For UK grocers, the Christmas of 2016 brought cheer for the established retailers, with strong results for Tesco, M&S, Morrisons and Sainsbury’s. Within the pack, perhaps most notable, was Sainsbury’s - beating analysts’ expectations thanks to stronger than expected sales at Argos.
Sainsbury’s acquisitions of Argos and Habitat completed in 2016 are therefore looking very savvy, with strong general merchandise complementing Sainsbury’s food coupled with strong digital capabilities which can be leveraged for the future.
Indications for how the businesses will complement each other for customers can be seen in South London, where a 60,000 square foot store in Nine Elms opened at the end of the summer. The store has the latest generation Argos insert, offering fast track delivery backed by high density intelligent racking; a mini Habitat and smart next-generation versions of the ‘traditional’ Sainsbury’s non-food.
The strong offer shows three established businesses working well together to give full expression within a store despite not having much time to do so (the takeover being finalised not long before). However, to get the best scale and the ‘significant’ cost savings of the acquisition, what will future Sainsbury’s’ stores need to look like?
Joining the dots
The current store opening programme shows Sainsbury’s wants to continue all three brands, so they will need to review the ranges in their entirety to see how they fit together – for the business and for customers. Categories such as Home, Cook and Dine are traded in all three, with some different SKUs, colourways, styles and pricing structures.
To be clear, this doesn’t mean all three brands have to merge in to one, but it does mean there needs to be clear understanding as to how the brands work together, and the ‘plumbing’ behind the scenes (such as data management, buying processes, team structures, sales trends and stock visibility) needs to be aligned to ensure the business is efficiently supporting this.
Let’s take an example of a product group that cuts across all three – cushions:
- What is the relationship between the products, and their overall hierarchy?
- Are they ranged in-store, online or both?
- Of all the cushions, which make it in-store?
- Is the customer priority breadth of range, or depth?
Pretty standard (if tricky) omni-channel questions retailers such as Sainsbury’s have been tussling with over the last few years – answering these, however, across three businesses is a different skillset.
Building on this understanding of brand roles within the range, understanding the missions that drive people to each store, and which general merchandise products play to these missions, will be critical to success. Our cushions are unlikely to ever be a distress purchase in the same way a dress or an iron may be, however, with customer missions understood and store assortments tailored, ranges in-store can be optimised and clearly linked with the extended range offer that Argos provides. To get there will require lots of pooling of information and insight, made more challenging in businesses which have matured independently in different channels.
So, ranges have been rationalised, duplication is reduced (and exists only where consciously planned), and customers can sensibly navigate the ranges, but how is this then implemented in-store?
Range rationalisation is likely to see some categories in-store shrink. Nine Elms had lots of space devoted to CDs, DVDs, audio accessories and equipment (radio alarm clocks, for example). When retailers have a great online offer (none better than Argos), such areas tend to get the chop.
So what to do with all this space? It’s a key question – Sainsbury’s estimate that 25% of their stores will have underutilised space over the next five years, half of which will be used to grow general merchandise. In that context, how can they effectively repurpose space leveraging the three brands?
Expanding the Argos offer and footprint is an option, however, the challenge with this is either creating large warehouses on the shopfloor (where the Argos is at the front), or moving inserts to the back – not ideal when part of the customer offer is convenience. Divorcing the warehouse from the shopfloor isn’t ideal ether and this will only increase labour cost.
Promoting Habitat’s broader range is an alternative, using their strong capability to focus on room-sets and create something experiential, which Nine Elms hints at, however these can be very low on sales densities. General merchandise in general is far lower than food, often just scraping double digit pounds per square foot, and this will reduce that further – considering the space turned over to room-sets will once have been dense grocery space, this could lead to a significant dilution of the overall store and estate densities.
There are, however, digital opportunities for Sainsbury’s through the tie-up. Innovations that are popular with customers (based on a recent Capgemini study), such as the ability to check stock and beat queues, are mature in Argos and it’s easy to imagine Sainsbury’s leveraging these to help transform the stores. However, how these digital capabilities (and others) Argos will bring help with the space challenge aren’t obvious.
So, back to Nine Elms - a lovely shop in a growing part of London, and a great indicator of the future direction of Sainsbury’s rather than the future itself. Fast-forward a couple of years, and maybe expect general merchandise ranges built around brands and missions, best served by the logos as required. Getting there will require work on curating ranges in-store from the best of all brands, skilfully changing space in-store and sorting out the commercial and assortment ‘plumbing’ of the three businesses – all whilst not taking their eye off the ball of a very competitive grocery market. If they can pull these off, the future looks very bright and orange for Sainsbury’s…