The thinking behind Sainsbury’s £1bn-plus purchase of Argos back in 2016 wasn’t entirely other-worldly. The big idea was that, by putting Argos general merchandise shops within Sainsbury’s supermarkets, both chains would benefit via a customer crossover effect. But the problem was also screamingly obvious: why volunteer to step in front of Amazon’s non-food steamroller?
Simon Roberts became chief executive of Sainsbury’s in 2020, replacing Mike Coupe, the architect of the Argos deal, and immediately indicated where he stood. His “food first” strategy wasn’t quite a declaration that he viewed Argos as inessential to the day job of competing with Tesco et al, but it wasn’t far off.
Thus nobody was surprised by Sainsbury’s confirmation on Saturday that it was considering an approach for Argos from JD.com, the enormous Chinese retailer. The identity of the would-be buyer was logical – JD.com publicly flirted with the idea of bidding for electrical chain Curry’s last year and is still thought to be keen on a splashy entry into the UK.
Sunday, however, brought news that the talks were off already because, said Sainsbury’s, JD.com would only engage on “materially revised terms and commitments”. In negotiation-speak, that’s like calling the other side a bunch of time-wasters. The talks look properly dead. Everybody knows Argos isn’t worth what it was in 2016, but it’s still a substantial business.
There is still a possible upside to the messy weekend saga for those Sainsbury’s investors who view Argos as unwanted baggage. The mere fact of talks suggests Argos has not become so enmeshed in Sainsbury’s infrastructure that the business could never be separated and sold.
Of the 664 Argos shops, 461 are within a Sainsbury’s store, so a divorce would still be tricky. But more and more of Argos’s trade is going online, so perhaps there is still somebody out there who would want the 200-odd rump stand-alone shops, allowing Sainsbury’s to take back its store space to put to better use.
Sainsbury’s doesn’t reveal Argos’s profits, but the detail-free charts it occasionally publishes suggest margins are slim (certainly slimmer than in the supermarkets) and have been getting slimmer in recent years. On the other hand, turnover at Argos is almost £5bn and digitalisation has happened, so perhaps there still an appeal for somebody.
For Roberts, Argos is best viewed as a low-level headache. Its presence is annoying for shareholders who would prefer a pure grocery-only story, especially now Sainsbury’s has sold most of its bank. But the core supermarket business isn’t obviously being distracted – and the weekend update confirmed this year’s expectations on operating profit and cashflow, which helped the share price. The worry is more the medium-term one that, one day, the demand on Argos to stand on its own feet internally will become impossible to maintain.
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It would have been better if Argos had never been bought in the first place because the competitive pressure in non-food is relentless. But it is still fair to turn down offers at silly prices. Roberts has a couple of years to find an alternative – either a self-help fix of Argos or a sale on respectable terms. The task is not easy, but nor should it be impossible.
