Competition in the frozen food business is hotting up, which is surprising in a market that can only be best described as flat. However this lack of total growth is forcing stores to be more innovative and fight harder for greater market share. All the major supermarket chains are offering bigger and better frozen food deals and one of the best known names in freezer land, Iceland, is promoting a buy one get five free' deal ­ buy half a leg of lamb for £5.49 and get McCain 1kg Roast Potatoes, Iceland 907g Mixed Vegetables, Iceland 12 Unbaked Yorkshire Puddings and a Sara Lee 340g Double Chocolate Gateau free. So with the fierce competition and frantic activity it would be easy to overlook one small corner of the sector which, despite the tough conditions, appears to be ticking over nicely. But just who are these retailers? Unless you live near one of the chains, you probably won't even have heard of them. Frozen food discounters such as Farmfoods, Jack Fulton and Heron Frozen Foods seem to court anonymity. Nestling innocuously on the high street, all three companies quietly get on with the business of selling frozen foods to those within the lower bands of the socio-economic spectrum. Farmfoods may be small at the moment but it is growing rapidly. During the past 10 years the business has more than doubled in size and now has more than 230 stores across Scotland, the north of England and Wales and is now beginning to branch out into the south and south-east of England. Heron Frozen Foods has more than 100 stores around the north and the Midlands and in its most recent directors' report for the year ending December 1999 it states its intention to expand the business by opening new shops. Jack Fulton is the smaller of the three, with about 60 shops, but it is also looking to expand. The company's directors' report for the year ending July 2000 shows it opened three new stores and that: "The directors believe that market conditions are suitable for, at least, a similar opening programme in the forthcoming year." So all three of the minnows of the frozen food retail market appear to harbour expansion plans and with apparently healthy operating margins of between 4% and 6%, according to their annual financial records, each is performing extremely well, particularly when compared with the hard discounters such as Aldi and Lidl which operate with margins of about 2%. This is backed up by the fact Jack Fulton's parent company Frozen Value was, according to the report, subject to an uninvited, though not hostile takeover bid. Although the bid apparently failed because of internal goings on at the unidentified prospective acquirer, it does show that a small frozen food discounter can still prove attractive to investors. In fact, Frozen Value had already undergone a venture capital backed management buy in by two ex-Budgens directors Kevin Gunter and Chris Bond back in 1997. However, none of the companies is willing to talk about their operations, with Farmfoods marketing director Alan Henderson simply stating: "We are a private company who have no interest in gaining column inches." But perhaps it's this silence that is the key to their existence. Their reluctance to draw attention to themselves means they remain low on their competitors' radar screens. Frozen food has changed considerably over the past few decades, according to Alf Carr, director general of the British Frozen Food Federation. "The frozen food industry's initial infrastructure was built by the freezer centres, not the multiples. Many of the multiples just looked at it and didn't take it seriously." However that has since changed, and the multiples are now focusing on the sector in a big way, as one of the businesses pioneers, Iceland founder Malcolm Walker, points out: "If you look at the frozen food areas in supermarkets they're now massive, something like between 10% and 15% of the store. "I would imagine that as a sector, Tesco and Sainsbury are bigger in the frozen food market than Iceland, and have been for some time." So it seems there are many retailers which are competing for a slice of the cake which, at the moment, is not expanding ­ the sector was worth £814m last year, a drop of 0.3%. But that in itself is misleading, says Carr, who points out that while some areas of the frozen food sector may be flat or even in decline, others are taking off. "People waffle on about the frozen food market as a whole, but it's such a varied area, from peas to ready meals." At the moment more traditional products such as frozen vegetables are suffering, but the real stars of the show are pizza and ready meals which are all showing steady growth. Carr adds: "There are companies in expanding segments and there are companies that are stuck in areas like peas and they have to concentrate on extending their margins. "We have, as an industry, been written off so many times its ridiculous. We've had more comebacks than Frank Sinatra." The decline in more traditional areas has galvanised manufacturers to invest heavily in new product development and this is starting to result in new products emerging, such as Bird Eye Wall's Enjoy! range. However, this could cause problems for the smaller discounters, according to PriceWaterhouseCoopers consultant Sally Z Blackwell. An expert on the retail sector, Blackwell says the only growth in the sector is coming from innovation and new product development, which isn't good for the cheaper discounter. She says: "I can't see Farmfoods having access to the kind of new product development that Tesco might have and I don't think they have the access to the best suppliers, which are introducing those innovations. "I don't believe they're able to offer the consistency and quality of products that other operators like Tesco and Iceland can." So with high competition is there any room left in the market for Farmfoods and the rest of the gang? Carr believes there is. "All of them are very well established