* Sainsbury's has until Feb. 2 to make firm offer
* Amazon influencing thinking - Sainsbury's CEO
* Sainsbury's could seek to spin off Homebase
By James Davey and Paul Sandle
LONDON, Jan 9 Old-fashioned catalogues, pencils
and paper order slips still line many Argos stores. But whether
customers shop there, online or using white tablets in some
revamped shops, they have access to one of the fastest delivery
systems in Britain.
Goods not in stock can arrive within hours, seven days a
week, the result of a push to turn the catalogue retailer into a
digital business. This has made Argos parent Home Retail
attractive to supermarket Sainsbury's as it
prepares for grocery competition from U.S. online giant Amazon
Britain's second biggest supermarket made a surprise swoop
for Home Retail, also the owner of the Homebase do-it-yourself
chain, in November and has until Feb. 2 to make a better offer.
A Home Retail spokesman declined to comment on the outlook for
an offer but analysts expect one soon after trading updates from
Sainsbury's on Jan. 13 and from the Argos owner on Jan. 14.
They say a deal could speed up Sainsbury's deliveries, widen
its range with electronics, appliances and toys, and optimize
space by shutting some Argos stores, selling Sainsbury's
products in others and opening Argos concessions in Sainsbury's.
Homebase is expected to be sold.
"The stakes are now being raised on same day deliveries for
groceries," Sainsbury's Chief Executive Mike Coupe told Reuters
on Dec 3 when discussing the impact Amazon was having on the UK
grocery market, where it is not yet a big player.
"You could argue that they're already having an impact in
the way that people are thinking," he said, noting that
Sainsbury's was looking at same day grocery deliveries.
Sainsbury's has done a better job than rivals Tesco
, Asda and Morrisons of battling the
advance of German discounters Aldi and Lidl
But it has been a laggard in some aspects of ecommerce and
non-food products compared to Tesco and Asda, a risk as Amazon
expands into food.
Argos, which accounts for almost three quarters of Home
Retail's sales, wants 75 percent of sales to have an online
element by the end of its five-year digital push in 2018.
Already internet sales account for 46 percent of total Argos
sales and by February 2016 about 200 stores out of 840 will also
be equipped with tablets.
But it is its hub and spoke system, where 160 larger stores
have at least twice daily deliveries to smaller shops or homes
ensuring quick collection or delivery, that is attractive to
Sainsbury's in its bid to fend off Amazon and other online
"There is some logic (for Sainsbury's), at the right price,"
said Nick Bubb, an independent retail analyst.
FAST, FLEXIBLE, RELIABLE
Experts predict that retailers will only be able to keep up
with Amazon if they can capture the frequency of customers' food
shopping with more profitable purchases of other goods.
Sainsbury's said on Tuesday a deal with Home could enable
"fast, flexible and reliable delivery to store or to home across
a wide range of food and non-food products".
Home Retail is expected to give details next week about the
reception for the same-day, nationwide, seven-days-a-week
delivery service announced in October.
Amazon offers delivery within one hour for members of its
Prime subscription service in a limited number of city-centre
postcodes or in a two-hour same-day window.
The company launched its "Pantry" food service in Britain in
October for Prime members, offering one-day delivery on a range
of more than 4,000 packaged goods. Analysts have speculated it
is gearing up to replicate its U.S. Fresh service for about
20,000 chilled or frozen products in Britain later this year.
However, British supermarket networks still provide a major
advantage over Amazon, especially given popular click and
Sainsbury's said it sees potential for Argos concessions in
its stores, trialled in 10 over the last year and from selling
Sainsbury's products through Argos.
If it can use Argos to fill surplus space in its stores,
Sainsbury's could close about a fifth of Argos stores, Citi
"There would be synergies from optimising the combined
group's property portfolio, but that might not be entirely
straightforward with Home Retail's lease liabilities," said one
major institutional shareholder in both companies.
The deal would also enable Sainsbury's to extend its already
extensive network of successful convenience stores by converting
some Argos locations to sell food.
By contrast, analysts see few synergies between Sainsbury's
and Homebase, which the group did not even mention in its
statement on Tuesday. Analysts believe Homebase, which used to
be owned by Sainsbury's, would be sold.
Home Retail, which warned on its profit outlook in October
and was trading at almost a 50 percent discount to the broader
sector before news of Sainsbury's interest emerged, said on
Tuesday the November approach undervalued it.
After soaring on Tuesday, the group now has a market
capitalisation of 1.1 billion pounds, but analysts said the
break-up value could still be as much as double that.
"We believe there is significant intrinsic value in the
business," said Cantor Fitzgerald analyst Freddie George, who
rates Home Retail "buy" with a target price of 195 pence.
($1 = 0.6835 pounds)
(Additional reporting and writing by Emma Thomasson; editing by
Kate Holton and Anna Willard)