Anthony Hilton: Sainsbury’s leap into the dark could be fatal

With this example for all to see, does Amazon really want to get into the food business or is it simply following Rupert Murdoch’s maxim that when business gets boring, it is fun to dream up a wheeze that terrifies the opposition? Amazon is brilliant at displaying, selling and delivering almost every type of one-off item — a book, a DVD, sunglasses, even a refrigerator.

But those skills are a world removed from what is needed to source and offer the weekly family food shop and then deliver it with the food still fresh and the frozen food still solid. Presumably Amazon realises it can’t just pop it in the post. Likewise at Argos. The ability to deliver a single item does not mean it has any of the skills needed for food, and it is far more likely that its core technology is fundamentally different from the stuff Sainsbury’s runs.

So will the combined group integrate the systems or keep them separate? Perhaps someone should remind the board of the computer debacle in Sir Peter Davies’ time as chief executive, when Sainsbury’s built its first big central warehouses, and its stores’ ordering and delivery system virtually collapsed. The odds are that if the systems are integrated, it will be a technological nightmare; if they are left separate, it will be a financial nightmare. That leaves little room for a good outcome.

This might be a tolerable risk if the businesses were a cultural fit but Sainsbury’s and Argos are chalk and cheese. At the risk of using politically incorrect terminology, the Sainsbury’s customer is upper middle class, the Argos customer lower working class. Only a handful of Sainsbury’s shoppers venture into Argos, and Argos customers prefer Asda, Morrisons and Lidl. It is alarming that the Sainsbury’s board has so little feel for how its customers see themselves. How will they react if their stores — and car parks — are taken over by hordes of Argos customers? Waitrose must be rubbing its hands in anticipation.

This is the point where believers in the deal will say that if it really were as bad as depicted above, the board would have stopped it. Time therefore for a few home truths about corporate governance and groupthink.

Psychologists have proved that people in a tight-knit group will deliberately give an answer they know is wrong rather than go against what they think everyone else believes. They keep their doubts to themselves. Add to this that, despite all the talk of challenge, boards are actually terrified of going against the wishes of their chief executive for fear that he or she will quit and the share price will tank. In a case like this, where the chief executive is new and this is his first big deal, they feel an obligation to be supportive. No one is going to oppose him even if privately they think it is madness.

One further point to underline how the board looks asleep at the wheel: Argos makes loans to its customers. As a way of emphasising his financial acumen and the affordability of the deal, Sainsbury’s chief executive has said that these £600 million of debts will be transferred to the loan book of Sainsbury’s Bank. This suggestion is totally outrageous. Have we forgotten Co-op Bank already? One reason it nearly went bust was that the group chief executive tried to tell the bank board what to do. Where Sainsbury’s Bank lends should be a matter for its board and officers, and nobody else.

There is no reason to believe the Argos loan book is toxic, although Mike Coupe would not know if it was, but good or bad is not the point. It is a matter of principle. It cannot be right for Sainsbury’s Bank to be directed into a major new area of business at the whim of a group chief executive with a new strategy to show off. Perhaps the Prudential Regulation Authority’s Andrew Bailey should have a word with the board and explain that to it.

It is all very sad. Sainsbury’s is currently caught up in one of the most vicious price wars the supermarkets sector has seen in years. For management to be distracted by this deal at this time, and to be further distracted for years to come as it tries to make it work, is quite simply the height of folly. Make no mistake; if it goes wrong, it could be the end of the business as we know it.