Why does Sainsbury’s want to buy Argos?

Like other food retailers, Sainsbury’s has employed a traditional business model. That is, they put stock on the shelves and let customers browse, select what they want, and pay for it at the checkout.

In its race for market share as Tesco has extended the use of this model to add non-food lines. The problem is that this has meant that the retailer has had to construct ever larger super-stores which are now looking increasingly obsolete in the face of discounters, particularly as we buy more online. Indeed, some stores have been mothballed (Chatteris, Cambridgeshire), even before they have opened.

Since its inception, Argos has employed a very different model and one appropriate for an extensive, non-food range. There is often only a single item in stock for each line and these are stored in a high density stock-room. Hence it requires very little store space compared to the Tesco approach. Moreover, it captures demand, not just sales, and therefore aids range and inventory planning.

Injecting this model into existing Sainsbury’s stores will accelerate the growth of their non-food business without needing investment in what could become large, redundant stores. As such, it will enable them to continue to win, or at least hold onto profitable share.

3rd February 2016