Sainsbury's finds it tough but Tu and Argos strength carry it through
UK supermarkets giant Sainsbury’s reported a third consecutive year of falling profits on Wednesday morning. But there was good news too as the company’s clothing label, Tu, continued to outperform the market and as the Argos unit that many had said it shouldn’t buy proved its value by driving sales upwards.
In the year to March 11, underlying pre-tax profit was £581m, more than analysts had expected but down from £587m a year earlier as it invested in price cuts and dealt with cost inflation. Argos contributed £77m to that figure.
While CEO Mike Coupe understandably said “food is the core of our business,” he couldn’t get away from the fact that it’s non-foods that are powering much of the firm’s growth at the moment. He also recognised that “Sainsbury's design-led general merchandise and clothing both outperformed the market.”
Growing that offer is one of its key priorities. No surprise given that the firm’s 11.6% sales rise to £26.2bn in the year was boosted by strong sales of electricals and toys at Argos as the foods business remained challenging. Total company comparable sales fell 0.6% on the back of those challenges. But clothing grew 4% in the year and general merchandise sales grew over 2%, with market share rises by both volume and value, while Argos sales rose 4.1%.
The company said that the clothing market is tough but the launch of its Tu Premium line helped boost its fashion offer and meant that eight million customers now buy the Tu brand. Its market share by volume increased by 20 basis points and it retained its place as the sixth largest clothing retailer by volume in the UK, with a strong position in the womenswear and childrenswear markets and opportunities for future growth in menswear.
It also said the Tu Premium line has been “well received by our customers” with standout performers such as its women's leather biker jacket at £95 and a silk blouse at £30.
Its general merchandise offer also saw market share growth by both volume and value, driven by seasonal events such as Christmas and Halloween and by offering “design-led, ethically-sourced homeware products” at affordable prices.
The company said that its own ranges outside of the Argos offer are selling well. These are updated every eight to 10 weeks, are sold “at prices that are significantly better value than high street stores and homeware specialists.” Its trend-focused in-house-designed ranges such as Harvest, Shore and Blue Daisy, displayed in a department store-style setting, have “proved to be very popular with our customers.”
But it’s Argos that has been the big game-changer. The firm’s acquisition of Argos owner Home Retail Group plc in September 2016 created a £6bn general merchandise and clothing business and made Sainsbury’s one of the UK's largest food, general merchandise, clothing and financial services retailers, with over 90,000 products across 2,200 stores.
The deal had been questioned by a number of analysts who suggested that it was distracting the firm from fixing its under-pressure food operations. But the appeal of Argos is very clear. It’s the UK's number one retailer for toys and a market leader in homeware and electrical products. With around one billion hits a year, it’s the third most visited retail website in the UK and over half of its sales originate online. The first UK retailer to achieve £1bn annual sales online, Argos was also the first to achieve £1bn sales through mobile devices.
So how is it doing? “Argos is performing well both commercially and operationally, with strong results during the Black Friday and Christmas periods,” the company said. With over 10m webpage visits on the day, 65% of Black Friday sales were initiated online. Nearly 100,000 Fast Track deliveries were made over that weekend alone. And there were over 120m visits to the Argos website in the run up to Christmas, an increase of over 9%.
There are now 59 Argos Digital stores in Sainsbury’s supermarkets and they are “performing well”. Comparable sales are ranging from 20% to 30% up at stores open over a year and there has also been a clear sales uplift of between 1% and 2% in Sainsbury's stores where there is an Argos Digital store.
The company also said customer satisfaction scores at Argos stores are at “their highest levels ever and digital remains a key differentiator.” No surprises then that in 2017/18 it plans to transform 60 existing Argos high street stores to a new digital format, meaning that over a third of the Argos store estate will be digital in a year's time.
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