US Ice Cream Sector Update – Competitive Dynamics &
Health Trends – 27 May 2021
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Specialist: Michael DaPonte (MD)
Title:
Moderator: Nyree Hinton (NH), Third Bridge Sector Analyst
EVP at New England Ice Cream Corp
Agenda:
1. Demand dynamics across grocery, club and convenience
2. Competitive landscape amid aggressive private label expansion
3. Health-conscious consumer trends and category risks
4. Supply constraints and growth outlook
Contents
Q: Could you give an overview of the US ice cream industry, its top players and historical consumption
drivers?
3
Q: Could you comment on the trends you were noticing pre-coronavirus and how those have developed since
3
the pandemic began?
Q: Could you elaborate on why it’s so hard to pivot away from concentration on a few flavours?
Q: What do you think will be the longer-lasting structural impacts of coronavirus on ice cream?
4
4
Q: Could you elaborate on the health and wellness trend given you mentioned the keto products? How has
this trend impacted the category? How have ice cream players diversified their product offerings in response
to these consumer dynamics?
5
Q: How is the clean labelling trend affecting ice cream given that 80% of the category is still full-fat flavours?
Can players get away with having full-fat flavours while tweaking the ingredient list to make them more
appealing?
5
Q: Could you elaborate on pricing and pricing power within ice cream? The thousands of price-competitive
options in supermarkets make consumer choice difficult.
6
Q: How important is product quality given you touched on brand switching and retailers’ private label
offerings? A player can beat competitors on price, but a bad product is a bad product.
Q: How do you assess consumer pricing strength? Are more consumers willing to trade up amid heightened
unemployment?
6
7
Q: The category grew 40% in the first few months of the pandemic and was up 20% at year-end. Have prices
for the actual product followed this growth or is there too much hesitancy?
7
Q: Do you think there’s enough time for retailers to raise price as amenities reopen before they have to revert
8
to higher promotional activity?
Q: Could you break down the percentage of sales that go through retail grocery vs more fragmented channels
8
such as convenience?
Q: Could you elaborate on the margin opportunity in the less penetrated markets?
Q: How have retailer-manufacturer relationships evolved over the years?
Q: Would you say that retailers are thinking about e-commerce and D2C while manufacturers aren’t
focusing on how consumer shopping habits have changed?
8
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Q: What recourse do manufacturers have to push back against retailers and hold prices at a premium rate? It
10
seems as if the retailers pull all the levers, which is similar to other categories.
Q: Could you comment on cold storage and the strain this has placed on the industry? Cold storage has
impacted every other industry I can imagine.
Q: How fragmented is the ice cream manufacturing industry? Is it run by the top players?
Q: How have the barriers to entry to ice cream manufacturing changed over the years? Do you think it’s
gotten harder or easier for upstarts to come in?
10
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Q: How do you think e-commerce and digital marketing have impacted national brands’ spending decisions,
given that retailers are requiring more money for marketing and trade while trying to undercut the
manufacturers with their own products? Could the manufacturers no longer need to go through the retailers?
Could they push back by leveraging apps that tell consumers to go to stores rather than spending this money
through the retailer?
11
Q: Which manufacturers do you think are doing well at innovating? What do you think will be the major
trends over the next few years?
12
US Ice Cream Sector Update – Competitive Dynamics &
Health Trends
Transcription begins at 00:00:00 of the recorded material
NH: Welcome to Third Bridge Forum’s Interview entitled US Ice Cream Sector Update – Competitive
Dynamics & Health Trends. I am Nyree Hinton and I will be facilitating today’s Interview with Mr Michael
DaPonte, EVP at New England Ice Cream Corp.
Michael, before we get started with today’s Interview, please state I agree or I disagree to the following
statement: You understand the definition of material non-public information and agree not to disclose any
such information, or any other information which is confidential, during this Interview.
MD: I agree.
NH: Thanks, Michael. Could you give the audience an overview of your background and the various roles
you’ve held in the industry?
MD: I’ve spent 40 years in the packaged goods industry. Started back right out of college in the food
brokerage business, and then went to work for Nestlé. Spent almost 20 years at Nestlé USA, mostly in the ice
cream role, ice cream division, selling their brands, and with their acquisition of Dreyer’s Edy’s back in 2002 is
when I was really involved in it, up until five years ago. At that time, I left Nestlé and joined a local food
distribution, ice cream distribution and manufacturing company called New England Ice Cream, located
outside of Boston, Massachusetts.
