The UK’s Big Four supermarkets are constantly jockeying for position, but while the weakest of the four appears to be making some progress – Morrisons posted a surprise profit for Q4 2015 – Sainsbury’s appears to still be struggling. Although the chain beat expectations for their Q4 2015 earnings, sales still dropped by 0.7%.

Given that’s the case, you’d be forgiven for being somewhat surprised that Sainsbury’s is bidding to take over the Home Retail Group. In this sort of climate, the bid by Sainsbury’s for HRG has been met with some degree of scepticism, both by the market in general and investors in particular. For a supermarket which has been suffering from a continuous decline in sales to consider expansion as a strategy rather than consolidation appears to have raised more than a few eyebrows.

What Does HRG Own?

HRG’s big-name companies are Argos and Homebase; and Sainsbury’s is very interested in the former. An aspect of the potential deal that Sainsbury’s has been keen to stress is the web delivery platform it would gain access to. Argos has ploughed a significant amount of cash into its online service in recent years, and Sainsbury’s would definitely be looking to incorporate this into its own offering.

However, any deal between Sainsbury’s and HRG would not include Homebase, with HRG having just finalised talks to sell the Homebase part of the business to Australian retailer Wesfarmer.

What Does Sainsbury’s Hope to Gain?

Sainsbury’s is presenting the move as a logical one which will improve the firm’s ability to offer products beyond its traditional range, which has been largely focussed on food. The supermarket chain has been branching out for a while now, with clothing and home-ware ranges launched in recent years.

As has been documented extensively elsewhere, expansion in the UK’s food market is now almost impossible for the Big Four nowadays; indeed, they have been steadily losing market share in recent years to hungry upstarts like Aldi and Lidl. Therefore, it’s quite natural that a company looking to make gains would seek other arenas in which to do so.

Questions, however, have been raised over Argos’s current property rental arrangements, many of which are due to expire within the next few years. Would a Sainsbury’s-owned Argos simply not renew such leases and transfer Argos in-house by giving it space within Sainsbury’s stores instead? It certainly seems like a possibility, given the hundreds of millions that such a move could potentially save.

Market Reaction to Possible Merger

So, what has the market’s reaction been to all of this? While HRG’s value has soared in the wake of Sainsbury’s making its interest publicly known (going from 98.70 on January 4th to 155 two weeks later), the response of the supermarket chain’s own shareholders has been somewhat lacklustre. Sainsbury’s stock was hovering at the 255.30 mark on the 4th January, which was the first trading day of 2016. Now, two weeks later, the stock price is at 241.26 and appears to be moving gradually downwards. If Sainsbury’s wants to convince shareholders that the deal makes sense, they’re going to have to do better than they have up until now.