Argos a 'thorn in Sainsbury's side' - will the retailer finally be sold?
It has been a tough Christmas for retailers. This week's string of updates has shown weakened consumer confidence is showing no signs of letting up, even over the festive period when they typically enjoy bumper sales.No retailer knows this better than Argos, which has quietly struggled for several years in the face of cheaper online competitors.In a trading update on Friday, Sainsbury's, which bought Argos in 2016, said total sales for its grocery division increased by 5.4 per cent in the third quarter.By comparison, Argos sales slipped by 1 per cent and by 2.2 per cent in the crucial festive period.While a marked improvement from the previous financial year, an underwhelming festive period – which also covered Black Friday – will disappoint investors.As Sainsbury's gears up for another year of fierce competition with discounters Lidl and Aldi, could Argos prove too much of a distraction? Argos is becoming a thorn in Sainsbury's side after poor Christmas sales, say analystsWhy is Argos struggling?Much of Argos' festive decline can be explained by weaker consumer confidence and the general economic doom and gloom.Primark's profit warning this week indicates that consumers are spending less as inflation and other cost pressures show no sign of abating.Even supermarkets are feeling the pinch, with Tesco boss Ken Murphy saying customers are 'counting every penny' while Sainsbury's chief executive Simon Roberts said customers are 'cautious'.Mark-downs to keep up with discounters and cheaper Chinese retailers are also having an impact on the bottom line.For Argos, this meant that 'volume growth in the third quarter was more than offset by the impact of lower average selling price across the market.'While it grew its market share in homewares, electricals and toys, there was 'subdued' spending on higher ticket items like furniture and a weak gaming market.But there are other factors unique to Argos. The shift to a food-first strategy to compete with Aldi and Lidl, mean Argos has played second fiddle for years.This, alongside the closure of stores and placing them into existing supermarkets as a concession, means Argos is no longer front of mind for consumers.In today's trading update, Sainsbury's said there were also 'significant' headwinds from 'online traffic trends, a tough and promotional general merchandise market'.It has struggled to keep pace with online firms like Shein and Temu that have undercut Argos products.Sainsbury's boss Simon Roberts today called for a parcel loophole that allows retailers to send cheap parcels to the UK without paying any customs duty to be removed 'as soon as possible'.The Government has pledged to scrap it in 2029.There were some bright spots amid the gloom, though. Argos improved its app visitor numbers by 33 per cent in the third quarter year-on-year, and has gained market share in some categories.Clive Black of Shore Capital said: 'We are pleased to see Argos report volume growth and a 'clean stock position at the period end' with progress in the self-improvement category having 'the basis to sustain and grow cash generation'. Christmas flop: Argos dragged down a solid performance in Sainsbury's grocery division'For sale sign hanging over Argos'Argos might not have a stronghold on the British high street like it once did, but it still account sfor 16 per cent of Sainsbury's group revenues.Richard Hunter, head of markets at Interactive Investor say Argos 'remains something of a thorn in the side for the group as a whole.'A strong Christmas would have done little to stem Argos' decline, so lower sales over this crucial period has prompted some analysts to say it's only a matter of time until Sainsbury's sells the brand.In September, Sainsbury's said it was in discussions to sell Argos to Chinese e-commerce giant JD.com, before ending the talks shortly after.The supermarket said the Chinese e-commerce giant would 'only be prepared to engage on a materially revised set of terms… which are not in the best interests of Sainsbury's shareholders, colleagues and broader stakeholders.'To some, it was an indication that Sainsbury's is planning to get Argos in a good enough shape to sell it on. Argos spoiled a decent set of numbers for the supermarket's core business Chris Beauchamp, chief market analyst at IG says Sainsbury's has 'essentially hung up the 'for sale' sign over Argos today, after the chain spoiled a decent set of numbers for the supermarket's core business.'A strong performance in groceries did little to calm investors' nerves, with the share price falling nearly 6 per cent on Friday.Dan Coatsworth, head of markets at AJ Bell said: 'The market is losing patience about the non-grocery side given the negative share price reaction to Sainsbury's figures.'Without the clothing and general merchandise contributions including Argos, investors would have been singing from the rooftop about Sainsbury's Christmas performance. 'The fact it has sustained strong momentum in the food arm for so long shows it wasn't just a stroke of luck. It has clearly hit upon the right recipe for success.'Roberts could come under more pressure to accept a takeover offer, regardless of the price, Coatsworth says.Beauchamp adds: 'The move to buy Argos looks increasingly like a wrong turn and an unnecessary distraction, especially when competition with Tesco over food sales is poised to heat up once more.'Sainsbury's has more important things to worry about, so the future for Argos is almost certain to see it become the target for yet another bidder.'DIY INVESTING PLATFORMSAJ BellAJ BellEasy investing and ready-made portfoliosHargreaves LansdownHargreaves LansdownFree fund dealing and investment ideasinteractive investorinteractive investorFlat-fee investing from £4.99 per monthFreetradeFreetradeInvesting Isa now free on basic planTrading 212Trading 212Free share dealing and no account feeAffiliate links: If you take out a product This is Money may earn a commission. 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