[00:01:45]
Q: Could you give an overview of the US ice cream industry, its top players and historical consumption
drivers?
MD: If you look at the ice cream industry over the years and the history of ice cream, it’s really about a feel-
good category. If you think about it, it’s filled with memories of when you were a child, going with your family
to ice cream stands or being at your grandparents’ house or extended families, around holidays, and ice cream
was always the end of the meal and it was part of that dessert factor, whether it was alone, whether it was
made a sundae out of, a cone of ice cream or even put on a slice of cake or pie. That’s what really continues in
the industry today, I believe, and what we’re seeing out there. As much as we see all kinds of new innovation
with flavours, we still see vanilla, chocolate, strawberry as top flavours, and you can go from year to year, from
century to century and it’s the same flavours that the consumer is looking for. There are definitely people out
there that are looking for different flavours and different concoctions, if you would, of ice cream. However,
when it comes down to it, the biggest flavours are still those core flavours that we see today.
[00:03:34]
Q: Could you comment on the trends you were noticing pre-coronavirus and how those have developed since
the pandemic began?
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MD: It was very interesting. If you look at pre-pandemic, we saw growth, the normal category growth in ice
cream was anywhere from flat to 1-2% growth per year, and we continued to see innovation pre-COVID. We
saw the big surge of the Halo Top keto-type product that was big, and we started to see the bringing together
of vegan-type products and a resurgence of frozen yoghurt, healthier-type products. Pre-pandemic, we saw
that and it continued, but, all of a sudden, when the pandemic hit, we saw the trend just go out of control as
more people were eating at home, families getting back together again. The category rose in the 40-50% range
in the first couple of months of the pandemic, causing a severe strain on the supply chain. However, it
continued throughout the year. If you look at the category as we close 2020, the category was up about 20%, or
the total category was up about 20%, so, even though COVID was still there, the pandemic, we saw people still
continue that stay-at-home-type thing and eat product at home and I think we’re seeing that as a trend today.
We’re still seeing some growth. We’ve seen a little bit of pushback in the last couple of months, because the
openings have started getting back to normal, but we still see a very strong category in ice cream. As far as
trends go, I think we’re still seeing that the keto Halo Top product has slowed a little bit. Those sugar-type
products that fit in with the keto diet have slowed. We are still seeing vegan as an emerging trend. We’re still
seeing some of the all-natural-type products, people looking for those, and expanding out of just regular ice
cream to novelties and frozen snacks, but one of the key things that I continue to look at every day, still 80% of
the category of ice cream, whether it be novelties or packaged ice cream, 80% of it is still full-fat flavours and
that trend has continued over the years. While all these new trends pop up, we still go back to the basics of
80% people looking for full-fat products.
[00:07:06]
Q: Could you elaborate on why it’s so hard to pivot away from concentration on a few flavours? You said
there’s innovation, but consumers are still searching for vanilla or chocolate.
MD: I think you’ve got to look at what the usage is of the product. A lot of the vanilla product is used with
desserts, whether it’s used on top of a pie, making a sundae or adding something to it, and they want that base
of a plain flavour that they’re used to. A lot of people are very personal about their ice cream and they want
certain ingredients in it, and a lot of people will buy those base flavours, whether it be a vanilla, chocolate,
strawberry, coffee, and put their own mix-ins in the product, because if you look at a product that has a lot of
mix-ins, somebody may not like pretzels in their product. Somebody may not like a certain kind of chocolate
chip in their product, so the feeling is that it’s an old standard and people know what to expect from vanilla.
They may not know what to expect from a different flavour that has many occlusions in it or may taste
differently, and they want to be tried and true and stay to their specific flavour.
[00:08:42]
Q: What do you think will be the longer-lasting structural impacts of coronavirus on ice cream?
MD: I think we’re going to continue to see that time spent with family, and the time spent with family where
people were forced into family time because of COVID and the restrictions that were put out there during the
pandemic. I think we’re going to see more of that happening and continue to happen, and it’s going to be the
theme around is it’s got to be a feel-good. Ice cream is a feel-good-type category and when family is together
and they want to be able to celebrate their time together, it’s going to be with products that they all enjoy, that
are items that they can say, “This may not be the greatest thing for me, but if I eat it in moderation, it’s going
to make me feel a little bit better, based on what’s happening on the outside world or the outside factors.” My
belief is we’re going to continue to see the rise in in-home. We’re going to see the rise of in-home eating even
more and we’re going to also see the shift of that in the foreseeable future, is that ice cream out of home is still
going to be a destination, especially when are people are on vacation, especially when people are looking for
something that’s going to make them, again, feel good and celebrate with family members or time with people.
