such as furniture taking the shine off a good performance in other categories including toys. Importantly he says, Argos has maintained its electricals share, as measured by analyst Gfk.
Where’s the spark?
Gfk’s latest figures don’t make pretty reading for the consumer electronics sector, showing a value decline in sales of 22% during April - the largest fall in 10 years, on which basis Argos, as Duddy claims, held its share. Tesco this week also highlighted the category as a weak performer. However, it’s important to point out that electricals market leader Dixons does not participate in the Gfk data, and its UK performance so far has been more robust.
Duddy says that while he expected the consumer electronics performance to weaken as World Cup comparatives kicked in, the effect actually became apparent earlier.
There was a marked deterioration from April and the outlook isn’t good. “Not only has the consumer electronics market remained in decline, but it appears to be getting worse,” says Gfk Retail and Technology UK analyst Simon Whitehead.
The issues facing electronics sales are clearly significant. But the reason Argos has so few fans in the City is that it is just one of a series of headwinds that have hit the company’s performance and - its critics argue - are likely to make things worse before they get better.
“It is hard to see why trading will turn around,” says Oriel Securities analyst Ben Hunt. “Home Retail is unfortunately a victim of both increased competition from supermarkets and the internet, as well as having direct exposure to a customer facing considerable pressures.”
The supermarket onslaught into general merchandise is not new, and Duddy’s view is that while supermarkets are tough competitors, which offer convenience for those not looking for a broad non-food assortment, their growth doesn’t jeopardise the Argos model.
He points out that while grocers have put huge efforts into building their offers in Argos’s core categories such as small electricals, Argos still sells more toasters than all the supermarkets put together.
Surveying the scene
The ICM poll backs up his argument that the narrow supermarket general merchandise assortment doesn’t
compare with the breadth offered at Argos. 45% of those surveyed think that Argos offers a better range of products, while only 16% believed the supermarkets did.
However, more people thought the supermarkets’ prices were keener than Argos than vice versa. With Tesco, Sainsbury’s and Asda all placing renewed emphasis on their non-food offers, competition in core categories isn’t going to get any less intense.
The Tesco Direct catalogue is a direct lift of the Argos model, and the UK’s biggest retailer has been putting catalogue areas into its refurbished Extra stores, while online other catalogue retailers such as Shop Direct have also upped their game to re-emerge as competitors.
Lightening the mood
While supermarket competition is nothing new, what Duddy can’t do anything about is the consumer mood. He points out that it’s no coincidence that trading at Homebase - which has a more middle-class shopper base - has seen trade hold up much better than Argos with its core C2DE shoppers. “These people are really feeling it at the moment,” Duddy says, and that’s reflected in Argos’ trading.
In response though, Duddy is defiant and the business continues to invest in broadening its offer. Thanks to a combination of foresight by management and the footing its catalogue model put it on, the Argos model has lent itself to being a multichannel pioneer. While others have made up ground, Argos is continuing to build its proposition.
Interestingly the ICM poll showed more people had used the Argos website than had gone into a store, but it also strongly suggests that people are using a combination of the web, the catalogue and the stores.
This week the retailer introduced the next strand of its multichannel development with the launch of Argos TV, which will be available in 10 million homes via Sky, showcase 1,000 products a week and enable customers to use the check-and-reserve service from their sofas.
The highly popular click-and-reserve service has been extended to the Argos iPhone app - which has achieved 1.7 million downloads - and a third of sales go through the website, an impressive figure particularly given that its core customer base have not been early adopters of the web.
At Christmas the company tested a 90-minute delivery service in London in partnership with fulfilment company Shutl, another first, which has since been emulated by several fashion retailers.
It is also broadening its assortment into new categories that it considers complementary to its core offer. The retailer has been advertising for fashion buyers ahead of a first step into clothing with childrenswear.
This will primarily be licensed product that ties in the with toy range. Sportswear is also to be added, and other clothing ranges may follow depending on the success of these first ventures.
As well as doing it in its own right, Argos also aims to extend into new categories where it doesn’t have authority by tying up with third parties that source and deliver the product while to the customer it looks as though they’re dealing with Argos.
The first such category is children’s books where a 5,000 title range has been added. There is a natural tie-in with the retailer’s strong toy assortment, and other categories are expected to be added during the year.
But some fear that despite all these innovations, structural changes in the sector mean that Argos is swimming against the tide. “The last catalogue showroom closed in the US 20 years ago,” says one veteran retail analyst who asked not to be named. “Terry and his team have done an amazing job and squeezed as much as they can out of the model, but when you look at the relentless growth of the grocers, it’s a one-way ticket.”
Steadying the ship
It’s certainly not an easy time for Argos, and its woes have been compounded by the loss of managing director Sara Weller who left for personal reasons earlier this year.
For the time being, Duddy is running Argos himself, and says he will take his time reviewing the business before deciding on the person required to run it for him.
He says he is confident that performance over the rest of the year will be better than in the first quarter, and points out that the first quarter is a quiet time of year for Argos, which does much of its business in the run-up to Christmas.
But the pressure is on, and while Homebase is performing well, that isn’t enough to counter the weakness of Argos. In the ICM poll a worrying 29% of those surveyed said they are shopping less at Argos than they were five years ago, and while Home Retail is actively refurbishing the Argos estate, the store experience is still clearly an issue - in the survey, more than double the number of respondents said the supermarkets provided a better experience than those saying Argos was better.
“I’m not sure there are any easy answers,” says Arden Partners analyst Nick Bubb. The weakness in the share price suggests the City isn’t expecting the long-mooted pounce on Argos by Walmart. “If you were Walmart I’d think you’d look askance at buying the sort of company you’d put out of business in the US,” Bubb adds.
Argos finds itself in the perfect storm, and with no sign that the consumer environment will get better soon, things are unlikely to change in the near future.
Self-help will be key to Argos turning things round. While the competition is intense, the retailer’s track record of innovation and plans in new categories give hope that there may be light at the end of the tunnel. Argos’s journey is not going to be easy though.
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