Argos Competitive Strategy Essay

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5th March 2012 Argos History Founded in 1973 by Richard Thomkins, Argos is the largest general-goods retailer in the United Kingdom and Ireland with over 751 stores (1). It was then acquired by GUS plc in 1998 and subsequently became part of Home Retail Group, which was demerged from its parent company, GUS plc, with effect from 10 October 2006 (2). A non-specialized store, Argos carries over 35,000 different household goods such as furniture, toys & games, electronics, jewelry, sports, leisure equipment and PCs.

Currently it is the leading UK retailer of toys, small electronics and jewellery (3), and has a significant market share in ‘Do It Yourself’ (DIY) and sports equipment (Exhibit 1). Nowadays, the company boasts over 33,000 employees, serving more than 130million customers each year. As of 2011, took in ? 4. 2bn (€5. 03bn) in annual revenues (4) – approximately 7. 5% of the ? 56bn industry. Argos’ mission statement is “We provide our customers with the best value for money through the most convenient shopping experience” (5).

The company is based on a simple idea: provide the comfort and convenience of home selection, purchasing and delivery with the closeness of high street stores. In 2004, over 98% off the population of the UK live with in 10 miles (16k) of an Argos store. Since then an additional 201 stores have been opened, totaling 751. Industry Overview “The current UK retail market is dominated by a comparatively small number of large retailers (6). ” For these retailers, including Argos, to be part of this industry they need to find it attractive or to have a competitive advantage that allows them to survive and out perform their competitors.

Exhibit 2 shows an overview of the attractiveness of the retail industry in UK. Porter’s model of the five competitive forces help in analyzing the industry’s “attractiveness”. In order to narrow down the analysis, we focus only on the UK market. We can deduce from the exhibit that the retail industry is not characterized by its attractiveness. So we may ask, what did Argos do in the past and what is it doing now that propelled it to the market leader, and what is the underlying strategy behind its success?

As a whole, if we consider Argos business model, the variety of products it stocks and the several market segments it serves, we realize that there are no “direct” competitors. Presently, Argos is competing in no less than ten different product markets, outlined in Exhibit 1. Of these, it is currently the leader in the Toys, Jewelry, Home ware and Small Domestic Appliances sectors. For the purpose of this report, the main competitors in each of these categories have been chosen for comparison.

Those are Toys R Us (toys), H. Samuel LTD (jewelers) and Dixons (home ware /small domestic appliances). Competitive Advantage Argos has been able to differentiate itself from its main competitors by developing and maintaining a strategic cost advantage through its innovative, technologically centric and lean business model. Also, Argos maintains its competitive price position by utilizing its purchasing scale and capabilities in all areas of sourcing to create a highly advantaged supply base (7).

Exhibit 3 compares some key financial data of Argos and the competitors. We can observe that Argos enjoys a competitive advantage in Cost of Good Sold, which as a percentage of sales are 62. 8% and 62. 4% (2011, 2010) are the lowest. Consequently, it has a higher Gross Margin relative to its competitors. We can assume that this is a result of economies of scale that allow the firm to have lower purchasing costs from suppliers due to its high volume of sales and purchasing power.

Primarily a catalogue merchant, it offers customers multiple channels in which to purchase goods, such as physical stores, online (Web & Smartphones), via telephone using the “Ring & Reserve” service, and through its digital TV station, Argos TV. The catalogue business model facilitates not only convenience for the customers through comfort and ease, but, perhaps more importantly, it provides Argos with great cost savings opportunities which Argos passes on to the customers by offering great value, further strengthening the competitive advantage.

Since Argos displays goods primarily through the form of a catalogue, customers make their selection by looking through the offerings, then they check the availability of the item through the advanced computerized inventory system, pay for the item(s) and then either collect the goods themselves or have them delivered by Argos. The Internet has played an important role in the company’s development. In 1995 the Argos website was launched, and has been continuously developing its online services ever since.

Today it is the second most visited website in the UK, with 400M visits per year (8). Since December 1999, Argos customers have been able to use the “Click & Collect” service via the website, or similarly, as of 2008, the “Text & Take Home” mobile service allows ordering via smartphone (9). Theses methods of including the customers in the over-all service helps keep staff levels low (see Exhibit 4) as there are no products actually on display in the stores, which therefore do not require time-consuming maintenance, costly displays, restocking, security etc.

