Changing tastes churn up ice cream industry
Changing tastes and distribution challenges in emerging markets are opening up an ice cream industry long dominated by global food companies such as Unilever and Nestle.
Though classic vanilla, chocolate and strawberry remain the world's most popular ice cream flavours, increasingly health-conscious consumers are moving away from the large tubs of the past to smaller treats.
And rather than mainstream products, they are turning to niche or upmarket brands with unusual or healthier ingredients.
"People either want unprocessed ice cream with latent, functional health benefits, or people are of the mindset: if I'm gonna have some ice cream, it's gotta be the good stuff," said Alex Beckett, a global food and drink analyst at Mintel.
That's posing a challenge to Unilever and Nestle, which together control about a third of a global market that Mintel expects will grow to $71-billion this year from $67-billion in 2014.
They have responded with a variety of strategies, including selling some bulk ice cream businesses, buying start-up brands, introducing new products and pushing into new markets.
But competition is mounting, whether from niche players such as Jude's in Britain and Ciao Bella in the United States or regional names including R&R Ice Cream in Europe and China Mengniu Dairy.
And expanding into emerging markets -- a major source of growth for other consumer products -- is proving difficult, in part due to the cost and complexity of distributing frozen goods in sometimes vast countries with unreliable power supplies.
Selling ice cream in large containers is a low margin business, and prices in markets such as the United States are coming under growing pressure from supermarket own-brands.
More profitable are smaller treats that require more complex production and can therefore garner higher prices, such as Unilever's Magnum bars and Nestle's banana-like Peelin' Pops.
Nestle has already sold some of its mass-market ice cream operations and speculation it might carve off more from a business that provides about $4 billion of its $95 billion in annual revenue has been as recurring as an ice cream van jingle.
"They've already dismantled part of it," said one industry banker. "At some point I wouldn't be surprised if it happened."
The Swiss company sold the rights to its UK ice cream business to Richmond Foods in 2001 and this year agreed to sell its South African ice cream business to the same company, now called R&R Ice Cream.
At the very least, analysts don't see Nestle adding to its brands. As shown by its recently formed Skin Health unit, Nestle sees itself as a company focused on health and nutrition.
"I don't think that they want to expand in the unhealthy and junk ice cream business," said Vontobel's Jean-Philippe Bertschy, adding he could imagine Nestle selling some of its mass-market brands and focusing on higher-end star performers such as Haagen-Dazs and Movenpick.
A Nestle spokeswoman declined to say whether divestments were on the cards, but noted the company's strategy was "based on providing products and services that contribute to the nutrition, health and wellness of its consumers".
Industry sources said R&R, backed by French private equity firm PAI Partners, would be a logical buyer for more Nestle assets. Last year, R&R bought Australian ice cream business Peters, which used to belong to Nestle, and is now Europe's largest private label ice cream maker.
It's not just a case of selling businesses, though, as some big ice cream makers have been snapping up fast-growing smaller brands and investing in new products.
Unilever, for example, bought the upmarket Talenti brand last year. And with freezer cabinets in Europe and the United States filling up with more low-fat ice cream, frozen yogurt and dairy-free ice cream made from almond, coconut or rice milk, the Anglo-Dutch group's Ben & Jerry's brand announced in June it would launch a non-dairy ice cream.
Nestle, meanwhile, recently launched "Simply a Yoghurt" bars, which it says have double the proteins and only 90 calories, complementing lines such as Skinny Cow and Dreyer's Slow-Churned, which are also lower in calories.
With consumers cutting back on processed foods high in fat and sugar, ice cream makers are increasingly promoting their products as small treats offering new flavour experiences.
Unilever has opened pop-up Magnum "pleasure stores" in cities such as London and Manila, where shoppers design their own bars with toppings such as rose petals, chilli and sea salt.
"People look for small indulgent snacks to treat themselves," said Kevin Havelock, president of Unilever's refreshment business.
Innovation is costly, however, and the big ice cream makers also face challenges expanding in the large developing countries that are rising to rival more established markets.
While the United States is by far the world's largest ice cream market, it is followed by China, where annual sales reach about $7 billion according to Euromonitor International and local players Inner Mongolia Yili Industrial Group and China Mengniu Dairy are the biggest players.
It is not proving easy for the global manufacturers to make inroads, with Unilever's Chinese market share rising 30 basis points to 8.4 percent in 2014 and Nestle's dropping 10 points to 2.3 percent, according to Mintel.
"Local players already have an existing distribution network in place, where they have partnerships with supermarkets, hypermarkets, but also smaller convenience stores, which are typically hard to reach because there's no one particular chain," said Lianne van den Bos, a food analyst at Euromonitor.
Another big challenge is keeping the product cold in certain emerging markets where electricity is unreliable. Unilever, for example, has developed cabinets that can keep ice cream cold for several hours without electricity.