That’s taking a trip to the local scoop shop or on a Sunday night, or when they’re on vacation in a resort area,
and it’s going to be able to have people a place to go and continue that, make them feel good.
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[00:10:55]
Q: Could you elaborate on the health and wellness trend given you mentioned the keto products? How has this
trend impacted the category? How have ice cream players diversified their product offerings in response to
these consumer dynamics?
MD: Everybody, all the major ice cream manufacturers, whether it be Unilever, Nestlé, Feroni [sic], M&M
Mars, even private label product or own brands, everybody is afraid not to be on the new-item bandwagon,
always looking for innovation, and that comes from history in food in general. Everybody is looking for that
next new item that’s out there, the next item that is going to catapult the category, and every retailer or
everybody is afraid to be the last one in. They want to be the first one in, so the innovation is going to continue,
but the bottom line is going to be what the consumer thinks of the product and how the consumers react to the
product. As I said earlier, if you look at over time, and, again, being in the industry over 40 years, I’ve seen the
no-sugar-added craze come and go. I’ve seen the Atkins craze come and go. I’ve seen the frozen yoghurt craze
come and go. We’ve seen a lot of categories be developed, take off, but they all peter out or they go to that
certain level, so, again, if you contrast and compare back to that 80% of ice cream is full-fat being sold, that
20% makes up a plethora of brands in a plethora of categories that are very small, that are, again, smaller
categories that have been developed over time.
However, they also peter down to a certain amount based on what the consumer thinks of those products and
what the repeat purchases are, and I think that that’s going to continue and I do not see or indications of
seeing a huge revelation in the ice cream category that’s going to change people from having, wanting and
needing a good-tasting product that’s going to satisfy them, because it is a pleasurable experience. It’s not a
core, three meals a day, ice cream. For some people, it may be three meals a day, ice cream, but it’s not a core
three meals a day. It’s that once a week, some people. Some people have it every night, but it could be that one
scoop per night to make them feel good and say, “I worked hard today. This is my reward for working hard
today. I ate well at breakfast, I ate healthy at lunch, I had a great dinner, but I’m going to splurge a little at
night,” and it’s got to have the taste and people aren’t going to pay for product that does not taste good for
them and does not meet their needs.
[00:14:34]
Q: How is the clean labelling trend affecting ice cream given that 80% of the category is still full-fat flavours?
Can players get away with having full-fat flavours while tweaking the ingredient list to make them more
appealing?
MD: Yes, we’ve seen a lot of that. That’s a very good question because I have been involved in that in, actually,
the last couple years on launching some different items. People want to say and people want all-natural, they
want to understand all-natural and they want to live that clean life, but it’s what they’re willing to pay for it,
and it’s a combination of between the manufacturers and the retailers, of what that does in certain categories.
For an example, manufacturer wants to do everything possible to have the cleanest product or good-for-you
product and be able to have that type of product for their customer and to satisfy everybody and be responsible
for a good product. The question where it comes aboutis with the retailer, and then again, this is is a certain
category. If you look at the packaged ice cream category, and I’m talking 48 ounce, 56 ounce, 64 ounce, your
typical old half-gallon product that you see in the supermarket. It’s a very (? 16.22) item. You’ll see it on the
front page at a very good price almost weekly.
In that category, there is very little, I don’t want to say brand awareness but, “I’m going to buy the same brand
no matter what it is every week, no matter what the price is.” There’s a lot of brand switching going on because
they’re buying it for USD 1.99, two for USD 5, USD 2.99, whatever it may be, and the pressure from the
retailers to have that on the front page at the best price possible has forced the manufacturers to not be able to
innovate with higher-cost ingredients in that product because the cost would be way out of whack. If you look
Private and confidential 5
at the smaller brands or the smaller pack sizes, whether it be pints, quarts, you tend to see the more all-natural
products, because those are the people that are willing to pay for it, that are used to buying in that category,
used to buying product that has a very good, high percentage of fat in it and it is good-tasting with high-quality
ingredients. That’s where you’ll see the all-natural products because that’s where the consumer is willing to
pay for it.
[00:17:50]
Q: Could you elaborate on pricing and pricing power within ice cream? The thousands of price-competitive
options in supermarkets make consumer choice difficult.
