Argos is one of the top retailers in the UK they have been on our main high streets for many years. Over these years they have seen off some stiff competition from Index and many others and they remain the strongest catalogue stores around. This week they revealed that their landlords had been put on notice as the group looked to restructure its high street presence.

Argos to Review Store Network

Home Retail Group the company that operates the Argos stores has begun a review period of its stores. It is thought that the retailer is looking to close around one in three of its current store base over the next five years. To be fair to Argos they are not the first company to do this, in fact they are one of the last to review their real estate.

The move comes after the group released its latest trading figures which showed that profits had fallen by a massive 60%. So what does this mean for the company? In essence not much will change in the near future. The company will look at its stores on a case by case basis reviewing how profitable (if at all) they are and the level of overhead costs associated with operating the store. Then as the leases come due for renewal or a break period is reached they will look to either renegotiate the lease or close the store.

Typically a lease can be for any period up to 20-25 years however within these periods there will be what is called a break period. The break period is where either party can either initiate a renegotiation of the current terms or exit the lease if they so wish. These break periods are normally set in five year intervals and will last for a set period (i.e. three months).

This is a pretty typical situation for any retailer who is looking at falling profits. Argos however is a slightly different animal. The company has been extremely successful with its internet portal. They have successfully managed to translate its old catalogue model onto the internet which has been a huge growth area in the retail market. Argos however has been one of the pioneers of the “click and collect” concept along with other such as B&Q. This makes their decision to close stores much more complicated.

Click and Collect Makes Cutting Stores Difficult

When the group reviews its stores they may find that some are typically loss making. In normal circumstances they would look to either negotiate a significant reduction in lease cost to make the store profitable or they would exit the lease. Argos however may find that while a store is loss making it is a hub for their click and collect service making it very difficult to close. The decision they would then have to make would be to close the store and hope that customers click and collect at another local store or keep the store open to service the internet demand.

The group’s financial results read like many in their market. The company has seen like for like sales drop by around 9%. This is a huge drop in top line which has been the death of many others in the market. As the company carries a significant level of fixed costs (including lease and staff costs) any drop in turnover normally signals a drop in profit margins. The drop in sales has been driven largely by the fall in demand for technology products like televisions, video games and other electronic items.

What is clear is that the face of the UK high street is changing quickly. We have already seen some major failures in the form of TJ Hughes, Game and Blacks and others are trying to react to market changes to try and make sure they are not added to the long list of major casualties. Argos is one of our favourite company’s and we hope they can restructure and reposition themselves successfully.