Sales chill sets in at Iceland

THINGS could scarcely have got worse for food retailer Iceland - or so it seemed three years ago. Co-founder Malcolm Walker had been ousted amid bitter controversy after pocketing £13.5m from a share sale.

The company, whose slogan is Mum's gone to Iceland, had just issued dire results - worse even than had been signalled in two earlier alerts. And sales were sharply lower than the year before.

But new chief executive Bill Grimsey exuded steely determination. 'The group is in a recovery phase and the company is prepared for the lengthy process of rehabilitation,' he told investors.

A year later, with the company renamed Big Food Group to reflect its ownership of cash-and-carry operator Booker as well as Iceland, Grimsey admitted that sales through the High Street stores were still going down. In the 12 months to March 2002, there was a 1.8% fall in Iceland's 760 shops. It got worse the following year as like-for-like sales fell 4.3%.

Now, internal company documents seen by the Financial Mail on Sunday show that hopes of a recovery - hopes boosted by encouraging sales figures for the final three months of 2003 - are likely to be dented when Grimsey gives a trading update next week.

As his reign at the helm stretches well into its fourth year, it is clear that customers are deserting Iceland. Almost without exception, the weekly total of customer transactions has been below 3.4m since the New Year. When Grimsey took over, the weekly total was almost four million.

About 150 Iceland stores have been refitted, in most cases turning them into convenience outlets selling items such as cigarettes and chilled goods rather than concentrating solely on frozen food. Grimsey aims for six conversions a week in the year ahead. But the stark fact is that the volume of sales at Iceland's stores has fallen by a fifth since Grimsey's arrival.

In one recent week, the number of transactions is believed to have fallen below 3.3m.

The apparent recovery at the end of last year has not held up. Grimsey's optimistic declaration that 'we are gaining sales momentum', voiced less than three months ago, was premature. And BFG insiders now concede that like-for-like sales for the January to March quarter were, at best, flat measured against the same period last year.

If the company reports a positive number for the financial year as a whole - and sources suggest Iceland's underlying sales may be up by just short of 1% cent - it will be thanks only to the strong showing last summer and autumn.

So will BFG miss its profits target for the year just ended? Not necessarily. By reining in spending, a company can squeeze out extra margins, even when sales are sluggish. BFG should hit pre-tax profits of about £50m, broadly in line with analysts' forecasts.

But the renewed downturn in Iceland's sales means that the company goes into its new financial year from an even lower platform than was the case 12 months ago.

Grimsey's recovery plan, outlined in the summer of 2001, has yet to deliver results. Since taking over, he has repeatedly stressed that reviving Iceland would take time. Certainly, he inherited a business in profound trouble. Both Booker and the Iceland chain had received little investment.

'We had stores that hadn't been refitted for 15 years,' said Grimsey. Financial control systems were antiquated and lacked integration. The group had debts of £600m after the Booker deal.

Grimsey admits that a misguided price-cutting strategy in 2002 put the planned recovery back a year. Also, no one denies that the food retail market remains fiercely competitive.

Booker has shown underlying sales growth for two years, but even Grimsey's most patient supporters must be wondering when, or if, his strategy will reap satisfactory rewards.

Grocery industry figures suggest that Iceland's market share has slipped to less than 2.2% in recent weeks.

Ambitions to expand have been quietly shelved. In 2002, Grimsey said: 'The chain intends to expand by the opening of 80 new stores over the next three years.'

In fact, Iceland now has fewer outlets than it did then. Ironically, the only signs of growth in the frozen food retail industry have come from Cooltrader, the chain started by Malcolm Walker after his spectacular falling out with Grimsey. It started with one outlet in 2001 and is now believed to have ten.

Grimsey has asked investors to be patient. So far, they have obliged. And he insists that Iceland can be reborn as a successful convenience chain. But as he heads into his fourth year of BFG's 'recovery', that patience must be wearing thin.