Of all the big four supermarkets last year Sainsbury was unique last year in that it managed to outperform every one of its peers by a significant margin. Share price gains of 5% on the year stood the supermarket apart from up to 20% losses for Morrison’s and Tesco, while Asda owner Wal-Mart saw share price losses of over 25%. As we head into 2016 the pressure on margins on the supermarket sector isn’t likely to diminish any time soon with further food price deflation likely to filter through in the months ahead, alongside increased staffing costs as the living wage commitments also filter through into the rest of the year’s numbers. With Aldi and Lidl continuing to gain traction in a competitive groceries market, the big four have been looking at a number of ways to not only stem the erosion of market share but also diversify their product offerings within the context of their current store space. Sainsbury have started to do this in the past 12 months, with the appearance of Argos retail concessions occupying the same floor space as the grocery section, as both businesses look to utilise the best use of available floor space. It is this diversification that is likely to be the way forward for not only Sainsbury, but also for Argos owner Home Retail as well. Last year was a wretched one for Home Retail with share price declines of 50% as the company struggled in its fight with on-line retailers like Amazon, as well as the much slicker operation that is John Lewis. When Home Retail CEO John Walden took over in 2014 he stated that he wanted to take the fight to Amazon in the fight to revolutionise on-line shopping, but he was faced with the problem of too many stores that were underperforming, or were just plain tired and tatty While the implementation of same day delivery, in house collection points for eBay customers, as well as the concessions inside Sainsbury stores has improved the business, the sheer number of Argos stores in terms of real estate overheads is going to make it extremely difficult to compete with Amazon, which may mean that more Argos stores are probably going to have to close. This battle is likely to prove unsustainable but a tie up between Home Retail and Sainsbury’s might well provide some sort of a solution, though again Argos stores are probably likely to close, given the overlap between Sainsbury floor space and Argos floor space in the same city centre locations. Cutting costs to compete with on-line and low cost retailers is likely to be a recurring theme in 2016, and while it is easy to dismiss this latest bid by Sainsbury for Home Retail it is indicative of the pressure that the retail sector on both the food side as well as the general retail side is under, in the context of increasing competition and shrinking margins. The reaction of Home Retail’s share price to the Sainsbury bid is certainly instructive as it moved sharply higher, and while we’ve seen Sainsbury’s share price slip it certainly doesn’t mean that under the right conditions a successful bid might make sense. The reality is that the food retail sector is likely to continue to be challenging in the weeks and months ahead and we’ve already seen the beginnings of food retailer’s diversification in 2015. Tesco already has Sports Direct concessions in some of its stores, while Sainsbury not only has tie ups with Argos but Timpson as well. This bid for Home Retail merely moves the process further forward into a fully integrated multi-channel offering The bigger problem for Sainsbury, if a bid is successful, is what to do with the Homebase part of the business which it sold off a few years ago, and that could well determine whether this particular bid is worth pursuing. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.