MD: What’s happening is, again, as I just mentioned, in that certain category, if you break down the
categories on package, not so much on the novelty side of the business or the frozen snack category, but if you
look at the package size, there are really three categories of consumers in there. We have the pint category,
which is typically your Häagen-Dazs, Ben & Jerry’s, high-fat flavours, mix-ins in Ben & Jerry’s case, but
product that is priced relatively high, USD 5.99-6.99 a pint, and the consumer that is buying that is really
about me. They’re buying it for me. “After a hard day, I want to have Ben & Jerry’s XX flavour or Häagen-Dazs
XX flavour. That’s mine. I don’t want anybody else touching it and that’s my own personal one. I’ll buy the
control label or the brand that’s on sale for the kids, but nobody is going to touch my Häagen-Dazs or Ben &
Jerry’s,” and they’re willing to pay for that because they feel that it’s almost like the Starbucks effect with
coffee. “I deserve this. I can afford to have Starbucks coffee and that’s my treat for the day.” Same thing on the
ice cream users in the pint category. In the quart category, which is predominantly a northeast-type area
where you’ll see quarts in, quarts is that hybrid. “I like the all-natural. I like the high butter fat in product. I’m
willing to pay for it. I want to give my whole family this product. I’m not saving it for myself, but I’m also very
aware of what’s in the product,” and those people tend to buy for themselves or, again, smaller families, but
are very focused on what’s inside the product.
When you get to the bigger categories, again, the football categories as I call it, when you’re looking at the 48-
ounce category, 56-ounce category, and that can be national brands like Friendly’s, Breyers, Edy’s, Dreyer’s,
Tillamook, items like that, it’s really about that mainstream ice cream user, budget-conscious-type consumer
or favourite flavours, feeding a family, feeding an event with that. The supermarkets play into that by pricing
that at somewhat of an EDLP level, where they’re all about the same pricing in that USD 4-5 range, USD 3-5
range. However, they’ll football that item on the front page at a very hot price, low margin, to get traffic in the
stores. There are key items that drive traffic into the stores and we can see that every day if we pick up the
circulars from any part of the country, whether it be Coke, Pepsi, Tropicana orange juice, a certain cut of meat,
a certain produce item. Those items on the front page have got to make that decision for the shopper to shop at
store A vs store B vs store C, and ice cream is in that category and that’s why we see so much switching,
probably in the high-90s range of switching from week to week, because they feel that a Breyers, a Friendly’s
or a certain one is interchangeable because of the characteristics of the product.
[00:22:04]
Q: How important is product quality given you touched on brand switching and retailers’ private label
offerings? A player can beat competitors on price, but a bad product is a bad product.
MD: Exactly. That’s a great point. You think about the national brands, there’s a lot of pressure on them in
those certain categories to make product as cheap as possible and sell it for as much as possible, but the
pressure is down on the trade spend to promote and I think the retailers have done an excellent job of sourcing
product that is very comparable to that. Certainly in this category, ice cream category and also the packaged
ice cream category, the supermarkets or the food stores are very focused on what is in their product when
they’re putting their name on it and that it’s comparable to a product that is out there based on a national
player out there, so I think they’ve taken a lot of steps in working with developing their own quality assurance
programmes in-house. I’ve been through some of these private label bids or these control brand bids and the
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information that they ask for and the level of knowledge that the buyers have on the ingredients that are going
into some of these products in the comparable items that they want and their control brands are at an all-time
high right now. I think as every company, every retailer, has, they’ve put a lot of emphasis on their brands but
also the quality behind it, and we’ve had the opportunity to cut these brands against a national brand vs a
control brand and, in a lot of cases, it’s just as good, if not better in some cases.
[00:24:29]
Q: How do you assess consumer pricing strength? Are more consumers willing to trade up amid heightened
unemployment?
