Can Iceland juggle value and service?

Frozen-food retailer Iceland’s re-appointment of ad agency HHCL & Partners last week signals the start of a drive by the chain to reverse declining sales and re-invent its position on the UK high street.

HHCL has handled the chain’s &£14.4m account since 1998, in which time the retailer has undergone a series of changes to its strategy as it seeks to find its place in UK food retailing. After the collapse of its misconceived foray into organic food retailing – launched in May 2000 – the old management has been replaced – mostly because of the &£20m in losses incurred and the indifference of its shoppers to its home delivery service (the stores were re-branded as Iceland.co.uk).

Founder Malcolm Walker left in January 2001, after questions about a &£13.5m share deal. Under its new chief executive, former boss of Wickes Bill Grimsey, the chain is attempting to return to some of the heady growth of its earlier years, though many observers doubt this can be achieved.

The Big Food Group – Iceland’s new name after taking over cash-and-carry operator Booker – plans to spend some &£375m – raised from a sale-and-leaseback scheme – to open 80 stores by 2005 and to refurbish many others. This March, the group announced that like-for-like sales dropped by 3.7 per cent in the eight weeks to March 1. Meanwhile, supermarket rival Sainsbury’s increased like-for-like sales by 4.2 per cent over the same period. Tesco’s like-for-like sales were also up by 5.2 per cent, as were Morrison’s, which achieved 7.4 per cent.

But Iceland faced an even worse time during the normally buoyant Christmas period, when like-for-like sales dropped by 4.2 per cent after the chain tried to get away from the deep discounting that has become its trademark. This was largely because Iceland didn’t offer its usual deals. As Grimsey says: “Iceland decided not to give away the products for nothing.”

But this goes to the heart of the chain’s problem – once it stops running price promotions, people stop going to its stores. It will take a clever strategy to draw people in and, at the same time, move away from the destructive round of price cutting.

While it takes a lot to drive a retailer out of business – even Somerfield has come back from the living dead – some analysts are sceptical as to whether Iceland will be able to return to its former lustre. According to Credit Lyonnais Laing analyst Paul Smiddy, Iceland has had a problem moving its marketing away from Fifties-style price promotions to become a retailer for the new century. He says: “Life is difficult and so far Iceland has struggled with marketing. The new management has had to revert to the promotional style of the previous management, which they lampooned when they arrived. The new management is still in the camp of ‘if they didn’t exist you wouldn’t rush out to invent them'”.

An Iceland spokesman says that tactical promotions were reined back last year, but “with hindsight it was a mistake, because the business was not prepared.”

He says there will continue to be outstanding promotions on offer, but it will be a host of other moves such as new store formats that will form the basis of Iceland’s recovery. He adds: “Iceland will always be strong on deals, but there have been promotions that do not contribute to profit. It is going to have promotions – it is a question of playing to the strength of the business and the brand more than it has done in the past”. He says the current management team has only been brought up to strength this year with the arrival of former Asda trading director Mike Coupe.

Coupe, who was brought in by Grimsey from Asda in January, ordered the advertising review. It is thought he was looking for an agency to spearhead a strategy to move the chain away from its focus on price. Rather than risk an untried agency – though Iceland refuses to name the other agencies involved in the review – he chose to retain HHCL. It is thought that HHCL has to come up with a new direction for the chain’s advertising, though chairman Simon Burridge refuses to reveal what this will be.

But he says: “HHCL was asked to participate in a series of strategic creative workshops at the beginning of April with the Iceland marketing team. The thinking and creative work we developed has been well received and we look forward to getting started on the new campaign.” It is understood that HHCL will create more deal-based ads, along with a new campaign that attempts to build the Iceland brand, but moves the emphasis away from price.

Iceland’s fundamental problem, but also its potential strength, is that its stores are located on high streets, while its supermarket competitors often operate out-of-town stores.

Part of the solution developed by Grimsey is to segment stores for the benefit of different groups among the chain’s 4 million shoppers. Product ranges will be adapted to the needs of the identified consumer groups. The only format announced so far will target commuters.

Industry commentators are agreed, however, that it needs to move on from its basic frozen foods offer and extend its fresh and chilled ranges.

A spokeswoman for Iceland says: “There are 760 Iceland stores throughout the UK, predominantly on high streets. Since 2001 we have undergone a wholesale strategic review and, through that process, it became increasingly clear that when it comes to our stores, one size does not fit all.”

He adds: “We have developed four trial store formats and are opening a limited number of trial stores for each of the four formats, with the aim of having 20 open by the end of the year. We will examine each initiative in detail before adapting and adjusting the formula and making decisions about which elements should be rolled out.”

But as Sally Bain, senior analyst at Verdict Research, says: “There are fundamental problems. Iceland has got a long way to go with regard the product offer. There is a big ‘but’ on profitability. Will it be able to increase sales when the market is so competitive?”

She believes that segmenting stores by different groups of shoppers is a good strategy, but says other chains have done this already, and Iceland is straggling. But she believes price has climbed up the agenda for shoppers in choosing where they buy their groceries. And adds: “Price has become the key battleground, replacing convenience as the most important driver of loyalty.” But Bain sees the future in steady pricing rather than the “high-low” promotional approach of Iceland and other stores. Safeway, which has pursued Iceland’s “high-low” route, could only boost underlying sales by 3.5 per cent in the three months to March, which raises questions about the future of such a strategy.

Iceland was given plaudits and prizes (even by the Marketing Society) for its misguided relaunch as an organic retailer. But it will take a clever balancing act over the next three years to repair the damage done. Digging the retailer out of the promotional vortex will be partly down to the strength of HHCL’s advertising ideas.