The Strange Business of Ice Cream

ice cream is beloved around the world and compared to other perishables it's an Ever evolving product for infinite flavor possibilities and form factors ice cream in the US is a multi-billion dollar market dominated by Legacy players like Ben and& Jerry's hogen Bluebell and brers yet consumers have demonstrated a curiosity beyond the brands they grew up on and switching costs remain low as it takes seconds to grab something different from the freezer aisle the industry has expanded from value oriented family-sized tubs from a few select household names in the 9s into ever growing landscape of small pintes from a wide variety of newcomers from the outside it's a win-win customers get luxury of choice every brand must innovate to maintain market share and there's something for everyone at every price point from the manufacturer's perspective ice cream on paper should be a worthwhile business it's a product with Decades of proven unit economics sales channels distribution points and business plans compared to other perishables ice cream is frozen requires few inputs and can be reliably scaled into massive quantities and it's never a question of if someone will eat ice cream but when the global appeal of the product has made the industry a target for private Equity who have supercharged emerging mom and pop scoop shops into premium brands with massive Capital infusions they've invested into companies like van Luan and Jenny's all under the bet that they can one day become the hogen for the Next Generation yet for a product that's so well understood and universally loved ice cream is a strange business it's so low margin that the owners of hogendas and Ben and& Jerry's not only engage Eng in shink inflation to squeeze out profit but have been actively offloading their ice cream Ventures to anyone who will take them these conglomerates also own other iconic brands from Klondike and talenti to Good Humor Magnum and drumstick they're consumer conglomerates who have operated these assets together with unrivaled synergies for as long as 60 years despite having the leading Brands the best IP and economies of scale for decades Nestle Unilever and Kroger have each concluded that the ice cream business is just not worth it retail Concepts that one St ated in the 2000s like Baskin Robbins and Coldstone have also experienced similar stagnation in this episode we're diving into the Curious business of ice cream from the macro to micro starting from the big Brands all the way to three Independents in New York City who have uniquely found success in this oddly difficult [Music] industry this episode is sponsored by netw sweep by Oracle the leading Cloud Financial system powering companies all around the world what does the future hold in business ask nine experts and you'll get 10 answers hire three consultants and you'll get four different reports read five newspapers and you'll get six different interpretations in one week the media will report that rates are rising and in the next that rates are falling analysts will tell you that we're in a bull market this quarter and then in a bare Market the next could someone please invent a crystal ball until then over 40,000 businesses have future proof their business with net sweep by Oracle the number one Cloud Erp bringing accounting financial management inventory HR into one fluid platform platform with one unified business management Suite there's one source of Truth giving you the visibility and control you need to make quick decisions with real-time insights and forecasting you're peering into the future with actionable data when you're closing the books in days not weeks you're spending less time looking backwards and more time on what's next modern MBA is small at the moment but as soon as we grow in scale within the US and into other countries we will need and use netw Suite today we're stitching things manually with our bookkeeper accountant and a constant flood of emails in our inbox it's progressively harder to assess Business Health especially as we've expanded to multiple workflows and production pipelines we'll need the ability to track production costs to run payroll that's compliant with states and countries to manage our physical inventory of equipment across borders to evaluate profit and loss by team and project rather than just at the company level and to maintain a proper list of accounts receivable rather than email invoices and calendar reminders as a corporation we have to pay tax throughout the year and it's a nightmare jumping from system to system just to get one clean answer these are all capabilities that only netsuite provides and it's a platform and opportunity that we will take every advantage of for the future whether your company is earning millions or even hundreds of millions netsuite helps you respond to immediate challenges and sees your biggest opportunities speaking of opportunity download the cfo's guide to Ai and machine learning at netsuite. com sodern MBA the guide is free to you at netsuite. com slod MBA netsuite.

com sodern MBA the surging popularity of ice cream through the 9s attracted the attention of the British conglomerate Unilever back then Unilever was the market leader in mayonnaise pasta sauce margarine deodorant and soap ice cream by all signals was a slam dunk as the next big essential cpg category by 2001 unever had scaled to become the world's biggest ice cream company with Acquisitions of popsicle ryer Klondike Ben and Jerry's good humor and Cornetto on top of homegrown inventions like Magnum even Ben and Jerry's despite the surging popularity in the 9s struggled to generate profits as an independent and at scale the vision was to bring all these ice cream brands together to share assets and to unify a single supply chain to achieve better margins but since the Great Recession the ice cream division has become unilever's weakest link and it's not for a lack of effort Unilever has tried pushing Magnum to the top of Market buying talenti innovating flavors in Pines for Ben and& Jerry offering non-dairy variants and launching smaller volume derivatives all in the pursuit of better margins now for the first time ever they're reporting the ice cream division by itself to show investors why they're so committed to divesting this business from 2001 to 2008 the company reported the ice cream business alongside the TBR Lipton which combined gross roughly 7. 6 billion EUR every year fast forward to present day the ice cream division gross 7. 9 billion EUR in 2023 that's a total growth of 4% across 20 years on the bright side the bottom line has improved to low double digits but still lags behind the other division management has consistently blamed the weather weak Summers and increases in sugar dairy and cocoa costs but the sample size is too great unver has committed to sell off its entire ice cream business by 2025 and is struggling to find buyers the Swiss conglomerate Nestle had an identical Epiphany to Unilever Nestle was already selling bottled water milk candy coffee frozen pizza and Pet Food in bulk to retailers around the world adding ice cream to the catalog was a no-brainer by 2004 nesle had made itself into the second biggest player in ice cream by acquiring hog and da drers drumstick and creating new brands like dibs like Unilever they cut costs shared manufacturing infrastructure merged distribution launched new flavors and released Innovations across all brands the ice cream division peaked in 2007 with gross sales of $8.