MD: I think we’re continuing to see, and again, a category that’s growing at 20% is unheard of. A category
that, pre-pandemic, was flat to 1% or 2% up to jump to a 20% growth for the total year is unheard of, especially
in the ice cream category, so I think we’re seeing, and I think we’re seeing it in a lot of industries right now,
that people, again, I think it’s they want that feel-good-type thing thing. They’re willing to pay for it and I think
there’s more discretionary income around than we think. I think as people have pulled back on vacations and
not having to spend. Look at a typical person that worked in a downtown area and ate out for lunch every day,
spending USD 10-15 a day for lunch and now, all of a sudden, they’re working at home and going to the store
and buying their meals and making a sandwich at home. There’s more of that discretionary income around
and more time you’re spending at home, more time you’re spending in the supermarket looking for these
distinctive products out there, and I think that’s why people have not been afraid to spend the money on the
category. Some of these indulgent novelties or indulgent ice creams, like a Häagen-Dazs or a Ben & Jerry’s or
even some of these vegan-type products, the new-age products if you would, keto-type products, they are not
priced at a low-ball price by any means. They are very expensive products and people are looking for those-
type products. We’ll always have the budget consumer out there, and that’s what the control brand or that
promotional brand that’s out there will do, but I think a lot of the growth is coming from those items, the
higher-tier items, because of the discretionary income that’s out there right now.
[00:27:06]
Q: The category grew 40% in the first few months of the pandemic and was up 20% at year-end. Have prices
for the actual product followed this growth or is there too much hesitancy?
MD: Yes, exactly. What happens is it’s the whole supply and demand situation. As COVID started, the pre-
pandemic started, or started last march, factories closed down or brought their labour force down because
they were concerned about what was going on in the world and, in some cases, workers had COVID. There
were just a lot of situations, so as production came down and the supply chain became disruptive, what we saw
was the promotions just stop, either product promotions or, when I say promotions, your weekly advertised
promotions, EDLC programmes. They either stopped or they were significantly reduced, so typically we would
see, pre-pandemic, again using that category of packaged ice cream, 48-ounce, we would see as low as USD
1.99s, two for USD 5 sales, very aggressive front-page sales. Post, in the middle of the pandemic, you saw
those, even if they had the ability to run a promotion, it was now at two for USD 5, USD 2.99. It was, again,
much higher, USD 3.99 in some cases where they could do it, then typical items that you would see at regular
retailers, USD 7.99, USD 6.99, being promoted at USD 4.99, USD 5.99, you just wouldn’t see those
promotions, so I think the increase was seen because of the pullback of trade, and what we’re starting to see
today is the opposite. As that 20% growth has kicked in, retailers are coming back to demand that trade to get
consumers in the store, we’re going to start seeing potential price increases coming forward.
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[00:29:38]
Q: Do you think there’s enough time for retailers to raise price as amenities reopen before they have to revert
to higher promotional activity?
MD: Exactly. I think what we’re going to see is, again, if you look at the supply chain, very disruptive right
now. You look at all of the major manufacturers. They are probably at a 75-80% fill rate on their orders right
now and I think that’s going to continue through the summer and potentially could get worse due to the
openings, as we reopen. The other category we need to look at, besides just that retailer and the take-home
category, is all that out-of-home business, all the product that is sold in what we call immediate consumption,
drugstores, convenience stores, mobile-vending trucks, food service, scoop shops. I can go on and on on every
place that you can purchase an ice cream outside of the supermarket and take it home and eat it. That is going
to put more pressure on the supply chain as people start travelling, start going to the beach again, start going
on vacation and looking for that experience with ice cream again. I think with the summer months coming,
we’re going to continue to see the supply chain issues and then I think, at some point, we’re going to see those
prices start to rise. It could be after the season but, at some point, it’s going to happen.
[00:31:31]
Q: Could you break down the percentage of sales that go through retail grocery vs more fragmented channels
such as convenience?
MD: The retailers, the national brand retailers or the regional brand retailers, we can put supermarkets into
that, we can put wholesale clubs, we can put in mass merchants, those type. They are still a big part of the
category. I don’t know the exact number. I don’t have the exact number in front of me, but what a lot of
individuals don’t understand is just how big that outside of the marketplace is, outside of just that take-home
business, and it’s key for an ice cream manufacturer to be diversified with products and portfolio to be able to
compete in all of those categories and not be limited to just the take-home retail segment, if you would.
Servicing convenience stores, drug accounts, those are all opportunities to go out and get additional revenue.
There are hundreds of thousands of mom-and-pop stores that sell ice cream up and down the street that don’t
have a national brand, a national banner associated to them, and then you look at the whole, I think, if you
would, the food service category, what we call it, and that’s schools.
