Dancing on ice: Iceland’s remarkable turnaround

It’s 2am in the lift of a hotel in Euro Disney Paris. One of Iceland’s longest-serving store managers, who is a bit squiffy after a few drinks, is giving me chapter and verse about how the frozen food retailer is “on a roll” and that he expects sales growth to continue over the next year, despite being up against strong comparables.

The lift arrives at his floor and he shakes my hand. Just before leaving, he says: “It’s great to have the old boy back.” His eulogy to Iceland chief executive Malcolm Walker – who returned to rescue the retailer in 2005, when it was teetering under financial pressures and tumbling sales and profits – summed up the ebullient, almost delirious, mood at Iceland’s store managers’ conference last week in Mickey Mouse’s European backyard.

The upbeat mood was largely a result of the retailer’s strong sales and profit performance this year, although the chance for 680 store managers and its top brass to let their hair down, have a few drinks and engage in team-building alongside Mickey, Goofy and friends probably also helped.

The story of Iceland between 2001 and 2005, when Walker was absent, is well known. He has never been shy in coming forward with his views on the period, which he calls “the dark ages”, and which is laid out in great detail on Iceland’s web site.

In truth, the 680-store frozen food retailer’s performance had started to falter before Bill Grimsey, now boss of Focus DIY, took the helm as Iceland chief executive in January 2001. Walker sold half his equity stake in Iceland for£13.5 million in November 2000, just weeks before it issued a shock profit warning.

Today, the retailer – which was acquired by Icelandic retail investment giant Baugur in 2005 for £160 million – is in a much healthier condition.

Speaking exclusively to Retail Week at the conference, Iceland managing director Andy Pritchard says: “This continued sales growth, combined with tight costs and margin control, has resulted in Iceland being more profitable than it has ever been.” Walker revealed that like-for-like sales are up by more than 10 per cent since the end of March, following 15 per cent like-for-like growth last year. Its figures are supported by TNS Worldpanel, which reported that Iceland’s sales rose 8 per cent in the 12 weeks to September 12.

The retailer is confident of beating its record net pre-tax profits of£73 million, achieved in 1995 when it had 100 more stores. It is also understood that Iceland expects to post a substantial improvement this year on the£95 million EBITDA it delivered in the year to March.

So how has Walker, who founded Iceland in 1970 with just£30, managed to turn the business around and how confident is he of maintaining its momentum in the face of fierce competition from other food retailers?

The quietly-spoken chief executive attributes Iceland’s revival to the hundreds of changes that have been made to how it runs its stores, supply chain and head office. For instance, Iceland has simplified, rationalised and improved its product offer, reduced prices, sharpened up store operations, expanded its free home delivery service and whipped its supply chain into shape. “We made all these massive changes very quickly, which, as a private company, you can do – you are restricted as a plc. It has been one continuous line of improvement,” he says.

For example, Iceland has taken a sword to head office and store bureaucracy. Upon returning in 2005, Walker had to cut 900 of its 1,400 head office staff. “If you were a store manager previously, you were inundated with paper work, form-filling and compliance issues. We have made the operation dead simple now,” he says. “If it doesn’t put cash in the till, you have to question why you are doing it, because the company had become like the civil service.”

Over the past two years, Iceland has also made two big improvements to the efficiency of its supply chain. First, it closed down its underperforming distribution centre in Deeside, Flintshire, and moved down the road to a bigger depot in Warrington, Cheshire. “It is now our most efficient and lowest cost-per-case operation – and it is only a year since we moved,” Walker says.

Another big change was the outsourcing of distribution to logistics specialist DHL, a switch that was made in April. “All our depots are seeing massive improvements now – on time deliveries, pick accuracy, cost per case and reduced left-offs. All the things that plague a store manager’s life are massively better. For years, distribution has been a thorn in our side,” he says.

