With like-for-like sales down 8.8% and with a operating profit of just 0.2%, Argos and its parent Home Retail Group (HOME.L), is clearly in trouble in a falling economy. Prabhu Consulting has analysed the situation using publicly available data and have come up with the following recommendations to improve margins and realise growth from the turn-around. Store closures Exiting certain markets Expanding on certain areas

1. Home Retail Group - Study
www.prabhus.com January 2012

2. 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
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3. 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-profitable markets, establish-
ing 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.
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4. 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 Store opening
4400 1100.0
4325 1050.0
4250 1000.0
4175 950.0
4100 900.0
2007 2008 2009 2010 2011 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 profit per year.
4

5. 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 re-
mained constant in pound terms compared to 2011, despite a fall in sales thus indicat-
ing very high fixed overhead.
100% collection for Check & Reserve?
Need to recheck the validity of check & re-
serve 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
Duddy’s (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 Argos approach
Customer buys the product on- Customer reserves the product
line and gets the product delivered and the product gets delivered to
to the store. the store. Customer can choose
not to buy the product.
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6. 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 por-
tals like amazon.co.uk, play.com is a recommended option.
Tracking Internet Sales
Argos doesn’t have a mechanism to track profitability of internet sales in terms of inter-
net 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 profitability, because it would just become a huge cost al-
location model”
Their business model is not optimised for home delivery. Argos would prefer their cus-
tomers 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 deliv-
ery 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).
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7. • Check & Reserve internet - £1.065bn
• Home delivery internet - £417mn.
• Operating profit 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 traffic.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 profit 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 profit would have been £5.39mn. (10.1% of
54.4mn profit. Source: Home Retail Investor Presentation, page 10). £14.04mn profit
for internet based collection.
Operating Profit
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.
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8. Endnotes
1 Home Retail Group - Q3 Interim Management Statement
2 Q3 Investor presentation, page 39.