FD Interview: Tarsem Dhaliwal

ICELAND is up for sale. The failed Icelandic banks Landsbanki and Glitner, which together own 77% of the frozen foods retailer, are cashing in, sparking a wave of bids from supermarkets and private equity firms.

Asda and Morrison’s have both made bids at the top end of the £1.3-£1.5bn price range and are bidding against a quartet of private equity firms: Bain, Blackstone, TPG and BC Partners. No wonder. Iceland once again reported record results in June, making its financial year to 25 March 2011 the sixth consecutive year of growth. Sales grew 5.9% to £2.4bn, while net profit before tax increased by 14.8% to £155.5m.

Iceland’s finance director, Tarsem Dhaliwal, concedes that the sales process has been time consuming and a distraction, although it has been a necessary evil as all parties involved want to get to the end of the haggling.

None more so than Dhaliwal himself, who together with Iceland’s founder and CEO, Malcolm Walker, and the company’s management owns 23% of the business. Dhaliwal says they have their own ambitions for company ownership.

Dhaliwal and his team have yet to show their hand – the management is not obliged to bid in the first round due to a complex share agreement which means they have only to match the highest bidder in order to win the auction – but he is clear that he is committed to being at the company in the long-term.

“We want to roll over our investment and own the business completely and we are doing everything in our power to try and achieve that. There are no guarantees we are going to get there, but we are trying our best,” Dhaliwal tells Financial Director.

Dhaliwal could be forgiven if he wanted to cash in his 5.5% stake in Iceland, worth £66m. Working as a director on the board of a number of private food and property companies, including DBC Foodservice and Bywater Properties, it is not as if he does not have other things to occupy his time.

His history at Iceland goes all the way back to 1985 and he was appointed finance director in 1995. However, he was then ousted, along with Malcolm Walker, in 2001 when a new management team came in shortly after Iceland had made a recommended offer for Booker, the UK’s largest cash-and-carry operator, with the aim of exploiting buying and other synergies between the two businesses.

“The new management had a different way of working and they didn’t need any of the old guard around,” Dhaliwal says.

Basket case

However, between 2001 and 2004, the business, renamed the Big Food Group, struggled under the new management as costs soared, sales slumped and customer numbers declined. It eventually tumbled, frail and exhausted, into the hands of a consortium headed by the Icelandic retail group Baugur, while Dhaliwal and Walker returned as FD and CEO and company shareholders. They had a turnaround job on their hands.

Dhaliwal returned to find a company in crisis. Sales were 10% down on the previous year, having declined every year since 2001. Over the same four years overheads had escalated on a massive scale, with head office employee numbers growing from 800 to 1,400 and a further £16m being spent on the services of external consultants. The product range had expanded chaotically and prices were well out of line with the market.

“When we came back the business was effectively bust. It had no money,” Dhaliwal says. But he is honest enough to resist laying all the blame at the feet of the management who replaced him. Although they were culpable for creating accounting provisions in 2001 which plunged the business into loss but were subsequently found to be “not needed” and used to support profits until 2004, he does concede that the combined Iceland-Booker business was partly his creation. After all, he was involved with the acquisition of Booker and Woodwards Food Services, which combined to make the bloated group.

“To be fair some of the decisions that we took when we were running the business were wrong because we were too busy trying to please the City rather than do the right thing for the business,” he says.

Dhaliwal says that being able to look at the business from the outside in, where he was not subject to the short-term pressures of running a plc, meant he was able to take an objective view of where the business was going wrong.

At the time, Iceland was moving towards a multi-layered retail concept whereby a particular store in a particular area would have one format which may be very different to another store in another area. It was becoming more convenience led than frozen food led. That created a huge infrastructure to support the multi-dimensional store format, adding costs and complexities.

“My simple view was that here is a business that turns over nearly £2bn, and if we can’t make money out of a business that turns over £2bn with the margins it makes, there is something dramatically wrong,” Dhaliwal says.

Don’t analyse that

The returning management needed to remind the customers of what Iceland was. Dhaliwal says the store had lost its heritage by trying to become a convenience store, based on the idea that the more product lines you put into a store, the more customers will buy.

“We were selling cigarettes, we were selling toys, we were selling flowers. The name above the door is Iceland. We got rid of all that rubbish and got back on the things we were good at, and that was frozen food,” he says.

The first thing Dhaliwal had to grab hold of was the cash. The company simply had to stop spending money on things that were not relevant. Dhaliwal says he carved out nearly £50m of cost savings in the business. Head office costs had to reduce by 50%, suppliers were dragged in and told that Iceland needed a cut or they would not be with the company in the long term. Projects that were not adding any value were cut; capital expenditure was halved.

The decisions appear ruthless, but they were also obvious. Dhaliwal says that by looking from the outside it was easy to put a plan in place. He took the product range from nearly 4,500 to 2,500 product lines. That cost Iceland £20m on the profit and loss, but it generated cash.

“We didn’t over analyse what we had to do, we just did it,” he says. “When your back is against the wall in business or in life, you react, you don’t think about it, you have to do things because you haven’t got the time or the luxury of the time to contemplate decisions, you have to do things straightaway.”

Once the immediate danger had passed and sufficient cashflow had been generated, it was important to get the store and cost proposition right for the customer, and for the company.

Dhaliwal remembers that when he first came back, 25% of everything Iceland sold was sold on promotion, which meant that 25% was never paid for by the customers.

“It was not because they nicked it, it was because we gave it away,” he says. “If you take out all that complexity from the product range, you get a simpler pricing proposition and it’s easier to shop. Even though we are not a convenience store, we are convenient to shop in.

“If you look at the proposition in our stores, you work on roundsome pricing. Everything is £1, £1.50, £2. You have to move away from this 99p concept. Make it easy for customers to shop. If you put 10 items in your basket, it’s going to cost you £10. It’s dead easy. Keep that price proposition consistent.” ?