Argos: Home Retail Group, UK
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Introduction to the Company:
Argos is a fully owned subsidiary of Home Retail Group, UK. Argos is the pioneer of Multi channel business retail. With 33,000 employees working to support over 700 stores in UK and Ireland, Argos is a £4.3 billion company.
Argos serves over 130 million customers growing at an annual rate of 20%. 26% of these transact online or through the phone. 18 million families or about two thirds of the English population have an Argos catalog. It is amongst the most respected Brands of the UK and before being acquired by Home Retail Group, even featured in the FTSE 100 league.
With over 170 different product groups, Argos is a revolution which has single handedly changed the meaning of cost effective retailing over the past decade. Offering home enhancement and general merchandise products, Argos works on an innovative business model. Customers can browse through the entire catalog online, buy and pay online. Alternatively, they visit any of the 700 branches, browse through the physical catalogue, check the product availability via the in house kiosks with the product ID, order , pay and collect over the counter.
Business turnaround at Argos happened in March 1999, when it was acquired by GUS plc. At that time, Argos was primarily a single channel, store based retailer, selling a smaller range of general merchandise, concentrated primarily on toys, jewellery, house wares and electricals. In 2000, Argos, the GUS home shopping business, Reality UK operations were restructured to form the current business model. In 2000, a financial services wing was set up to offer credit and warranty products to the customers of Argos.
Argos is a preeminent retail brand in the UK and Ireland. The business runs by leveraging on the economies of scale. This is reflected by the fact that the average transaction size is just around £30, while the transaction numbers are around 5 per customer in an year.
Leadership in multi channel product distribution continues to be the prime forte of Argos and is the key differentiate to the customers' shopping experience, as compared to the competitors, by enabling the customers to shop the way they want. Around 40% of the total sales are through multi channel - internet and phone/ store for home delivery. The fastest growing channel, over the years, has been the online reservation for in store collection. The feature is available at every store.
Argos product line can be differentiated as home enhancement and general merchandise products. With approximately £60 billion in sales, it accounts for 10% of the UK market share.
In the home enhancement line, it offers Home improvement products, Housewares and furniture. The product line accounts for approximately £31.5 billion in sales.
The general merchandise product line offers Jewellery, toys, sports and leisure equipment, consumer electronics, large domestic appliances. The line contributes about £28 billion to the Argos Top lines.
Argos runs its business operations primarily through its extensive network of 700 stores spread across the length and breadth of UK and Ireland. It has presence in the biggest centers, and the network is overwhelming. The stores are located mostly in commercial centers having decent residential areas in the vicinity.
Depending on the demographics, the purchasing power of the inhabitants and the consumer spending, the scale of operations and the size of the stores are decided. For instance, in the counties of Yorkshire, there is one store for around 7 towns. In heavily concentrated business zones, like London, there are 10 stores.
A great deal of business also happens through other channels. Customers can order online or over the phone with options of having the products delivered to home or in store pick up. The official website, www.argos.co.uk, is the second highest visited retail site in the UK. In the last fiscal year, online shopping accounted for 20% of the business.
Pricing decision is one of the most important duties of the top management at Argos. Majority of the sales happen because of the cost effective products and services offered by Argos.
The Pricing strategy is situational with a lot of factors affecting the pricing decision.
Majorly, Argos follows Economy Pricing. The success of the business hinges around leveraging the economies of scale. Though the margins are relatively smaller, compared to its competitors, the huge volumes generated over shadow these low margins. Argos genuinely prices the products at a discount without any frills or loopholes. It achieves this by managing the manufacturing and marketing costs to a minimum. It offers a range of in house economy brands. Distribution channel management is at the heart of cost management at Argos. There are fewer intermediaries between the manufacturer and the end customer meaning lesser dilution of profit and thus the lower prices.
Though economy pricing is the major pricing strategy at Argos, it also adopts other strategies for a few market segments.
Penetration and Skimming. When the I Pod was first launched in 2001, Argos had preferred partner status with Apple and exclusive rights to sell the I Pod for a year in UK. To popularize the product, Argos adopted a Penetration strategy. The I Pods were discounted to about 25% to gain momentum. When it became a revolution and demand started crossing the roof, the price was adusted to normal. As a matter of fact, the prices were skimmed until it lost the exclusive rights in mid 2002.
Psychological pricing. About 75% of the Argos products are priced at a penny below a whole number. The rice cooker, as an instance is £13.99. The I Pod Nano is £108.99.
Optional Product Pricing. Argos provides a range of additional services on the primary product sale. Its fully owned financial subsidiary, as an instance, sells warranty for the product at a negligible additional price.
