On the substantive point of the trademark infringement, I had the impression that if you don't defend a trademark then you lose it. Iceland have been displaying their name in huge illuminated signs all over the UK for decades so how the Country can now come along and act shocked I can't imagine.
It's not the defense itself that's the important part. If you don't defend a trademark and it's used more and more to refer to things other than those you're selling, you risk the trademark becoming a generic term for... well, refrigerated food in this case, but w/e. The law cares only minimally about the amount of vigor with which you've defended the trademark against genericity; the important thing is whether it's still a trademarkable word or not. In this case, "Iceland" isn't used by anyone as a generic term, so the genericity stuff doesn't come into play.
What might come into play is "laches", the legal doctrine that if Iceland-the-country has let Iceland-the-store spend decades opening stores and advertising and building brand awareness, it's no longer equitable for a judge to simply take the trademark away from Iceland-the-store. IANAL and I certainly ANA international trademark L, though, so it's possible that laches cannot bar this claim.