Like millions of Britons, grocery chain J Sainsbury (LSE: SBRY) hit the sales straight after Christmas, making a 1bn approach for Home Retail Group, the parent company of Argos, Habitat and Homebase. Thats quite an ambitious shopping list for 1bn. Too ambitious, perhaps,as its advances were rejected.
It isnt hard to see what Sainsburys is up to here. Margins in the grocery sector are being squeezed until the pips squeak, as Lidl and Aldi discount their way to ever greater market share. Sainsburys has defied the challenge better than most,being the only top four supermarket to boost share in the fourth quarter, helped by its relatively upmarket position. Butthe cut-throat supermarket price war has cost it blood and treasure, forcing itsoperating margins down to a squeaky 0.3%, according to Digital Look, and theres no let-up in sight.
With future profits imperilled in this way, nowonder chief executive Mike Coupeis seekingsome extra sizzle. Buthavent supermarkets beenhere before? During its heyday, Tesco (LSE: TSCO) sold just about everything in its vastwarehouse Extra stores, piling up TVs, toys, home electronics, books, clothes and whatnot alongside the food, as it aimed to replace the high street. Isnt this rather too similar to the Argos concessions that Sainsburys has been piloting in several of its stores?
Doomed chief executive Philip Clarke retreated from that strategy after admitting defeat in the price war against Amazon. He then pinned his hopes on other forms of diversification. In his attempt to make Tesco the family destination he bolted-on family-friendly restaurant chain Giraffe and artisan coffee chainHarris+Hoole, the latter of which is now on life support after posting 25.6m of pre-tax losses in the year to March 2015. This strategy is a distraction at best, as new boss Dave Lewis sinks his teeth into far bigger problems.
Sainsburys and Tesco are first and foremost grocers, and past attempts to diversify inspire little confidence. I cant get too excited by the Home Retail bid either. Presumably, Sainsburys rates its link-up with Argos as a success and wants to pursue further cost savings, efficiencies and markets. The problem is that the challengeshave rather uncomfortable echoes.Argos has also been squeezed by foreign competition, in the shape of all-conquering behemoth Amazon.
The big prize is the Argos online delivery service, which has been beefed up to compete with Amazon and would help Sainsburys boost its drive to increase higher-margin non-food sales.If Coupe didsucceed in its bid, hewould have tough decisions to make, such as what to do with the 800 Argos stores still scattered about the country. DiehardArgoscustomers continue to snub the digital revolution and buy from its weightycatalogues, and Sainsburys wouldntwant to lose them.
You can see why Coupe wantsto escape skinny food margins, but to make a success of diversification hereally has to know its onions.
Growth prospects for both these grocers look limitedbut there are far more exciting opportunities out there.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.