Not only that, but because all of the stock is held in stockrooms to which only staff have access, the stores themselves don’t require huge floor space, which saves the company from spending exorbitant sums of cash on large expensive retail properties. Also, on average, much more stock is held per unit of floor area than would be normal in a traditional retailer (10). Its stores tend to be on average 14,000 sqft, yet within these stores there can be up to 11,000 stocked items (4). Exhibit 5 shows the average floor space/items stocked of Argos versus its main competitors.

In two of three, Argos has double the space utilization, the exception being H. Samuel, who’s goods, being “pure” jewels, are much smaller by nature; even so, it only obtains almost the same utilization as Argos. Another great cost advantage for the company lies in its highly streamlined, technologically advanced supply chain operations. Argos has always been noted for its innovative use of technology, computers have always held a central function in its business model. In the early years, Argos had a very complicated network of suppliers, using 45 different ICT systems to manage the required orders and delivers.

However, although this system help create an advantage over competitors in the beginning, as the company grew this outdated complex system was hindering the entire logistical operation and was preventing the company from growing further – some of the mainframe bases merchandising, forecasting and replenishment systems were over 20 years old when they were replaced in 2001 (4/11). In order to rectify the situation, Argos entered into an innovative co-development relationship with Oracle Corp. and together built a revolutionary Advanced Inventory Planning (API) system.

The new system not only allowed optimization of inventory levels, it enabled increase product availability through instant delivery notifications and is continually tuning supply to demand so that there was always perfect equilibrium. The new system resulted in increased sales across the board by maximizing the products to stock ratio within the constraints of the existing store plans, increased product availability and decreased cost through reductions in inventories and number of warehouses, which generated more than ? 100M in stock reduction savings in 2012 (4). See Exhibit 6 for further streamline benefits of AIP.

Further more, Argos has implemented its own distribution system called “Nominated Carrier Scheme” (NCS) in order to efficiently manage the flow of merchandising from an extensive base of over 750 suppliers to a number of centralized distribution centers throughout the UK (3). Prior to the introduction of NCS, all the suppliers used their own transportation to deliver goods. This was a highly complicated system, which required extremely high levels of coordination and often resulted in wrong delivers, over/under stocking and also wasted a lot of resources, as staff has to be unloading delivers throughout the week.

A decision was taken to adopt a single system, one which would entirely controlled by Argos and would collect all orders from individual suppliers, check the orders were correct, consolidate them with other orders and then transport them to Argos’ own distribution centers. From there smaller trucks transport customized single daily orders to individual stores. All of this was facilitated through direct computer links, which guaranteed correct orders were collected and delivered on time (12).

This system provided Argos with immediate cost savings as it reduced the number of trucks on the road by 9% and consolidation of the deliver logistics ensured full loads; whereas before nearly 55,000 truck loads were required, with the NCS system, that number was reduced to 15,000 (9), an efficiency gain of over 72%. In the year after its initiation, the percentage of inbound goods carried increased from 20 to 25% (4). All these competitive advantages are reflected in the profitability ratios detailed in Exhibit 7. The significantly higher ROA shows that Argos is able to generate much more Net Profit from its assets.

While the ROE reveals that it yields competitive returns to its investors, with only Toys R Us surpassing its performance by roughly two percentage points. Finally, the NPM reflects Argos ability to manage its expenses better than its competitors across its entire cost structure. Current Situation/Recommendation Argos has seen fall in its like-for-like sales of 8. 1% in the first quarter of this year, sales of consumer electronics had been particularly hard hit, falling 20% over the period (13). This, coupled with the record breaking poor Christmas period, which saw sales down by ? 50M (14), has put Argos in a very difficult position. In an effort to lessen the effects of recent events and in order to grow further, we recommend that Argos adapt the strategy of the company with an aim to cut costs and focus heavily on the developing online purchasing channel, with the result of strengthening its cost advantage against its competitors. Approximate 150 stores are nearing the end of their property leases over the next 4/5 years, with 25 ending this year (15). As we can see from Exhibit 8, sales in Net New Space (sales in newly open stores) is declining year on year.

