Could Home Retail Group Plc Deal Be Key To J Sainsbury plc’s Turnaround?

The bidding war to secure Argos operator Home Retail Group (LSE: HOME) has taken a further twist in recent days.

The retailer emerged as a shock £1bn target for Sainsbury’s (LSE SBRY) in November, but South Africa’s Steinhoff International got in on the action last month by making a £1.4bn bid for the catalogue specialists.

However, Sainsbury’s has been given free run on Home Retail Group after Steinhoff withdrew its offer late last week, leading the British supermarket to make a formal offer at the same price. The board of Home Retail Group said that it looked forward to “working towards a recommendation.”

Food for thought

Sainsbury’s chairman David Tyler has said that the deal “presents an opportunity to accelerate our strategy, delivering compelling revenue and cost synergies.” He added that “we will create a multi-product, multi-channel proposition with fast delivery networks that we believe will be very attractive to the customers of both businesses.”

Sainsbury’s is looking to reduce its reliance on the ultra-competitive food sector, an arena beset by an increasingly-bloody price war prompted by the fast emergence of low-cost rivals Aldi and Lidl.

And at face value this strategy would appear a sage one. Sainsbury’s saw like-for-like sales edge 0.1% higher in the last quarter, the first such rise for two years and one that was underpinned by strong demand for its non-food items.

Sales of entertainment products and clothing galloped 11% and 10% higher in the period, helped by the successful launch of its latest Gok Wan fashion lines.

Is Argos ‘back’?

But many analysts are concerned that the deal may have given Sainsbury’s too much to do. After all, the supermarket now has to battle to turn around two ailing businesses instead of one.

Sales at Argos have been more encouraging of late — a 1.1% sales decline during the 11 weeks to February 27 marks a vast improvement from the 2.6% slip punched in the year to February 2016.

And Sainsbury’s will be particularly pleased with the catalogue specialist’s improving fortunes in cyberspace, a hot growth segment for the retail industry. Online takings at Argos rose 13% year-on-year in the latest quarter, driven by the popularity of the firm’s new FastTrack same-day delivery and collection service.

Sainsbury’s also hopes that Argos’s rising online popularity — not to mention plans to bring Argos outlets into its supermarkets — will significantly bolster the cross-selling opportunities of its existing products.

Don’t expect miracles

Still, the supermarket has plenty of work in front of it to transform Argos into the digital retailer of choice and take the fight to Amazon. Like the grocery segment, Argos operates in a highly-competitive environment, and the firm needs to offer more than better delivery options to return to sales growth.

Besides, Sainsbury’s still relies on its traditional food business to generate earnings growth, prompting suggestions that the grocer would have done better using the funds to invest in developing its existing operations rather than splashing out on Argos.

While the firm’s diversification strategy certainly makes sense, I believe the headaches are likely to persist at Sainsbury’s thanks to the widescale competition across Britain’s retail sector.

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Royston Wild 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.