By James Davey and Paul Sandle
LONDON (Reuters) - Old-fashioned catalogs, 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 catalog retailer into a digital business. This has made Argos parent Home Retail (L:HOME) attractive to supermarket Sainsbury's (L:SBRY) as it prepares for grocery competition from U.S. online giant Amazon (O:AMZN).
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 (L:TSCO), Asda (N:WMT) and Morrisons (L:MRW) of battling the advance of German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL].
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 retailers.
"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-center 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.
STORE CLOSURES
However, British supermarket networks still provide a major advantage over Amazon, especially given popular click and collect services.
Sainsbury's said it sees potential for Argos concessions in its stores, trailed 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 analysts predicted.
"There would be synergies from optimizing 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 capitalization 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.
(Additional reporting and writing by Emma Thomasson; editing by Kate Holton and Anna Willard)