Home Retail Group - Study

www.prabhus.com

January 2012

Contents
Problems Reported!..................................................................................3 Scope!.......................................................................................................3 Analysis! ....................................................................................................3
Competitive advantage!..........................................................................................3 Resources & Capabilities!.......................................................................................3 Recommendation! ...................................................................................................4 Argos - Homebase overlap!....................................................................................4 Store Closure! .........................................................................................................4 Books and Clothing?! ..............................................................................................5 100% collection for Check & Reserve?!.................................................................5 Exit from Audio and Video games!..........................................................................5 In-store collection! ...................................................................................................5 Toys!.......................................................................................................................6 Tracking Internet Sales!..........................................................................................6

Endnotes!..................................................................................................8

Problems Reported
Argos like-for-like sales down 8.8% from September till December 2011 1 Two-thirds decline in consumer electronics category particularly on video gaming and audio markets. Growth from iPad2 and kindle sales. Sales 35% down in video gaming category. Pulled-away from loss-leading deals. Homebase like-for-like sales down 2.6%. Group will be closing its UK homewares trial format.

Scope
We are going to limit the study to Argos alone. Data is collected only from public sources and for the year 2011 and 2012.

Analysis
Competitive advantage
Argos claims to have low-cost advantage due to scale. We believe this alone may not be enough to provide a competitive advantage and the group has to start thinking in terms of differentiating their offering. This would involve exiting un-protable markets, establishing good brands and reducing the cost in the value chain.

Resources & Capabilities

Established own-brand products. Bush and Alba in consumer electronics Chad Valley in toys Schreiber and Hygena Second largest UK internet retailer with 400 million visits to the website.

Recommendation
Argos - Homebase overlap
Too much overlap between Argos and Homebase as shown in the table below.

Store Closure
We are recommending immediate store closures as part of the turn-around strategy. Below are some charts comparing sales and store growth.

Sales growth
4400 4325 4250 4175 4100 2007 2008 2009 2010 2011 1100.0 1050.0 1000.0 950.0 900.0

Store opening

2007 2008 2009 2010 2011

Sales

Stores

1092 combined stores appears too much and is not suitable for the current tougher environment. Number of stores make just 25K to 100K prot per year.

Books and Clothing?

Need to re-evaluate the strategy behind selling books and clothing on a commission basis. This brings them in direct competition to online retailers like amazon.co.uk, play.com and other clothing retailers. Home retail cost base is just too high and is not suitable for this kind of business activities. This is evident from their Operating and distribution costs which has remained constant in pound terms compared to 2011, despite a fall in sales thus indicating very high xed overhead.

100% collection for Check & Reserve?

Need to recheck the validity of check & reserve percentage claim. (Refer to the chart on the left taken from the investor presentation). 100% collection rate may not be possible.

Exit from Audio and Video games

We recommend them to exit from markets like audio and video games where they cannot leverage their competitive advantage. In Terry Duddys (CEO of Home Retail) own words

I cannot provide an own-brand version of video games consoles.

In-store collection
Order for in-store collection was launched for 4300 categories. This is different from the in-store collection method offered by other retailers. In case of Argos, the customer need not pay upfront. Hence failure to collect would lead to Argos incurring the transportation and storage costs. In-store collection Customer buys the product onto the store. Argos approach Customer reserves the product the store. Customer can choose not to buy the product.

line and gets the product delivered and the product gets delivered to

Toys
We believe that Argos has a good opportunity to expand on Toys. There is a potential to establish their Chad Valley brand as a competitor to Vtech, LeapFrog and other brands. For this to happen, Argos has to expand on the supplier base. Partnership with online portals like amazon.co.uk, play.com is a recommended option.

Tracking Internet Sales

Argos doesnt have a mechanism to track protability of internet sales in terms of internet based collection and home delivery. In Richard Ashton (Finance Director), own words

We have been asked this question before but unfortunately we do not run channel protability, because it would just become a huge cost allocation model
Their business model is not optimised for home delivery. Argos would prefer their customers to come to their store, pay using the quick pay kiosk, rather than order for home delivery. We at Prabhu Consulting, tried to uncover some sales numbers related to home delivery through internet. We started with the chart in their annual report.

In 2011, total internet sales was 35.9% out of 46%. 46% sales is equal to 1.9bn. This means 1.48bn in internet sales. (From 400mn visits).
6

 Check & Reserve internet - 1.065bn Home delivery internet - 417mn. Operating prot is 5.2% which equates to 21.68mn. In 2012 H1, again 46% of total sales is multi-channel. 9.1% decrease from 2011 H1 and 11% increase in website trafc.2 Total sales from internet has gone down to 33% from 35.9%. Again one-third of 33% i.e 11% represents home delivery from internet. 11% is 184.36 mn. (Total sales - 1.676bn) Operating prot for Argos is 0.2% (0.179% to be exact). If we assume the same for internet sales as well, we get 368,720. (737,440 for internet based collection). We are guessing that in H1 2011, this prot would have been 5.39mn. (10.1% of 54.4mn prot. Source: Home Retail Investor Presentation, page 10). 14.04mn prot for internet based collection.

Operating Prot
15000000.00 11250000.00 7500000.00 3750000.00 0

Delivery

Collection

H1 2011

H1 2012

We believe the poor margin is mainly attributable to the operating and distribution cost. Even though Argos carefully tries to avoid cut-throat competition, their cost base is just too high. As explained earlier, store closures is a good start to reduce the cost base.

Endnotes
1 2

Home Retail Group - Q3 Interim Management Statement Q3 Investor presentation, page 39.