Iceland Foods prepares for expected thaw in Russian sanctions

Iceland Foods prepares for expected thaw in Russian sanctions
UK frozen food giant Iceland is ready to enter Russian market when the political chill eases.
By Jason Corcoran in London January 19, 2017

Iceland, the British-owned frozen food giant, is planning to offer its own-branded products in Russia for the first time via partnerships with the country’s leading retailers, bne IntelliNews can reveal.

The company, a high-street institution in the UK with over 800 stores, is optimistic of being able to do business in Russia within a year if sanctions and counter-sanctions related to the Kremlin’s conflict with the US and the European Union are eased.

“If sanctions were lifted, then potentially we could work with retailers in Russia selling some of our products,” Ewan McMahon, international director at Iceland, told bne IntelliNews in an interview. “I think it would be more selling products into existing retailers rather than opening Iceland-branded stores or franchised outlets.”

Magnit and X5, Russia’s two home-grown food retailing champions, are believed to be the best fit for Iceland, which would consider franchising or direct ownership of Russian stores if the initial tie-ups were to succeed. Iceland’s international unit already operates wholesale as well as directly-owned businesses and franchises outside the UK in Ireland, Spain, Portugal, Iceland, the Czech Republic and even Libya.

Iceland was a key sponsor at a recent Russian-British business forum in Westminster, where city grandee and gold-mining tycoon Sir Peter Hambro castigated the UK political establishment for not doing enough to repair tattered relations with Russia.

Relations between London and Moscow are at their chilliest since the Cold War. A British public inquiry concluded in January 2016 that senior Kremlin officials probably ordered the 2006 killing of defected Russian intelligence officer Alexander Litvinenko using radioactive polonium-210, and that President Vladimir Putin himself likely approved the hit. But many investors like Hambro say the world has since moved on and that the UK has to adjust its view of Russia given the fallout from the Brexit vote and the elevation of Donald Trump to the US White House.

The UK has been one of the most vocal supporters of stringent European Union sanctions imposed on Russia over its actions in Ukraine, but the government will be forced to strike new trade deals once Prime Minister Theresa May triggers article 50 to leave the EU in March.

Iceland is also banking on president-elect Trump to fulfil some of his election promises to ease sanctions that the US imposed on Russia in 2014. Igor Shuvalov, Russia’s deputy prime minister, predicted on January 13 that the Western sanctions will soon end, along with the trade embargo that Russia slapped on Western food imports in retaliation.

“It is time to understand that sanctions will soon cease being in effect,” Shuvalov told delegates at the annual Gaidar Forum. “Or counter-sanctions,” he added, referring to Russia’s embargo.

McMahon says Iceland is working Russia’s Trade Federation in the UK but has yet to sit down properly with any Russian retailers.

“There’s lots of different sanctions around Russia so to do something immediate isn’t really possible,” he says. “However, we don’t know how sanctions will develop because there are new governments in places like the US and various European countries, and there are more upcoming elections this year. You never know how things will develop. I read that the US will continue to support sanctions after Trump’s inauguration but you never know how things may change.”

McMahon and Alistair Cooke, Iceland’s head of sales and marketing, had a stand at the Russian-Business forum and even provided the food and the drink for the event.

“We were invited by the Russian-British trade federation, says McMahon. “We have links with lots of trade federations, such as the Chinese and the Indians as well as the Russians. I am not sure the exact reason why they approached us – I think because they like the quality of our food!”

Iceland is popular in the UK and other markets with budget-conscious families and could play well in a country where pockets have been hit by a two-year recession and ruble devaluation. But Russia has proved a difficult nut to crack for some foreign retailers. French chain Carrefour exited the market in 2009, while US discount giant Walmart departed without ever opening a single store.

Czech barometer

The British supermarket chain, which was launched in 1970 by Malcolm Walker, has grown to more than 800 locations, 25,000 employees and about a 2% share of the British food market.

It previously entered markets in Hungary and Poland but left quickly afterwards. “Hungary is corrupt and they pickle everything in Poland, so we are going Czech,” Walker told the FT in 2013.

In 2012, Iceland entered the Czech market and opened its first store in the capital Prague two years later. Frozen cakes are among the best-selling products for locals.

The initial plan was to open 200 stores in the Czech Republic, along with another 100 in Slovakia, as part of an expansion across Central and Eastern Europe. However, that hasn’t happened and Czech Republic remains Iceland’s only beachhead in the region,  with just six stores operated with a franchise partner.

“It’s a very, very small business,” said McMahon. It’s very early days and we need to know more about why Czech customers come to Iceland, and what they like about our business and our competitors. We have dipped our toe in the water and we are learning and we will see how it develops in the future."

“Could we go into other countries in Central Europe? It’s wait-and-see and will depend on demand, what the market looks like, who the potential partners might be and how well we do in the Czech Republic."

Cold comfort for Muscovites

Frozen fish and frozen vegetables will be nothing new to land-locked Muscovites, who were forced to endure sub-30 degree temperatures this winter. Iceland is known for its budget-price frozen food but is also offers milk, bread, alcohol and non-food items.

In the UK, some of its most popular staples are frozen curries, lasagna and doner kebab pizzas which may have to be adapted or replaced for the Russian palate. Frozen dumplings known as pelmeni are very popular in Russian supermarkets while frozen fish and vegetables can be found in most stores.

David Steer, the former Russian head of US conglomerate Kraft in Russia, said the Iceland format has a shot at succeeding if they can adapt to local tastes.

“There is a good solid business in frozen food,” Steer, who managed 6,000 employees across Russia, told bne IntelliNews. A lot of its local but there is already some Western food in the freezers such as the pizzas and the pastries. If Iceland can bring some differentiation and things you can’t classically get in Russia then it will be really interesting.”

Using a local partner to initially break into the Russian market and to help with logistics is the “smart” option, according to Steer.

“Brand up with the local partner like X5 and then at some stage, you can talk a walk if you are being very successful,” says Steer, who now runs his consultancy East West SBS Limited.