Evolving supermarkets

There was a piece in yesterday’s Observer that alluded to the attraction of Argos’ lease structures to Sainsbury’s – who have made enquiries to the Home Retail Group with a view to acquiring Argos.  I can’t remember a similar lease structure driver – albeit a short-term driver – of a corporate takeover.  Apparently…

The short-term appeal is that 40% of Argos leases expire in the next four years. That presents an early opportunity to close those shops and open a replacement Argos unit within the nearest Sainsbury’s supermarket, many of which have surplus space. There could be about 350 such units within a few years. If all Argos punters stay loyal, there are two benefits: you make a big saving on rent but keep all the custom; and some of the Argos punters may pick up a few groceries while they collect their toasters, toys and gadgets. Ten experimental Argos concessions within Sainsbury’s stores are said to have traded well in the past year.

It’s an interesting potential strategic response by a supermarket operator  to the changing environment in convenience good retailing (online, competition from discounters, more frequent shopping, growth of small outlets etc.). I make no claim to be a retail sector analyst – but at first sight a Sainsbury’s acquisition of Argos sounded as plausible to me as a Sainsbury’s takeover of Argus (the real estate appraisal software company).  However, the narrative of cost savings and business synergies does sound plausible.  It could enable them to use surplus space in their large stores more intensively and to get access to some good sites for the Sainsbury’s Local network.

However, from the perspective of an investor or a valuer, it might be time to think about the probability of voids in assets leased to Argos which have lease expiries or breaks in the next three years. It’s the phrase “a big saving on rent” that is ominous for investors.  I wonder if the valuatons of units leased to Argos will show any reaction to this new information.

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