Sainsbury’s executives must be crazy to try fighting a war on two fronts

Outlook

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“Genius or madness” was the way one analyst described Sainsbury’s decision to throw a comet at planet retail by revealing that it had made an approach for Home Retail Group (HRG), the embattled owner of Argos and Homebase. The consensus around the City leans towards the latter.

The supermarket chain’s chief executive, Mike Coupe, would probably like you to think his company is being “bold” and “confident”. You could just as easily substitute the word “crazy”, and you wouldn’t be alone if you did.

The official explanation for what Mr Coupe is trying to do was provided in a statement to the Stock Exchange that appears to have been required by the Takeover Panel after Home Retail’s shares started lighting up dealing screens across the City. It contained several bullet points that didn’t say very much, but the upshot is that Sainsbury’s would probably like to convert a lot of Argos stores into Sainsbury’s convenience outlets, close quite a few more, and use what is left of the chain as a click-and-collect super-hub with lots of new Argos iPads appearing in unfashionable Sainsbury’s superstores in the hope that they will lure shoppers in.

I’m told that Mr Coupe has had his eye on Argos for a while now, and you’d presume that the results from Sainsbury’s allowing HRG to trial concessions in some of its stores have gone well enough to encourage him in his ambitions.

What about Homebase, which Sainsbury’s owned once upon a time? Well, there was nary a mention of HRG’s DIY chain in the Sainsbury’s statement, so Mr Coupe’s investment bankers will presumably be busily knocking on the doors of their mates in private equity to see if a bidder can be smoked out. A happy ending for the group’s shareholders, given that it isn’t exactly in rude health and has been touted as a bid target for a while. The fact that no one had been smoked out until now had led to some gloomy predictions about its future, given what has happened to other generalist retailers in recent years.

The problem for Sainsbury’s shareholders is that, of late, their company has been just about the only bright light among the grocers. Defying the doomsayers’ predictions (the stock has been heavily shorted), it has managed to hold its own against the competitive threat posed by Aldi and Lidl while rivals have wilted.

Whether it can carry on doing that, while at the same time trying to park its tanks on the lawns of Argos rivals such as Amazon, is open to debate. You don’t need a GCSE in history to understand the folly of fighting a war on two fronts, and that’s what Sainsbury’s appears to be contemplating with this. If Mr Coupe wanted to try something “bold”, a better option would surely have been to push out of the slow lane Sainsbury’s venture into the discount sector with Netto. There would be nothing to stop him from letting Argos open concessions in Sainsbury’s stores at the same time, and it would share in the benefits with none of the risks of doing a deal.

But that, apparently, is not on the table. The biggest cheerleaders for what is on the table may be Sainsbury’s main rivals, who will be hoping a deal gets done and leads to an unexpectedly happy new year for them while Sainsbury’s is trying to make it work.