Captive Pricing. There are a number of proprietory brands which can only be refilled by Argos. As an instance, the Argos air freshner catridge is sold at about £3, when the actual cost is around 4 pounds to the company. The catridge runs with only the Argos fill ups. So the company makes up by pricing the refills at a premium.
Promotional Pricing: This strategy is adopted mainly to clear outstanding inventory and products which are nearing expiration. The BOGOF (Buy One get One Free) is adopted usually towards the end of Christmas season.
No matter how good a product is, it will not be successful unless it has strong promotional campaign. Argos is amongst the most respected and identified brands in the UK retail industry. It has built a huge brand value by investing a huge percent of its annual toplines to promotion. Argos has the following promotional mix:
Argos uses the electronic media extensively. Its ads are usually 30 sec long, created by ‘Professional Creativity', a respected ad maker in Europe. The advertising is beefed up during the Christmas and the easter.
Its tag line - ‘Don't Buy It, Argos It' is a true indication of the company's diverse and innovative business model.
The biggest exposure given to the company is its catalogue itself. Updated twice a year, the Argos catalog is a 2000 page colorful book, featuring the entire product range. A recent Argos survey showed that about half of the UK households have the Argos catalogue with them. This gives an immense brand exposure, while at the same time contributing to product sales.
Argos has a sizeable telemarketing sales team. It employs the services of professional business consultants to hold sales presentations at communal gatherings, office spaces, amongst others.
Argos conducts an annual trade show at the country centers of the UK. Discount vouchers are given as free compliments to companies who are sizeable customers. Free product samples are distributed for any newly launched in house brand. It conducts a number of contests all through the year, with the winners getting store vouchers.
Argos has a weekly newsletter which hits the inbox of any user who registers on their site. They write a quarterly report in leading magazines, discussing the current happenings in the retail business sector.
Its catalogue is the most powerful tool. Frequent surveys are taken on the changing customer trends and preferences.
Though the company has not been keen on this mode, it has serious plans to be associated with major events. Talks are currently happening with the Formula One administrators for a potential sponsorship of the Silverstone Grand Prix. Argos is also a serious contender to be associated with the 2012 London Olympics.
Industry and Company Performance:
The current economic crisis has been the most severe after the Great Depression. Consumer debt and Leverage has caused widespread discomfort in the economy. The fundamentals of many established economies have been questioned and quite a few have failed in these testing times. UK is, perhaps, at the centre of this storm. The economy has contracted by 5.7% over the past year and a half. With six straight quarters in red, while the European counterparts have started to post modest growth rates, we are still searching for positive triggers.
With the job market in doldrums, consumer spending has virtually frozen. This has affected multiple industries. Each and every segment, including the essential needs has been affected.
According to the Office of National Statistics, the business of the predominantly non food retail stores has remained flat over the last two years. The three Quarters of 2009 have posted a meager growth of 1.1%, while it was 0.2% in 2008. The fourth quarter of 2008 saw the industry contract by 1 %, the third quarter remained stable with rest of the periods posting growths of under 1%. When factored for inflation and the rise cost of capital infusion, these numbers are much more aggravated. This is after a robust and vibrant performance in 2007, seeing 12% growth. 2006 posted 8% growth and 2005 was at 7% in green. This is a dismal performance from an industry which was seen as to drive the economic growth, create liquidity in the economy by inducing the consumer spending (Office of the National Statistics, 2009).
Over the last two years, Argos' performance has been generally in line with the macro economic and industry statistics. The total group sales were down 1% from the previous year at 5897 million pounds. The gross margin was down 100 basis points. The operating and distribution costs increased by 1%, not factoring for the 3% inflation over the same time period. Operating profit was posted in red at £ 300 million, down 19%. The earnings per share were reduced by 24% at 25.9 pence. The non cash asset write downs (bad debts) over the period were £ 402 million. Finally, the group posted a net loss before tax of 394 million pounds coming off from a 426 million pound profit the year before. The group's Goodwill and Intellectual property rights fell down to 1541 million pounds from 1923 million. The total assets were down to 3802 million pounds from 4372 million pounds. The treasuries fell from 210 million to 174 million, without any significant investments or repayments (Argos, 2009).
The company has put up a dismal performance. Though a lot of this can be attributed to the general economic recession, performance has been way below the standards of its competitors. While the general industry has, infact, grown 1%, Argos has posted negative figures for the first time since its inception in 1997.
The present recession has thrown the marketing and promotional strategies of many global business houses to total disarray. Consumer spending has virtually frozen with the customer becoming more and more reluctant to buy and concentrate more on savings, the sales & marketing teams are struggling and under tremendous pressure to meet their targets and the marketing budget has started to look more and more murkier.