Just take out K-12, which has mandates on certain products that you can sell there, but college and university
is a huge opportunity to get into and to sell products in. We’ve seen a huge amount of business in that
business. Of course, COVID took care of that for a little while, but we continue to see that coming back strong
as more colleges open. Non-commercial-type business, that is anything from, again, beach concessions to
special events to pizza shops, anything that’s out there. Anywhere there’s a point of a consumer looking to buy
ice cream is a customer of ours, and it could be a different format. We’re not going to sell a half-gallon product
to a beach concession. That’s going to be single-pack novelty or something that they can immediately consume
or a sandwich-type product, so I don’t think manufacturers understand how big that other pot of the category
is and how profitable it can be because you’re not spending the money in trade, in marketing, that you’re
spending against the retail sector of accounts.
[00:34:51]
Q: Could you elaborate on the margin opportunity in the less penetrated markets?
MD: Exactly, yes. It’s where the margin is, exactly. Those are categories where, again, I’ll throw a number out
there of a typical trade in a supermarket, you’re spending probably anywhere from 18% to 22% of that costing
of your product that you’re selling to that customer, you’re giving back in trade, direct trade to the customer so
they can go out and sell it at a cheaper price to get the consumer to buy it. It’s part of everybody’s budget, but if
you look at that out-of-home category, convenience stores, drug accounts, some of that obscure business that
Private and confidential 8
nobody seems to know about but we sell a lot of product in, the trade rate is probably in the 2-3% range
because you’re not spending that. It’s more about the distribution to get it to those locations is where you’re
spending more of the money to get it to.
NH: Why aren’t manufacturers putting more focus on these channels given the opportunity from the lower
competition?
MD: Some do a very good job on it. There are some major manufacturers that do a great job of it. There are
other ones that ignore it, and I don’t think they understand it, is part of it. It could be that they don’t have that
in other parts of their business. There are not many ice cream companies that are just focused on ice cream.
They have other parts of their business, whether it being HBC category, food category, other different
categories, and they don’t really understand that type of business and what it takes to work within that
business. I think it’s the glamour of being in the supermarket business and then all this other business is the
backseat-type business and the manufacturers aren’t as focused on it, but the ones that are do a great job and I
think are the more successful ones, because they’re really diversifying their business to be able to weather the
storm through a retailer, because you’re at the whim of the retailer a lot of times, and to weather the storm in
the more difficult times.
[00:37:48]
Q: How have retailer-manufacturer relationships evolved over the years?
MD: It’s still that merchant-type scenario where it’s the marketplace. “I’ve got something to sell and I’m
looking to buy something to sell to my customers,” and it really hasn’t changed a lot. I think as retailers have
become more demanding and have shrunk over the years, that relationship has become tougher to deal with
on the manufacturer side because there are less people to go compete with, to go sell product to, and it
becomes a real planning, really a joint business planning thing that used to be done. That’s how the business
operates on planning right now. Its getting to that point where the retailer feels that, “You should be spending
as much as you can to promote your product,” and the manufacturer saying, “I’ve got to make a profit. I can
only spend X%,” and there’s always got to be that push and pull, pull and push on both sides of it to get to that
common point, and for the manufacturer to stay somewhat in truism between all of the retailers. Very hard to
be giving different-size deals on different items to different retailers, and I think that’s probably one of the
bigger challenges, is doing that, but also I think retailers are investing more in the ice cream category because
it does drive traffic. They’re willing to spend some of that margin back into getting people in their stores, but I
think the retailer is always going to be looking for the manufacturer to pay for that, no matter what.
[00:40:06]
Q: Would you say that retailers are thinking about e-commerce and D2C while manufacturers aren’t focusing
on how consumer shopping habits have changed?
MD: I would say that it’s definitely been one of the biggest in the last five years. That’s been one of the biggest
“ah-has” of the ice cream category, on how well some of these organisations, these true e-commerce
organisations, have been able to sell ice cream through e-commerce. Whether it be a traditional manufacturer
itself, selling product on a website and shipping it on dry ice to a consumer next day and charging a good
amount of money to do it, or the Amazon or Gopuffs of the world that have got that click-and-delivery system
down pretty well in certain major marketplaces and have been able to deliver that ice cream experience to the
consumer in a quick basis, or even some where there’s been a combination of a pickup-type programme where
consumer may buy the product directly from the manufacturer and the manufacturer has Uber Eats,
DoorDash, actually deliver that product, go pick it up at account A and deliver it to the consumer. I think
they’ve done a great job in a category that is highly perishable, that is stored and distributed at anywhere from
zero to -20 and it cannot be compromised and, if it is compromised, it’s going to be a bad experience on the
consumer. I think everybody is looking for it as to follow whatever else is going on in the food world, of being
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able to get stuff delivered to your door through e-commerce. I think it’s, again, done a great job so far, but
there’s a long way to go for it to be a staple within that e-commerce-type business.
