Iceland warns of energy cost hit from running freezers

Frozen foods group Iceland is facing a particularly acute hit from rising energy costs because of the aisles of chest freezers that make up its UK stores.

The retailer, which has more than 900 UK stores, told investors it had traditionally performed well at times when customers’ incomes were squeezed, citing substantial sales increases in the aftermath of the global financial crisis.

But the supermarket said in its latest annual report that the “considerable uncertainty and volatility in global energy prices” meant that it “will be unable to avoid a temporary reduction in our profits during the current year” unless prices stabilized.

All UK retailers are facing steep increases in energy costs, but Iceland is more exposed to price movements than its rivals. Around a third of its sales volumes come from frozen rather than fresh food, which requires more energy to keep cold.

Iceland’s energy bill was around £70mn in the year to March 2022, or around 2 per cent of sales.

Alise Ilzina-Raghuvanshi, analyst at Fitch Ratings, said this could increase materially in the current year and limit Iceland’s scope to reduce its indebtedness. It finished the last financial year with net debt of £696mn.

“If energy costs continued to increase by £19mn each quarter, as disclosed for the first quarter, this would suggest its energy bill could more than double in 2023,” she said.

Around half of Iceland’s energy needs for the current financial year have been secured, but from September it will be fully exposed to energy prices. Unlike domestic energy supplies, commercial power costs in the UK are not subject to a price cap.

Ilzina-Raghuvanshi said she was reducing forecasts for earnings for the current year to just under £100mn including lease costs, compared with the £126mn reported for the year to March 2022.

Sales in the year just ended were £3.67bn, down slightly from the prior year as the company derived less benefit from the closure of hospitality venues and the resulting increase in cooking at home.

“The true extent of profitability tightening will depend on actual energy cost in combination with Iceland’s ability to mitigate via its cost-savings initiatives,” Ilzina-Raghuvanshi added.

Iceland said that while the next 12 to 18 months would be “a tough time for the market”, it expected to benefit from investments in technology and logistics during the past year and its competitive stance on pricing.

“We are very strongly placed in the current testing environment for consumers. . . We expect to see growing numbers of consumers moving from fresh to frozen as household budgets come under increasing pressure,” it said.

After a long period as a public company and a brief stint under foreign ownership, Iceland is now controlled by the families of founder Sir Malcolm Walker, who started the chain as a single shop in 1970, and chief executive Tarsem Dhaliwal.

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