Sainsbury's heads into an unpredictable landscape
Mike Coupe, the chief executive of Sainsbury's, the British retail giant, was asked in recent weeks why on earth his company wanted to acquire the Argos enterprise, famous for its ubiquitous door-stopper catalogues.
Retailers, he explained, are in the middle of an "unpredictable landscape". He cited the difference between how his 78-year-old mother and his daughter shopped. The elderly Mrs Coupe dutifully turned up at the supermarket, grabbed a trolley and perused the aisles. His daughter, on the other hand, pressed a few instructions into her smart phone and effortlessly did exactly the same job as her granny. Though Mr Coupe was careful not to say as much, the implication was that his daughter saved herself both the petrol and the artery-hardening annoyance that a trip to the shops can often be.
Sainsbury's was founded by John Sainsbury and his wife in 1869 as a fruit store in Holborn, London. In time it expanded its range, built a reputation for quality food at fair prices and by 1922 was incorporated as a private company. Almost 50 years later it was listed on the London Stock Exchange.
Over the years it has attracted the attention (often unwelcome) of the merchant bankers. Stakes have been built up in the enterprise but the Sainsbury family with 20pc of the stock has usually repelled invaders. However, in the midst of this frenetic activity, Qatar's mighty investment company has built a 25pc stake.
Sainsbury's is a very good case study in the dramatic challenges that face the retail sector in these islands. It is a big company and not just a lot of shops with a whack of internet possibilities. It is also a bank. Its bank offers savings accounts, credit cards, mortgages to its 1.6 million customers (AIB has 2.3 million) and insurance products from homes to pets. Should the Argos takeover occur, Sainsbury Bank would benefit with £300m in cash and £600m in customer loans.
The company has 1,200 outlets, 1,400 ATMs, 24 million square feet of retail space, employs 160,000 and is the largest retailer of Fair Trade products in the world.
Recently, the new regime at Sainsbury's has offered a pile of money for Argos with internet expertise based on the 'click & collect' concept. Argos' multi-million pound investment in its websites and same day delivery platforms could help Sainsbury's expand into higher margin, non-food sales. Unfortunately, (for Sainsbury's) the Argos takeover is under threat. A South African retailer, Steinhoff, has made a higher offer. Time is running out for Sainsbury's and it must make a decision within the next week. Sainsbury's new multichannel strategy is predicated on allowing its customers chose what, when and how to shop. It intends to grow and build on its 17pc UK market share, its highest in a decade. To compete with the German discounters it has set up a joint venture with the Danish retail group Danske Supermarkt, owner of the discount chain, Netto.
As there has been no growth in British food retailing due to the intensity of the competition from Aldi and Lidl, plus the stubborn persistence of UK food price deflation, Argos would strengthen the company's position in the crucial online and home-delivery market. Buying Sainsbury's shares is a speculative buy and the shares are trading at a modest price/earnings ratio of 10 and at 269p are way below its five-year high of 360p.
Following Steinhoff's intervention there has been some volatility in the shares as the market waits for the Argos deal to crystallize.
The company's market value today is £5bn and the company has raised £1.2bn through property disposals, throwing up profits of £360m. The value of its property portfolio is solid backing for its shares and the balance sheet is strong but last year its dividend fell by 20pc. Regular readers will know I hate dividend cuts.
Nothing in this section should be taken as a recommendation, either explicit or implicit, to buy any of the shares mentioned.