Sainsbury slips as analyst warns of Argos distraction

Discussion in 'Market News' started by Lily, May 4, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
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    HSBC says Argos takeover could become a distraction at a crucial time

    Ahead of Sainsbury’s results on Wednesday, analysts at HSBC have cautioned that the supermarket group’s purchase of Argos could cause disruption at a key time for the business.

    HSBC analyst David Mccarthy said:

    Sainsbury lacks scale compared to Tesco in an industry that is scale driven, in our view. We also believe Sainsbury is vulnerable to a Tesco recovery that is gaining momentum. To combat this, Sainsbury is buying Argos with the expectation it will be a game changer. The deal is due to complete later this year when we expect price competition to intensify. We expect Tesco to turn the heat up again as part of its long-term plan, Asda to start trying to recover margin, and the industry generally to increase competition as Sainsbury faces the difficult task of converting and integrating the Argos business. There are positives around the Argos purchase, mainly concerning the loan book, for which consumers pay nearly 30% interest, but we do not see a retail solution to Sainsbury’s structural disadvantages.

    Sainsbury has moved to a medium-low pricing strategy. We applaud this move, which sees overall core prices lower and less reliance on promotions. This brings more consistency in sales performance, which in turn makes forecasting and store operations simpler and more efficient. However, this does not address the disadvantages it faces through a lack of scale versus the market leader. These scale disadvantages include buying, cost sharing, and distribution. When Tesco was not using its advantages efficiently, Sainsbury did well, but now Tesco is becoming increasingly efficient in sharing these benefits with customers.

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