businesses. Both Farmfoods and Fulton have a history of 25 years or more and Heron is certainly not new either," he says. "They fulfill a very necessary role for a different type of shopper." And that seems to be a key factor. The discounters cater for a sector of society who always have to shop for a bargain. Generally speaking, most stores occupy prime spots in the high street and town centre and are easily accessible on foot, a crucial factor for customers who often don't have access to a car. A quick trip to the Farmfoods store in Preston finds a cheap and cheerful shop that is brightly painted and lit, selling mainly frozen food with some groceries. Most products are Farmfoods own label, with yellow price point postcards positioned above them. There are posters in the window, but few promotions or bogofs ­ rather, Farmfoods sticks to an EDLP strategy. This basic approach obviously works. According to figures from ACNielsen Homescan, Farmfoods and the other smaller discount freezer centres all outperform Iceland in appealing to socio-economic bands D and E customers. So in many ways they are picking up the customers the bigger operators make little effort to go for. Put simply, Carr adds: "I think they have a sector of the market that doesn't tempt their competitors much. "In reality, they are not of great consquence to the bigger retailers like Tesco or Asda which could take all their customers and probably not even notice." "These discounters survive by hanging around on the sidelines," says PWC's Blackwell. "They fit in on an opportunistic level, carving out a niche for themselves in local markets, but in reality they are really just something of a sideshow to the frozen food sector. They are so small at the moment that they make next to no impact on the market." Anectodotally, the discounters have less than a 1% share of the market, but Carr says the temptation to dismiss all three organisations is wrong. "They may appeal to the low end of the market but they are all very professional organisations. "If people do judge them by the markets they aim at, then that's an incorrect impression, they're all exceptionally well run operations. "When someone from one of these companies visits your factory they're looking for the same high standards as anyone from Sainsbury and Marks and Spencer." Carr points to the fact that Farmfoods runs its own private label. "That's impressive," he says. "It's a remarkable achievement for both Farmfoods and their producers. "When you put out an own label you're taking on a very high level of responsibility for food safety and I think people may look at Farmfoods and underestimate them." Blackwell agrees. "Farmfoods stores are actually pretty impressive, they're not quite as down market as you might expect them to be." However, despite this apparent rosy outlook, there are some black clouds on the horizon. Blackwell points out that the competition for frozen food, particularly on price, is becoming more and more intense. "The discounters are aiming at shoppers looking for a bargain, but these days the big boys are offering deals that are as good as some of the discounters. "Customers would have to be exceptionally hard up if they can't afford some of the offers in Tesco and the other bigger retailers." She points out that at the moment discounters are still quite small and insignificant compared with the bigger operators. "It's a very astute policy to keep quiet. They keep their heads down and below the radar of the big boys who, although they are aware of them, have other things to concentrate on. "At the moment no-one is paying attention to them, but none of the supermarkets can afford to ignore any sector forever." So the bigger they get, the more likely they are to find themselves coming under fire from the big guns. And this is already beginning to happen. Kwik Save has recently made the decision to claw back the ground it lost to other discounters, and one of the battle grounds it has chosen is frozen foods. Trading controller Marcel Hayden says: "We have been growing our market share in frozen foods over the past six to nine months. We're focusing more and more on frozen foods. I wouldn't say we're being gung ho, but we've put a great strategy together to grow that category." And that strategy involves moving the freezer sections into more high profile locations with better signage, more promotions and the simplification of the range. "We've taken the complexity out of the freezer and introduced strong brands like Birds Eye Wall's and Ross." Hayden claims the strategy is already beginning to pay off: "We've been enjoying double digit growth for the last few months of between 12% and 15%." At the moment, Kwik Save is primarily concentrating on competition from Iceland and Asda, as well as hard discounters like Aldi and Lidl. However it is aware of Farmfoods and Hayden considers them a potentially serious threat. "They are still growing and that makes them a serious competitor, but looking at what they offer, we offer more. Customers can have a full shopping experience with us" says Hayden. "We are looking to grow our market share but we'll always be keeping an eye over our shoulder." So the discounters find themselves in a tricky situation. At the moment they are doing very nicely in their own little niche, and despite raging competition going on above them, have managed to avoid being squeezed too hard by the big operators. Yet if they follow plans to expand they will find themselves open to a new range of dangers and threats by directly challenging the big boys. But simply standing still does not guarantee their future either ­ eventually the multiples will focus in on them and they may well find their customers drifting over to the likes of Iceland and Asda. However Carr is optimistic: "There is still a sector of society that has to look for a bargain every time they go shopping and they will be there to cater for that." n {{COVER FEATURE }}