E-Commerce - UK - February 2010

Argos
Address: 489-499 Avebury Boulevard
Saxon Gate West
Central Milton Keynes
MK9 2NW
UK
Telephone: +44 (0) 1908 690333
Fax: +44 (0) 1908 692301
Website: www.argos.co.uk

Key personnel: Sarah Weller (Managing Director)

Terry Duddy (Chief Executive Officer)

Countries of operation: UK, Spain, Ireland

Argos is a hybrid retail format. Selling from catalogues and large outlets, it is a cross
between a catalogue retailers and a store based one. This format naturally lent itself
to online retailing and the business has developed rapidly in that way.

Strategic evaluation

The strength and success of the Argos format is masked at present by the impact of
the recession. It is inevitable that sales have been weak given the dramatic fall in
demand for homewares, particularly large ticket item goods. The format is very
strong, but the question is where next to take it.

An obvious option would be to expand abroad. Argos has already set up in Spain and
Ireland, paradoxically, the two weakest consumer economies in Western Europe at
present. One problem with such a strategy is the novelty of the Argos format. While
it is well known and understood in the UK, consumers might struggle to understand
it elsewhere and it would take much longer to establish than a standard high street
venture.

The strategy in the UK has been to steadily expand the product offer. However, it
seems likely that we are nearing the limits of growth in that respect. The
introduction of internet only lines is a way of getting round the physical limitations of
in-store warehouse capacity.

Another aspect of Argos’ strategy is store expansion, but this seems a little illogical.
With 26% of sales already coming from online it is odd that Argos should want more,
larger stores, although there might be a case for expanded in-store warehousing in
some areas.

At the end of August 2009, Argos had 739 stores of which 329 stocked the full Extra

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range. That means that the vast majority of the population has an outlet nearby and
Argos is well set up for its multi-channel proposition. Stores act as order points and
collection points and can make the full internet offer available, even if there has to
be a small delay for some goods to be delivered from a central depot. That is a
powerful proposition in the homewares arena, particularly when backed up by Argos’
reputation for being very price competitive.

But Argos is not alone. Tesco is developing a similar proposition with its non-food
catalogue. It differs in having fewer products on offer at present and in not having
most goods available for immediate collection. More worryingly perhaps for Argos, is
that what Tesco does, others (eg ASDA) can, and usually do, copy.

The paradox of internet development is that the more Argos develops a multi-
channel approach, the more the uniqueness of its proposition is eroded. But, as it
has already proved, the multi-channel strategy is the way forward.

History

1973 Green Shield Stamps catalogue showrooms rebranded as

Argos
1997 Start of internet retailing on www.argos.co.uk
1998 Acquired by GUS
2000 Website redesigned to become more user-friendly,
offering over 8,000 products plus online stock-checking
and a ‘show me how’ function
Early 2000s Launch of “Check & Reserve”
2002 Lauch of Argos Extra, a 17,000 line catalogue

Argos was bought by GUS, then the UK market leader in mail order, in 1998. The
deal gave the business access to mail order expertise and so strengthened its
position as an online retailer.

Argos is the most single minded multi-channel retailer. The whole strategy is to
make it as easy as possible for customers to buy from the business. Items can be
bought in-store, can be ordered online or over the telephone. Goods can be delivered
to the home address or collected from the store. This flexibility is highly valued and
Argos estimates that some 40% of its sales are now ‘multi-channel’.

Financial performance

Argos’ performance has been lacklustre in the last couple of years, reflecting the
impact of the recession on consumers. Argos’ strength is in homewares, the sector
traditionally hardest hit as consumers decided to cut back. And trading has been
weak. Like-for-like sales fell by 2% in the first half of the year and grew by just
0.1% in the third quarter, when consumer demand was much stronger.

However, the online segment is continuing to develop as an increasing number of

consumers are drawn to e-commerce. Growth of 250% over the past five years
highlights the potential for online operations.

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FIGURE 53: Argos: Group financial performance, 2004/05-2008/09

Latest year-end: 2004/05 2005/06 2006/07 2007/08 2008/09

March 2009

Sales (£m, excl 3,652 3,893 3,913 4,321 4,282

sales tax)
Including:
Online 314 471 683 900 1,100

Sales (€m) 5,380 5,689 5,732 6,309 5,377

Including:
Online 463 688 1,000 1,314 1,381

Operating profit 310 291 301 376 304

(£m)

Operating margin 8.5 7.5 7.7 8.7 7.1

(%)

SOURCE: Company Accounts and Annual Report/Mintel

Interim results for 2009/10 reinforce the online story:

● 28% of orders now come online.

● 18% of orders are on a ‘check & reserve’ (a service allowing customers to
check availability from a large catalogue of goods and collect from their local
store) basis, an increase of 50% on the previous year.
● There are now 5,000 internet only lines, a total expected to reach 10,000 by
March 2010.

Retail offering

Argos is primarily a homewares retailer, as the product mix chart shows. It is UK

market leader in toys and jewellery, but both are relatively small markets. Home
enhancement includes furniture and homewares, in both of which Argos plus its
sister company Homebase are market leaders. Electricals includes the whole
spectrum of brown and white goods from kettles and washing machines to TVs, PCs
and iPods.

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FIGURE 54: Argos: Product mix, 2008/09

SOURCE: Company report & accounts/Mintel

In a clear reaction to the recession, Argos has launched both an Argos Value range
and the WOW Value range. In March 2009 there were 250 of the former and 300 of
the latter.

One of the keys to Argos growth has been a steady expansion of lines on offer. The
Argos Extra catalogue, with 17,000, lines was an important aspect of this
development, but Argos has also started to offer internet only lines – of which there
were 5,000 by September 2009 and another 5,000 planned for the second half.

Market positioning
Argos has always positioned itself at the price competitive end of the market. In
jewellery and furniture it is pitched at the lower end of the market. In electricals it is
more of a middle mass market player, simply reflecting the strength of brands in
that sector.

Overall, Argos has a very strong price image and a somewhat downmarket appeal.
Its online profile is similar with a strong bias to younger age groups.

FIGURE 55: Profile of Argos online customers, Nov 2009-Jan2010

All internet Argos

% %

Age:
6-14 10.9 19.1
15-24 18.3 23.5
25-34 17.3 12.4
35-44 18.9 18.5
45-54 17.2 14.5
55+ 17.4 12.0

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Socio-economic group:
A 7.4 11.1
B 23.8 25.5
C1 35.0 31.9
C2 13.9 14.6
D 6.8 7.7
E 5.9 7.5
Retired 7.2 1.7

SOURCE: ComScore/Mintel

Operational issues
Some 40% of sales in 2008/09 were multi-channel:

FIGURE 56: Argos: Multi-channel sales, by channel, 2008/09

SOURCE: Company Report and Accounts/Mintel

This flexibility is one of Argos’ great strengths. From the point of view of the wider
market, however, it is notable just how small a share of the total telephone ordering
now takes.

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Hertfordshire.
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