How attractive is the ice cream business still?

Reto Lüchinger, president of Glacesuisse, the association of Swiss ice cream manufacturers, cannot remember the last time the industry had such a bad June. “I expect a decline of 30 to 40 percent for the month compared to the previous year,” he says.

June, July and August are the crucial months for ice cream manufacturers. More than half of the annual volume is sold in this period. Overall, however, the development since the beginning of the year has been less dramatic than one might expect given the wet spring. Ice cream sales grew by around 13 percent up to mid-May, says Lüchinger, who is also managing director of Froneri Switzerland.

How the figures for the whole year turn out will depend heavily on developments in the summer months. In recent years, ice cream sales in Switzerland have increased by between 3 and 5 percent, says Lüchinger.

Large corporations are rethinking

Basically, ice cream is considered a relatively mature business in which very large growth rates can no longer be achieved. The dependence on the weather is just one of the special features of the ice cream business. Another is the separate and expensive frozen food logistics that are needed for delivery. In addition, the consumption of own-brand ice cream has also increased in recent years.

Against this backdrop, the major consumer goods manufacturers have reorganized their ice cream business or are planning changes. In March, for example, the consumer goods giant Unilever announced that it would be spinning off its ice cream business. The group, with brands such as Magnum, Ben & Jerry’s and Lusso (Langnese in Germany), is the global market leader.

But the company is considered to be too broadly positioned, even after the spin-off of margarine and tea bags. It is therefore clear to Unilever’s management that the ice cream division is better off as an independent company with a turnover of almost 8 billion euros.

Ice cream boom under Brabeck

Nestlé is already one step ahead here. Under former CEO Peter Brabeck, who began his career behind the wheel of a Findus frozen food truck, the ice cream business was expanded. In 2006, following the full takeover of the American company Dreyer’s, he announced Nestlé’s global ice cream market leadership as the “culmination of a long-term strategy”.

But ten years later, priorities had changed. Nestlé brought its European ice cream business, including Mövenpick, into a joint venture in 2016. In the new company Froneri, it was merged with R & R, an ice cream manufacturer owned by the private equity firm PAI. In 2019, Nestlé’s American ice cream business was also incorporated into it.

The structure has the advantage that Nestlé no longer has to operate factories and Froneri can produce not only Nestlé brands in its factories, but also third-party brands such as Oreo from Mondelez as well as private labels for retailers. Although the latter only accounted for 13 percent of total sales of just under 5.3 billion euros in 2023, Froneri still describes itself as the world’s largest manufacturer of private labels. This strategy allows for better capacity utilization and offers a certain degree of security when consumers switch to cheaper products.

More money can be made with so-called impulse ice cream, i.e. cornets and ice cream sticks, than with the large ice cream containers for home use. The aim is to be able to offer retailers and restaurants a large selection of well-known brands. A swimming pool or a kiosk may only have space for one refrigerator and must choose a supplier. Froneri has managed to gain market share in recent years – for example with Nuii as a competitor to Unilever’s Magnum. A success that not everyone within Nestlé had expected.

A look at Froneri’s figures shows that the company has extremely high financing costs, as is usual with private equity. But the company is making money operationally and has also been able to increase its margins through restructuring since the spin-off from Nestlé – although not to the level of categories such as coffee or pet food.

What is financial investor PAI planning?

Some uncertainty arose in mid-January this year. Bloomberg reported that PAI was looking to exit Froneri and was therefore looking for a buyer for its half of the company. It was unclear what this would mean for Nestlé. But the speculation died down again. Four months later, unnamed sources again whispered to the agency that PAI was considering new financing in order to remain invested in Froneri.

Nestlé simply said: “We are very happy with Froneri – it is a successful joint venture and a strong force in the ice cream business.” A full takeover by Nestlé in the event of PAI’s exit does not seem plausible – the food company could have kept the division entirely. A merger with the Unilever division is also not conceivable for competitive reasons.

Should the two Froneri founders, Nestlé and PAI, want to sell the investment at some point, a sale to financial investors or an IPO are possible scenarios. Unilever is also likely to consider a takeover by private equity or a spin-off as a separately listed company for its ice cream division. The spin-off should be completed by the end of 2025, it was said in the announcement.

But not all companies outsource their ice cream business. One company that is investing in this area is Ferrero. The Italian family company has taken over various ice cream manufacturers in recent years and can therefore expand its very strong confectionery brands such as Nutella and Ferrero Rocher to the freezer. This also ensures sales in the warmer seasons when less chocolate is sold.

Health concerns

Apart from the competition from private labels, the complex logistics and the limited margins, health concerns also make the ice cream business less attractive. The boom in weight loss injections has raised fears that the patients affected will consume less ice cream, particularly in the important US market.

In addition, various investors do not want to or are not allowed to invest in companies that sell “unhealthy” food. However, this is where another positive side effect for Nestlé is revealed through the solution with Froneri. Because the Vevey-based company does not control the manufacturer, with only 50 percent of the voting rights, Froneri’s ice cream sales are not included in the calculation of the proportion of “unhealthy” products at Nestlé – this is therefore lower than if the ice cream division had remained entirely within the group.