Given the declining growth of in-store sales, Argos should not go ahead with the planned opening of 15 new stores (17); instead it should use the ending leases as an opportunity to close some of the stores that are under performing and focus their resources on developing their online presence. The catalogue merchant model is becoming out dated, customers are much more tech-savvy; the decline in in-store sales and the rise in online market clearly illustrates this. Printing 20M catalogues (over 1500 pages each) is costly and is not adding value to the company anymore. 8M of the catalogues are then delivered to households (16), again, a very wasteful and costly process, especially considering that 82% of households in the UK have access to Internet (17). In Exhibit 9, we observe that Argos’ distribution, administrative and selling expenses are significantly higher than that of their competitors, especially when compared against Dixons, which is also one of the largest retailers with a portfolio of 450 stores. This suggests that there is a lot of potential for improving Operating Profit Margin if key measures are taken to address this issue (i. . furthering its investment in multi-channel retailing and reducing catalogue printing and distribution). Exhibit 10 shows the total Unique Visitors (UV) for Argos, Amazon and Ebay ( only UK segments) over 2010. As we can see, from July to December, Argos enjoyed continuous growth, however, in January through February, experienced a sharp fall. This suggests that Argos should concentrate on regaining its presence online and on capturing more of the online market. Argos is currently heavily affected by seasonality. An initiative need to be but in place with n aim to altering customers perceptions of Argos as only attractive during the Christmas period. The graph clearly illustrates that there is a lot of room for improvement as Amazon has been achieving annual growth of 11. 7%, with over 18. 5M UVs. Currently, of the 20,000 product lines available in stores, only 12,500 can be purchased online. Even still, online sales are up 50% compared to last year (15). This suggests that Argos need to expand the online product range to include all of its lines and devote more resources to marketing and promotion of its online services.

Although no exact figures are available, Amazon. co. uk current stock literally millions of products – a blank search for ‘Toys & Games’ alone gives exactly 1,435,955 results (03/03/12). As Amazon is by far the online leader and although it may be a stretch to try and steal market share away from this particular retail giant, it certainly further suggests that Argos needs to increase the number of product line it offers, widening the gap between Argos and its closest competitors, detailed in Exhibit 11. As we can see in Exhibit 12, multi-channel sales have been rapidly increasing over the past five years.

Online sales now make up 36% of total sales. Since this trend of online sales is gathering momentum, Argos should invest and develop it further by creating a customer data base so that they can offer a higher standard of service, utilizing all the benefits of Web 2. 0, offering more ways to interact with the customers and using its customers to get information about tastes, products & services. Research show that doing so will encourage repeat business and enhance customer loyalty (18). Argos’s mobile channel generated ? 00M in incremental revenues in 2010, and the service had seen over 100% year-on-year growth of the user base (10), again confirming that investments in technology should remain key in the company’s strategy. Most recently, in April 2010, Argos launched the Argos App for iPhone and Android. In just three weeks the app was downloaded half a million times (19) and to date has seen more than 1. 3 million downloads, driving 1% of sales (7) or ? 42M in revenues. Exhibits Exhibit 1. Argos’ different products. Exhibit 2. Attractiveness of the retail industry in UK (Porter’s five forces). Exhibit 3.

Financial data for Argos and its main competitors. | Argos| | Dixons| Toys R Us| H Samuel| | 2011| 2010| | 2011| Sales| 100%| 100%| | 100%| 100%| 100%| Cost of Goods Sold| 62. 8%| 62. 4%| | 94. 1%| 64. 5%| 63. 0%| Gross Margin| 37. 2%| 37. 6%| | 5. 9%| 35. 5%| 37. 0%| Total Asset Turnover (TAT)| 1. 75| 1. 84| | 1. 3| 0. 16| 1. 20| Exhibit 4. Employees per Store | Argos| Toys R Us| Dixsons| H. Samuel| No. Employees| 33,000| 4325| 23901| 1989| No. Stores| 751| 75| 450| 338| Employees/Stores| 44| 58| 53| 6*| Figures taken from references 12, 17, 18 & 19. *The very low level of employees per store for H.

