Posting bumper sales and profit growth this morning (12 June), UK frozen food specialist Iceland hailed its “sustained recovery”. However, Katy Humphries contends, the group’s growth is linked to some key trends in the wider marketplace – namely the economic recession and improved image of frozen food. With the green shoots of recovery in sight, could Iceland be in for a tougher trading year in fiscal 2010?
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UK frozen food retailer Iceland doesn’t usually post its financial results. But with 16% sales growth, 36% EBITDA growth and an 84% jump in net profit for fiscal 2009, it is easy to see why they made an exception this year.
Unveiling these impressive numbers, chief executive Malcolm Walker hailed the company’s “sustained recovery”.
From his return to the group in 2005 to date, Iceland has posted four years of double-digit sales growth. This compared to what Iceland management terms “the dark ages” of sales and market share decline from 2001 to 2005.
Walker attributed the company’s success to a back-to-basics attitude.
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By GlobalDataIceland’s previous management had attempted to reposition the group in the market – massively expanding its product offering and converting a good number of its stores to convenience-style outlets. Under Walker and his management team this strategy has been reversed.
“The key to our success has been a simple strategy of focusing on the things we do best as the UK’s acknowledged expert in frozen food,” Walker said.
While Iceland has focused on its frozen range, the company also carries a range of groceries and chilled food.
“We have worked hard to ensure that our frozen range is unsurpassed in value, quality growth and innovation, and also offer our customers excellent everyday value in their daily purchases of grocery and chilled foods,” Walker continued.
This strategy has served the company well. While frozen food accounts for under half of what Iceland sells, it is what draws consumers in – with frozen items appearing in more than 80% of baskets.
Iceland has been at the forefront of efforts by those operating in the frozen food sector to improve the image of frozen food in the UK. Through marketing and other communications to consumers, the company has emphasised that frozen food is a cheap, convenient option that helps reduce food waste.
Indeed, according to data from the Food and Drink Federation’s (FDF) Frozen Food Group, these category-wide efforts have met a degree of success.
According to figures, published this April, 49% of consumers are looking to frozen foods to survive the economic downturn, while 70% of consumers believe that frozen food minimises waste and means less frequent shopping trips.
However, as these figures suggest, one of the main drivers behind growing frozen food sales is the deterioration of the economy.
Consumers have increasingly come to view frozen foods as good value. Not only are frozen products often cheaper than fresh or chilled alternatives but they also reduce food waste because they do not spoil and can be easily stored.
The frozen food sector has been plugging away at this message for decades. A pertinent question, then, is why consumers have taken it on board now. Is it because the industry’s ability to communicate has improved, or is it more likely the result of wider economic conditions?
If the answer is the latter, the concern is that, as the economic situation improves, consumers could revert to their old preference for fresh over frozen – with fresh foods, particularly vegetables and meats, often viewed as higher quality.
This said, Iceland has done the hard part. It has convinced millions more UK consumers to regularly buy frozen food from Iceland. Through its new loyalty card, launched this year, the retailer is looking to develop these new customers into a core of loyal shoppers.
Another factor that has benefitted Iceland – particularly since the onset of the economic downturn – is its position at the value-end of the market.
However, this is becoming a more crowded space: Asda recently launched a line of GBP1 frozen food products, a discounting move swiftly followed by the other UK multiples.
As a spokesperson for Iceland concedes: “The climate is tougher than it has ever been and pricing is one of the things driving growth. Competition is intensifying at the value end of the market, but Iceland is still cheaper than the other UK multiples.”
With increasing competition from the UK’s ‘Big Four’ supermarkets, Iceland will have to work harder to remain the “cheaper” retailer, an issue that could potentially have a negative impact on margins.
In addition, as the economy improves, the benefits of being a value retailer will diminish.
In other words: if the economic situation takes a turn for the better, Iceland’s results might well take a turn for the worse. And with the National Institute of Economic and Social Research yesterday proclaiming the “end” of the recession in the UK, economic recovery could well be on the cards.
Nevertheless, it seems likely that Iceland’s management will stick to its guns and stand by a strategy that has proven itself highly successful over the past four years.
“That is their strategy and I doubt it will change in the face of a changing economic situation,” the Iceland spokesperson tells just-food.
Iceland has seen double-digit sales growth continue in the first quarter of fiscal 2010, the spokesperson added.
With its plan to convert 50 former Woolworths outlets to its banner and open an additional 20 stores, the group is embarking on its first major expansion drive since 2005. This will undoubtedly lift net sales, but could like-for-like sales growth be hampered by economic recovery? Only time will tell.