[00:42:43]
Q: What recourse do manufacturers have to push back against retailers and hold prices at a premium rate? It
seems as if the retailers pull all the levers, which is similar to other categories.
MD: I think the manufacturer, it comes down to a couple things. The retailer can do the best job possible of
getting the product out in front of the consumer. That’s either through purchasing the right product for the
consumer, using the right supply chain system, whatever it needs, displaying the product, whatever it gets to
the shelf, but the pull-off from then shelf is the consumer and the manufacturer owns the consumer. The
manufacturer has to control what that consumer sees and how they’re going to see it to look at a new brand, a
new item, a new category, whatever it be within that, whether they’re putting in a line extension or a totally
new category, a new item, it’s about the manufacturer to find a way to get the consumer engaged and pull it off
the shelf because if you think about the retailer, the retailer wants to sell what sells. They’re going to stock
what sells and, specifically, they’re not going to market brand X to whatever class of consumer you’re looking
for. They can give you ways to do it through advertising in their circular, which, again, you’re paying for
through the retailer. There’s a way of doing targeted marketing towards certain consumers that shop at X.
Again, manufacturer has got to pay for it. Manufacturer has got to drop FSI coupons or hit the TV with it or hit
social media with it. That has all got to base on what the manufacturer has, so the manufacturer holds all the
cards with the retailers, to a point. If they can create the need for the product, the retailer has to carry it, and
they’ll want to carry it and they’ll want to promote it because it’s driving customers through their stores where
they’re making money off of those stores, so, on my feeling, it is that you’ve got to create that need and it’s not
maybe going to those top-tier customers first. It may be starting on some of the smaller-tier customers and
creating the need first and then bringing it to that large customer where you have all of this and the consumer
is actually asking for that retailer to carry you. “Why don’t you carry this product? I can buy it at account B
down the street that only has three or four stores. Why can I buy it there but I can’t buy it at my local chain A
hypermart?”
[00:46:17]
Q: Could you comment on cold storage and the strain this has placed on the industry? Cold storage has
impacted every other industry I can imagine.
MD: Ice cream production, you talk to any manufacturer, including the company I work for, we cannot make
enough ice cream in the middle of summer to supply our needs, so it’s really about projecting out and building
inventory ahead of time. That’s been the biggest concern of why we have supply issues right now, because the
manufacturers have not been able to build supply due to COVID and the pandemic with rolling outages of
plants, the issue of getting raw ingredients, packaging. All of that has had a major factor on the business right
now, in especially the last couple years. Ice cream is a, I said before, very perishable product, very
temperature-sensitive product, and there are two classes of supply chain for that product. It is the traditional
warehouse business where either the major retailers will buy it into their own warehouse or they’ll use a full-
line distributor to do that, where they’re buying product for their whole store, and it’s usually shipped with
frozen foods at anywhere from zero to five above. The product is then distributed to the store and it’s left up to
the store to put it up on the shelf.
The second part of the business, and that is mostly used in the out-of-home business, is the full-service
distribution business, which I admit I’m part of, where we do nothing but ice cream or our main business, 95%
of our business, is ice cream, and our warehouse is specced to a 17-below-zero warehouse. Trucks are specced
to same thing, -15 below zero. We train, or our class of trade, our supply chain, trains our drivers how to
handle that product and how to take it from point A to point B with minimal disruption. In the store level, the
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product is checked in and packed out immediately into the case. Most of your convenience store business
across the country, drugstore business across the country, any of those out-of-home-type operators where
there are one or two people working in a store and they’re doing the register and doing everything else, they
don’t have time to pack out ice cream and that product cannot sit more than 15-20 minutes on the floor before
it becomes compromised. It’s a huge investment on sizes to do that, and those costs are passed on on the full-
service side of it vs what you see in some of the supermarket business, where it’s a mainstream item like a
typical frozen food item that’s delivered.
[00:49:56]
Q: How fragmented is the ice cream manufacturing industry? Is it run by the top players?