Samuel can be explained by the nature of the jewelry business. Exhibit 5. Average Store Size (Sq. ft) & Stocked Items. | Argos| Toys R Us| Dixons| H. Samuel| Size| 14,000| 40,000| 13,000| 1,100| Items Stocked| 11,000| 17,000| 6,500| 900| Sqft per Item| 1. 27| 2. 35| 2| 1. 22| Figures taken from references 12, 17, 18 & 19. Fixed Costs of AIP spread over large product portfolio | Streamlining of the forecasting / replenishment processes| Faster forecasting| Replenishment plans are more closely aligned with actual demand| Daily stock management (before was weekly)|

Reduced levels of Safety stock held in inventory | Increased “Right First Time” product & pallet presentations from 69-99%| Improvement to a “Good-in efficiency” by more then 50%| Exhibit 6. Benefits of Advanced Inventory Planning (AIP) Exhibit 7. ROA, ROE & NPM for Argos and its competitors. | Argos| | Dixons| Toys R Us| H Samuel| | 2011| 2010| | 2011| Return on Assets (ROA)| 7. 0%| 8. 2%| | 2. 5%| 0. 5%| 4. 3%| Return on Equity (ROE)| 10. 0%| 11. 6%| | 6. 6%| 13. 9%| 6. 2%| Net Profit Margin (NPM)| 4. 0%| 4. 4%| | 1. 3%| 3. 4%| 3. 5%| Exhibit 8.

Sales Trends from 2007-2011. (Taken from Argos’ 2012 Annual Report) Exhibit 9. Some operative expenses for Argos and its competitors. | Argos| | Dixons| Toys R Us| H Samuel| | 2011| 2010| | 2011| Distribution, Admin. & Selling Expense| 32. 0%| 31. 4%| | 4. 1%| 30. 9%| 29. 0%| Exhibit 10. Total Unique Visitors per month. Exhibit 11. Top 10 UK Online Retailers. 1| Amazon. co. uk| 2| Argos. co. uk| 3| play. com| 4| Apple. com| 5| Amazon. com| 6| Tesco. co. uk| 7| Marks&Spencer. com| 8| Johnlewis. com| 9| Next. co. uk| 10| Easyjet. co. uk| Taken from reference 23.

Exhibit 12. Multi-channel Sales, 2007-2011. Taken from Argos’ 2012 Annual Report. References (1) http://en. wikipedia. org/wiki/Argos_(retailer) (2) http://www. investorschronicle. co. uk/2012/02/24/shares/news-and-analysis/gus-reveals-demerger-plans-unmXuhC2tocUgZ8yLBXUOO/article. html (3) http://ec. europa. eu/enterprise/archives/e-business-watch/studies/case_studies/documents/Case%20Studies%202004/CS_SR05_Retail_1-Argos. pdf (4) http://www. accenture. com/us-en/Pages/success-argos-supply-chain-management-application-management-outsourcing. aspx (5) http://www. argos. co. k/wcsstore/argos/en_US/images/StudentPack. pdf? (6) AGCAS & Graduate Prospects Ltd. http://www. prospects. ac. uk/industries_retail_overview. htm (7) http://www. homeretailgroup. com/ar/2011/_downloads/homeretail_annual_report_2011. pdf (8) http://www. computerworlduk. com/news/it-business/3275706/argos-online-and-mobile-sales-hit-nearly-half-of-total-revenue/ (9) http://www. velti. net/customers/case-study-argos (10)http://www. tutebox. com/10694/business/current-and-future-relavance-of-business-excellence-improvement-to-argos-uk-ltd-possible-benefits-and-likely-inhabitors-exists/ 11)http://idealpenngroup. tripod. com/sitebuildercontent/OAUG2008/Collaborate20Collaborate07/pdfs/abuckland_ppt. pdf (12) http://www. brc. org. uk/Downloads/rsd_ups001. pdf (13) http://www. bbc. co. uk/news/business-15364184 (14)http://www. mirror. co. uk/money/city-news/argos-suffers-150million-fall-in-christmas-171950 (15) http://www. irishtimes. com/newspaper/breaking/2011/0928/breaking13. html (16) http://www. guardian. co. uk/business/2010/aug/27/argos-sara-weller-interview (17) http://www. internetworldstats. com/top20. htm 18)http://www. interactivedata. com/uploads/File/Building%20customer%20Loyalty%20with%20Web%202. 0%20tools. pdf (19)http://www. mobilemarketingmagazine. com/content/half-million-downloads-three-weeks-argos-app (20)http://google. brand. edgar-online. com/EFX_dll/EDGARpro. dll? FetchFilingHTML1? ID=7815462&SessionID=a9O-FHPDsePEVm7#D10K_HTM_TX160069_8 (21)http://www. dixonsretail. com/dixons/dlibrary/documents/11-07-07_DixonsAnnualReport_bookmarkedforweb. pdf (22) http://www. signetjewelers. com/sj/pages/operations/brand-reviews/h-samuel

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