As with many others, Argos is undergoing dynamic business restructuring to help control costs, be more efficient and profitable. We put forth some of the strategies the management should adopt within the department, along with the common mistakes that should be avoided while the restructure happens.
Problem: Customers are looking for value products and are expecting price cuts.
Solution: Do not slim the margins- find ways to reduce costs.
History shows us that there is a huge problem with discount pricing- it becomes virtually impossible to raise them again. Though cutting the prices by slimming the margins might help in the short term by inducing the customers to buy, it has disastrous effects on the firm's profitability over the longer term. Argos should look at other ways to lure the consumer- offer value added services. This could by means of giving them better credit terms (hire purchase or installment schemes), offer free complimentary goods, introduce priority delivery, amongst others.
Problem: The sales team is struggling to meet targets.
Solution: Looking at other options before laying off.
Sales team works under immense pressure to meet its targets. Often, the biggest mistake done by firms is to lay off those who do not perform well, without any subjective thinking. Human Capital is amongst the greatest asset to a firm and when an employee leaves an organization, he takes all he can - company knowledge, business model, expertise, experience and loyalty- straight to the competitors. The biggest thing the sales team takes away is the personal rapport and network with the clients, which they have built over time. So, Argos should look at ways to improve without sacking the employees.
More often than not there are star performers who consistently beat all their targets. Selling is an instinctive art, it's a skill and those who posses naturally would not share with the others. Argos should identify these star performs and force them to share their ideas of lead generation and closing a transaction. Brainstorming sessions are an ideal way to have these ideas shared.
Problem: The treasury is getting slimmer and the business cannot afford to pay generous incentive to top performers as it used to do.
Solution: Money need not be the only incentive. Look at other ways to reward employees.
With the tightening job market, the companies are correcting their compensation structures. The weakening cash reserves are also contributing to these restructures. It must be noted here that the high achievers have nothing to do with the market conditions. Based on their expertise and accomplishments, they would not be struggling to find better paid jobs, even in a tough job market. If the company's position does not support a lucrative compensation package to keep these people happy, alternative ways to rewarding them should be looked at.
Argos should implement short- term sales commission to reward these star performers, until the markets get better and everyone is at the same page. However, this comes with its own disadvantages. These monetary drives can create a competitive and poisonous environment within the marketing department. Sales team would be looking to achieve their own sales targets, without working as a cohesive team; the company starts being too focused on the short term.
Argos could look at offering non financial rewards, which could be in the form of flexible working hours, giving a surprise day off or arranging for team outs. The financial incentives would follow at the year end, depending on the targets met.
Problem: The finance team is looking to cut down inventory to free up working capital, as the company badly needs capital infusion.
Solution: Concentrate on the 20 - 80 strategy.
Companies are not being able to afford the high levels of inventory that they used to boast of during boom. For Argos, diverse product offerings and choice is a prime business driver and cutting down the inventory could cause serious damages to the brand loyalty.
Argos should concentrate on the 80 - 20 rule. There is tried and tested business conviction that 20 percent of the customers constitute to 80 percent of the sales. The major consumers accounting for these 80 % sales are to be identified. An analysis is to be done on the consumer behavior and the buying patterns of these 20% consumers. The inventory can now be corrected to lower levels after having ensured that these prime customers have their choice. Though this will not completely solve the problem of brand dilution, we expect the impact to be three quarters lesser.
Problem: The strategic team wants more expansion to cover the diminishing sales.
Solution: Avoid it. The current market scenario is not the time to experiment strategic decisions.
With sales not meeting up with the projections, many firms are increasing either their product line, their product depth or by setting up new outlets. Firstly, with capital infusion becoming more and more expensive, such expansion would be financed at high costs. The sales team would come under immense pressure to support these costs with higher revenues. So we suggest no expansion to be made until the economy gets better.
Problem: The current recession has been tuning up for too long. How to tackle it?
Solution: Get the basics correct. The fundamentals of the markets remain the same, no matter the condition.
Many firms are adjusting their marketing strategies in line with the recession. Its being called ‘retailing for the recession'. The present financial crisis is not the first we are witnessing, but officially is recognized as the 90th. There have been harder times before and there will be even harder ones in the future. The recessions are only a short term phenomenon with the market protocols restored very soon. It makes no difference, whatsoever. When the markets start getting better, the sales plans and marketing strategies will have to be readjusted. All of this comes at costs and includes upsetting the sales department, which by nature, is vulnerable to change. We suggest the present recession should not result in Argos altering any of its strategic marketing decisions.
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