MD: Again, there are a lot of players in this category. Again, the national brands, whether it be a Mars,
Unilever, Nestlé, Feroni [sic], you’re going to see a lot of that. It is controlled by a lot of them because they’ve
had the legacy brands for a while that consumers have grown up with, or they have the new innovative trends
that are out there and they have the wherewithal to be able to develop that type innovation, but we do see a lot
of smaller organisations being able to get into different-type products at different times. It’s a real
combination and it depends on where the manufacturer wants to go and the money that’s able to do it. Again,
it’s a very lucrative category outside of supermarket because it is highly profitable, and the big guys need to be
in it. They need to be in it to offset those 22%, 23%, 18% trade rates that they’re spending at supermarkets, so
a lot of it is controlled by the major manufacturers, but when you get into some of these other outlets outside
of national-branded convenience or drug, there is opportunity for smaller players in there.
[00:51:49]
Q: How have the barriers to entry to ice cream manufacturing changed over the years? Do you think it’s gotten
harder or easier for upstarts to come in?
MD: Much harder, much harder. As we see consolidation over the years with the larger manufacturers, we’ve
definitely seen it tougher because, again, as the larger ones want to be able to play in that supermarket
business, they need to offset that revenue spend or the trade spend. They look to these other categories and
they put (? 52.25) programmes out there, including equipment where they can put their own ice cream
equipment out there to carry their own products in, and that’s of huge advantage to the retailer, not having to
purchase that piece of equipment to put in there. The barriers of entry are definitely harder for the smaller
manufacturers to get in there, because the larger ones are securing national contracts with some of these
bigger retailers to offset those costs.
[00:53:02]
Q: How do you think e-commerce and digital marketing have impacted national brands’ spending decisions,
given that retailers are requiring more money for marketing and trade while trying to undercut the
manufacturers with their own products? Could the manufacturers no longer need to go through the retailers?
Could they push back by leveraging apps that tell consumers to go to stores rather than spending this money
through the retailer?
MD: Definitely seeing that and it’s a great commentary to bring up, because if you look at that outside of the
major retailers category, if you get down to that C-store level, drugstore level, up-and-down-the-street-type
business we call it, the local guys, it’s not a planned purchase. When somebody walks into a convenience store,
it’s not a planned purchase, “I’m stopping to buy an ice cream,” and, really, ice cream is less than 1% of the
total convenience store category, total convenience store sales. They’re stopping in that store to buy gas, could
be buying cigarettes, coffee, food, whatever it may be, and ice cream is that afterthought, so there is no need,
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just like the candy category, where there’s really no need to promote or heavily promote that category. It’s not
the need of there’s a lot of downdraught of the retailer asking to spend a lot of money on getting price to a
certain point. That’s where the manufacturer needs to spend that money more so against getting people to
stop and understand who is carrying their product, where they’re carrying it and it’s an opportunity in that
store. I agree 100% with you that there is definitely a change afoot out there of manufacturers using that
leverage of communication to get to their consumers vs spending the money with the retailer.
[00:56:01]
Q: Which manufacturers do you think are doing well at innovating? What do you think will be the major
trends over the next few years?
MD: I think COVID has definitely put a damper on innovation. Nestlé launched two or three items last year. I
don’t think they ever produced them, because they couldn’t get the product out because they had to take those
lines and use them for regular stuff they needed to do, so innovation, and then you see innovation mostly on
the big retailer side of it. That’s where they’re doing the innovation. Then, if it sticks, you’ll see other
complementary brands come out for those other classes of trade. Across the board, I would think all the
majors are going to be coming out with different items and new items. Unilever this year was cones, Klondike
cones and Klondike shakes. Nestlé was with a couple of Häagen-Dazs flavours and a couple of Nestlé novelties.
M&M Mars launched the Kind bars and Kind pints, which is a strong category in the confection business. I
think we’re going to continue to see that. I think we’re going to continue to see more of co-branding, of taking
successful brands in the snack category, candy category, and seeing them come over to ice cream, but I think
it’s across the board. I can’t say that there is going to be one manufacturer that’s going to have that blockbuster
item, and we really haven’t seen that over the years. We don’t see that blockbuster item where, in a typical
year, we’re selling millions of these items, but it’s going to be line extensions of what they have. I think Nestlé,
Feroni [sic] has done a great job with the Outshine brand of fruit bars, with almost a 90% category awareness
on that and market share. You’ll continue to see that and it’ll be interesting to see if other manufacturers try
and pick off some of the items in that category.
[00:58:56]
NH: We’ll end the Interview there. Let me close by saying thank you, Mike, for your input. Clients, if you
would like to speak to Mike in a private call or meeting, please let your relationship manager know. Thank you,
clients, for joining Third Bridge Forum’s Interview today. Goodbye.
MD: Thank you.
Transcription ends at 00:59:09 of the recorded material
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