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* Higher margins in non-food helps compensate for foodsqueeze
* Sainsbury's CEO sees Argos boosting distribution network
* Dutch, French deals help keep Amazon in check
* Amazon moves into food so customers shop more often
* Retail complexity comes at a cost
By Emma Thomasson
BERLIN, Feb 24 (Reuters) - As Amazon encroaches onsupermarket territory, traditional European retailers are takingbigger steps to fight the U.S. ecommerce giant by offering morenon-food products and using extensive store networks as deliveryhubs.
Persistent food price deflation across Europe helped triggerBritain's Sainsbury's bid for home products retailerArgos. That follows Dutch chain Ahold's purchase of leading ecommerce site Bol.com in 2012 and FrenchCasino's decision to take full control of e-commerceretailer Cdiscount in 2011.
Sainsbury's hopes that using its stores as pick-up pointsfor a wider range of goods will boost profitability. Ahold andCasino have both achieved more sales volume through their storesby encouraging customers to pick up non-food orders at theirsupermarkets. Ahold's online sales grew more than 30 percent inthe fourth quarter while Cdiscount customers can collect goodsfrom 2,500 Casino stores.
"Food retailers offering non-food is a necessary survivalmove," said Sophie Albizua of retail consultancy eNovaPartnership. "Margins in food are razor thin and margins inonline food are almost non-existent so non-food is a way to havea slice of a more viable market."
Britain is one of the world's most advanced markets forgrocery ecommerce. Even German discounter Aldi, which has beensceptical about ecommerce, is feeling the pressure to change.Its British arm started to sell wine online in January.
But it has taken pioneers like Tesco and Ocado decades to reach break even, as keeping fresh produceat the right temperature makes logistics pricey.
To have a chance of turning a profit in grocery ecommerce,retailers need scale and they are more likely to recoup deliverycosts if they can get shoppers to add higher margin non-fooditems to their fruit and veg shop, or better still, they wouldprefer customers to pick up orders themselves from a store.
DISTRIBUTION DILEMMA
As ecommerce leaches sales from stores, many retailers havelooked for ways to trim their expensive real estate portfolios.However, stores can be an asset in the fight against Amazon ifused as distribution hubs for goods ordered online.
"From a real estate perspective, supermarkets are in a primeposition due to their proximity to customers," said CarlHartman, head of logistics technology company Temando, whichexpects customers to demand ever faster, more flexible delivery.
Sainsbury's Chief Executive Mike Coupe says buying Argoswould give the combined group a major advantage over Amazon dueto a network of 2,000 stores-cum-collection points.
"The more points of distribution you have ... the moreattractive and convenient that is for customers, because in theend, retailing generally is driven by proximity," he said.
Coupe noted that department store chain John Lewis says halfof its online orders are now collected in store, with 35 percentpicked up from its sister chain of Waitrose supermarkets.
Recognising the popularity of "click and collect" in Europe,Amazon is setting up a network of parcel lockers to offer abroader range of pick-up options.
AMAZON'S ADVANCE
Amazon is advancing into food to try and entice customers toshop more frequently.
"Fast moving consumer goods don't drive huge amount ofmargin percentage but they can help drive trip frequency thatearn you the right to capture the margin dollars through non-food," said Keith Anderson of ecommerce consultancy Profitero.
Amazon has been expanding its "Pantry" offering of packagedgroceries for its Prime subscribers and is expected toeventually extend to Europe its U.S. Fresh service, which offersabout 20,000 chilled, frozen and perishable products.
Shares in Ocado jumped last month on reports that Amazoncould make a bid to help it launch a fully-fledged groceryservice in Britain, but have drifted down again after Ocadodenied talks were under way.
"If the deal were to go ahead, Amazon would not only beacquiring Ocado's expertise, but its customers, fulfillment anddelivery fleet, delivery routes and optimization algorithms,"Profitero's Anderson said.
NEW FRONTIER
The next frontier in the race to provide the most convenientshopping experience for customers could be integrating non-foodand food supply chains and delivery options.
Sainsbury's Coupe said he could imagine delivery of non-fooditems eventually piggy backing on existing food logistics.
Amazon Fresh trucks already deliver food and regular parcelstogether in some U.S. cities and the company is starting tolocate temperature-controlled warehouses for food next to ornear to non-food storage.
Bernstein analyst Bruno Monteyne believes it will take along time for Amazon to establish the kind of consumer trustthat supermarkets enjoy in food. But he also cautions againstestablished players from fighting Amazon on too many fronts, "It is a game they cannot win," he said.
Sainsbury's bid to buy Argos-owner Home Retail would make it the biggest non-food retailer in the UK, ahead ofTesco, John Lewis, Amazon and Marks & Spencer, although a higher offer from furniture retailerSteinhoff means a deal is by no means assured. ($1 = 0.9093 euros) (Reporting by Emma Thomasson, Editing by Elaine Hardcastle)
