UK frozen food retailer Iceland has announced another profit warning. The firm's venture into selling all-organic food last year was an expensive mistake: customers just weren't prepared to pay. While the climate should improve in coming years, the organic debacle is still worrying news for Iceland. More than other retailers, it is likely to have trouble shifting its cost-conscious customers towards premium, higher-margin products.

UK frozen food retailer Iceland has lowered its profit expectations from GBP62 million to GBP40 million. The expectations had already been halved from Iceland's original predictions. The firm's founder and chairman resigned last month when the previous profit warning was announced.

Iceland is still counting the costs of its move into organic foods. At the time, it seemed like a good idea. The BSE crisis and worries over genetically modified 'Frankenfoods' gave the impression that UK consumers would be attracted by Iceland's pledge to stock all-organic produce. Indeed, 75% of consumers surveyed said they would prefer organic food if the costs were the same.

Yet consumers' wallets told a different tale. In the run-up to Christmas, Iceland's supermarket sales fell by 5.5%. Between January and March, they are expected to be down by 3.7%. Simply, Iceland's lower-income consumers were well aware that in a competitive market, non-organic food from other vendors was cheaper. This is true even though Iceland also had to cut margins to avoid significant price rises. The company has finally abandoned the organic-only policy, writing off GBP20 million to cover the venture's costs.

However, it's not all bad news. The group's Booker cash-and-carry subsidiary has been doing comparatively well, with a 1.9% increase in sales expected for Q1. And certainly, new CEO Bill Grimsey has brought in a more conservative accounting policy, making the profit cut seem worse than it actually is. Abandoning the organic strategy looks like a sensible decision as well. Iceland's profitability should get a little better in the next couple of years.

But it isn't in an enviable long-run position either. Despite increasing competition, retail chains such as Boots and Tesco are able to boost profits by using their respected brand names to offer higher margin, more differentiated products and services. But Iceland is associated more with low prices than anything else. Leveraging these perceptions to create differentiated products will obviously be an uphill struggle, as the organic fiasco demonstrates.

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