Why is Iceland aiming for another go at foodservice?

Iceland is poised to buy DBC Foodservice. But it has bought a foodservice provider before with limited success, so why again? Peter Cripps reports


'Once bitten, twice shy' is not an adage you can apply to Iceland. Twelve years ago, the frozen food specialist bought foodservice provider Woodward Frozen Food with the aim of building it into a major rival to Brakes.

By the time Woodward separated from Iceland in 2005, following a management buyout, the foodservice business was bleeding money. Yet despite the Woodward fiasco, it is understood that senior figures at Iceland, including boss Malcolm Walker, have agreed to snaffle up DBC Foodservice, a business whose parent company is none other than the Woodward Group.

So is history set to repeat itself, or has Iceland this time backed a winner?

"This has a real air of déjà vu about it," says one industry insider. "Walker seems sure that there are efficiencies to be made by having a foodservice provider alongside his retail stores. I just wonder what they are, because it hasn't worked before, so why would it work now?"

DBC's financials are hardly inspiring - the business made a profit of just £700,000 in the year ending March 2008, with a profit margin of only 0.3%. Controlled by two Icelandic investment companies - Baugur, which is now in administration, and Fons Eignarhaldsfelag - both are understood to be willing to sell their stakes.

The timing, too, is questionable. Foodservice is one of the sectors of the wholesale industry predicted to be worst hit by the recession, as customers choose to eat out less.

But Walker and his board have clearly identified attributes that shine a positive light on DBC as an investment opportunity for Iceland. Although DBC doesn't make much money at the moment, it has several factors in its favour.

For starters, Iceland's finance director, Tarsem Dhaliwal, is also the chairman of the Woodward Food Group, and would bring an intimate knowledge of DBC's numbers and business model. DBC has also shown recent signs of heading in the right direction. The business was making a loss a few years ago but is expected to make an EBITDA of £6m in 2008/9.

Lastly, three quarters of its business is with public authorities, hospitals and other state-run ventures, which are relatively recession-proof. It has only a handful of contracts with national businesses, such as Little Chef, Prezzo and Gourmet Burger Kitchen.

The company is now well placed to "gamble" on a few other contracts to claim some more of the restaurant and pub market, says Woodward Group CEO Andrew Ramsden.


Talking money
Iceland will not reveal how much it has agreed to pay for DBC, but industry insiders agree that Walker - one of the grocery industry's greatest wheeler-dealers - is likely to have picked up a bargain.

The cards are stacked in his favour. Not only are DBC's margins poor, but Walker is buying at a time when finance is difficult to raise, which is likely to have depressed the price even further.

"DBC is unlikely to fetch a great price on the market, as it doesn't make much money at the moment, so it's probably virtually worthless on paper," says another industry source. "But Iceland, through its connection to DBC, will know the figures better than anyone, and Walker may have sniffed a bargain.

"The fact that DBC is half-owned by Baugur, which is in administration, will surely have helped secure a good price. Iceland's performance at the moment is so strong that it is probably one of the few companies able to easily borrow money."

Equally as compelling as the bargain basement price, are the numerous synergies between the two businesses, the most obvious of which is Iceland's ability to help DBC develop its frozen range. DBC currently has just 300 frozen lines, but has been working with Iceland with the aim of adding another 500.

Increasing its range would help DBC compete more effectively with foodservice giants Brakes and 3663 First For Foodservice, where it will need a fully developed frozen portfolio to win contracts with pubs and restaurants, says Peter Backman, MD of foodservice analysts Horizons.


Buying power
Combining the two businesses would leverage their buying power. Iceland has a turnover fast approaching £2bn and adding DBC's £250m sales to this would help both parties, particularly DBC, negotiate better terms from suppliers. Iceland may also be able to help DBC with distribution. DBC is already a national player, although two of its depots, in Nottingham and Liverpool, have closed in the past two years as Ramsden dragged it back into the black. If it outgrows its current supply network, it is possible DBC could use Iceland's four regional distribution centres.

Iceland also has the means to support DBC financially. The retailer's performance in recent years has been strong. Walker claims it has an EBITDA of £140m, debt of £300m that will be paid off within a year and £200m cash in non-Icelandic banks.

"It can only help a little player such as DBC to have a cash-rich business such as Iceland backing it up, when it comes to getting loans, credit and trade credit insurance," says another source.

Then there are Walker's own attributes to consider. He is such a big name in the grocery industry that his association with DBC can only boost its profile, says one wholesaler. "Since Walker came back to Iceland he has got it flying again and his association with DBC will give it some more respect and people will know it's a force to be reckoned with."


How close?
What remains unclear is how closely Walker and Dhaliwal will associate DBC with Iceland. One possibility would be to rename it Iceland Foodservice. But the foodservice source says it is more likely they would allow the companies to run separately, just as Booker and Woodward were as part of Iceland Group.

"It all depends on what they want to get out of DBC," adds Backman. "If they want the third biggest foodservice company, which shows steady growth and profit, then they can have it. But if they want to create a truly major foodservice player to rival Brakes and 3663, which both have UK turnovers greater than £1.5bn, then that's much more difficult to achieve. Brakes and 3663 are constantly investing in their distribution, their picking and their systems and are constantly making themselves efficient and very difficult to compete against.

"History has shown that both Iceland and DBC have had a struggle growing much beyond £250m in foodservice. Substantial growth will be difficult, but not impossible. It depends how much money Iceland has to invest."

Only Walker can answer that.