Iceland has tackled its product offer and pricing with similar gusto. Its strategy of rounding up prices to£1 or£2 on many products appears to be popular with customers. Pritchard says: “I am confident that we can retain our price position and compete with the big boys, but it is not going to be easy.” He claims that Iceland is now cheaper and has grown faster than rivals, including Asda and Tesco, over the past year.

Referring to the ongoing supermarket price war, Walker chips in: “Everyone knows that price wars are bullshit. You put some prices up and put some down. Everyday good value is what matters.”

Buying director Nigel Broadhurst says that, for Christmas, Iceland will add new lines to and enhance product ranges, including its party fare, frozen joints and desserts. He adds that Iceland’s king prawn ring, its flagship Christmas product, delivered sales of£817,000 in Christmas week alone last year, which exceeded the same product sales of all the big supermarket and discounter rivals over the holiday period.

A people business

Above all, however, Walker believes that staff attitude has played the biggest role in Iceland’s recovery. “The key issue is staff morale,” he says. “People can take that lightly and with a pinch of salt – nobody can really believe how important that is. I am not talking about training the staff, till operations, saying please and thank you, making eye contact with the staff and all that. I am talking about motivating people and making them want to die for the company.”

He reckons that sales at a store with a “pissed off and demoralised” manager can be as much as 20 per cent lower than at one that has a motivated leader.

At the conference, Walker addressed a key factor in motivating staff when, six months ahead of schedule, he unexpectedly gave the 680 store managers a pay increase of£1,000, which took the average Iceland store manager’s salary to£30,000.

Depending on the retailer’s performance, Walker wants to get the average store manager’s salary up to£35,000 in 18 months’ time. “The intention is that instead of it being the last place to work, Iceland should be at the absolute top of the list in terms of pay and job satisfaction,” he says.

A pantomime over two days provided further insight into the unique culture of the retailer. Walker dressed up as Father Christmas and other board members got involved; a villain called Somerfield also featured. Perhaps understandably, stores director Iain Williams and buying director Nigel Broadhurst were not keen on Retail Week publishing pictures of them dancing around, dressed as ugly sisters.

On the second day, store managers divided into their area teams and wore fancy dress, dressing as leprechauns, carrots, scousers and Directory Enquiries’ 118 men – although the killjoys at Disney prevented them from entering the park in their outfits.

Another illustration of Iceland’s culture is its Christmas incentive programme. This year, Iceland’s top three performing stores in each of its three regions will get£10,000, so staff at these nine stores will share a£90,000 cash bonus. And Walker insists on taking a case full of cash, along with champagne, to each store himself and handing out the money to delighted employees. The manager of the top-performing store in each region will also win a Mini, models of which were on display at the conference.

Walker was typically bullish about Iceland’s prospects over the next 12 months. He expects the retailer to beat its sales performance from last Christmas, when like-for-like sales soared about 15 per cent. “They will be off the clock. They will be loads up on last year,” he forecasts.

Ahead of Christmas, the retailer will sponsor hit TV series, I’m a Celebrity, Get Me Out of Here, for the second year running, with former Neighbours star Jason Donavan appearing alongside Iceland regular, former Atomic Kitten singer Kerry Katona.

Walker insists that Iceland, as a niche frozen food retailer, has no direct competitors, although he concedes that, when the retailer was performing poorly, all food rivals were stealing trade from it. While it is well-equipped to battle rivals such as Farmfoods, board members’ comments suggest that they see Asda and Tesco as posing the biggest threat. One manager said that an Iceland store in Scotland had suffered a substantial drop in sales and footfall when a Tesco Extra opened nearby, although Iceland stepped up its free home delivery service to offset some of the shortfall.

Overall, Iceland appears to be a retailer that is thriving in one of the world’s most cut-throat markets by continuing to enhance its operations, motivating staff and remaining true to its target customer base.

Walker concludes: “We have brought the business back from the brink of disaster. It is buzzing with success and we are doing well.”