7 billion combined but since then has been on a decline year after year profit margins only grew after 2009 when they started charging customers the same price for Less product after reducing the volume of every hog and doll pint from 16 oz to 14 oz in 2019 Nestle cashed out and sold off the ice cream division to a Parisian private Equity Firm at a 20% premium for $4 billion like unver nesle cited their desire to focus on high growth verticals and didn't find owning the second bestselling ice cream brand to be worth it the pitch was that these assets would do better in the hands of fer a joint venture dedicated exclusively to the ice cream business to their credit fer has been able to deliver on This Promise as Revenue has grown despite no real change in in volume but operating margin remains low at 10% and management is once again banking on cost cutting to improve the bottom line fer is actually losing as much money as it's bringing in as the company has borrowed so much Capital to finance these Acquisitions all of the operating income is consistently eaten up by the interest the private Equity Firm is looking for ways out of fer whether that's raising more funds to bring the company to IPO or to sell their 50% stake to someone else the American Supermarket giant Kroger had an identical Epiphany to Nestle and un lever despite owning the seventh best-selling ice cream brand for four decades with an annual gross revenue of $500 million Kroger unloaded Turkey Hill in 2019 at a 50% discount to private Equity when the world's largest consumer conglomerates with the biggest brands are all exiting the ice cream Market over stagnation and poor margins it doesn't project much upside for the upstarts when we look Beyond store-bought ice cream we see similar regression in retail scoop shops Coldstone was all the rage in the 2000s and under franchising had scaled from 200 locations into over a th000 in 7 years yet since 2011 the number of shops have dwindled down year after year to a little over 800 given that The Upfront cost to open is $584,000 and the median Coldstone grosses $531,000 after royalties it's clear why no one's rushing to open a Coldstone the owner of Baskin Robins also owns Dunkin Donuts and the only way they've been able to maintain retail presence is to bundle the scoop shop next to the doughnut chain even then Baskin Robbins has fewer shops in the country country today than it did a decade ago systemwide sales which is a sale of all ice cream products wholesale or buy the scoop across all locations franchise or corporate has grown just 8% in 12 years while Baskin Robins bright spot is its international business where they've added over 2,000 locations over the past decade even those earnings have constraints the average sales per store overseas has grown only 14% over 12 years which is less than 2% year-over-year outside of franchising there's just not much in this business the limits of ice cream whether by the scoop or by the pint makes it even stranger why private Equity has invested so much into new brands like Jenny's salt and straw and Van luin these companies have collectively burned millions of dollars year after year scaling production advertising opening shops and blanketing retailers with as many pints possible but given how thin the margins are and how stagnant the earnings are for the market leaders it's difficult to imagine how these new startups can ever make it in the black profitability seems even less likely as these new brands are all single product business that lack the synergies infrastructure cross cell and economies of scale that Unilever Nestle and Kroger all relied on to achieve double digigit operating margins on the corner of the Lower East Side in New York City is Sam's fried ice cream this neighborhood comes alive when the Sun goes down and young crowds flood bars and clubs for a night out Sam has positioned himself to serve those looking to indulge their sweet too for all the shortcomings of the ice cream business from a manufacturing standpoint the upside is that the product sells itself Sam has been featured on Insider and delish but that virality has never translated to actual customers the appeal of ice cream the novelty of frying it and the never-ending Tipsy crowds right outside his door has been enough to sustain his business for the past 7 years back in 200 like 2009 or 2011 we were selling the t-shirt in Lisi and it's were competitive so it's hard to make a living out of it so then we start to like think of some kind of food we can sell that's you leaked and like no one else sell it and back then my brother and his friend was working in a Chinese restaurant and so like oh they have like dessert called fried ice cream and then we do walk around the street fair and see if that's like available anywhere and there's none of this so we just like sit together and just go online look try to perfect the ingredient however the way we want to make it and then we try test it out in the street fair like in 2011 in manahan and then it works out great after like the first two years we expanding like from one booth to like two booth and three booth and pretty much from then on to 2017 we start our own shop here in Louis I'm head Sam's a self- admitted opportunist and a man of few words there's nothing complicated about this business his shop is tiny and at 200 ft there's no chance he'll ever have the space to make his own ice cream he buys his ice cream in bulk from Hershey's and adds value by scooping them into balls and frying to order his customers don't care what brand of ice cream they're eating underneath the crust especially esally when they're sold at $8 a portion or $9. 50 with topping a lot of ice cream place I know is like been going close and open like really quick cuz it's like nothing really special I mean for us we do fried ice cream and so far we still the only one selling fried ice cream special like specialized only in Fred ice cream out here in New York City it's still different like like different than anybody else like Ro ice cream is everywhere but it's just like ice cream but I have a lot of customer asking what is fried ice cream and they still don't know what about so pretty much we use the ice cream with different batter roll up whatever Crush you want and then we just depress so outside is like a crispy funnel kick inside is a frozen cold ice cream the temperature is really important of course so we tried at home our but it's so easy to burn so you don't want to get a fire in the house so it's easier just to buy it than make it your own some of the time definitely is hot so people might not want fried ice cream cuz it's too hot even though it's hot and cold and of course they want something cold to drink so either drink mus Shake now we got slush so they probably wanted to just a different option for them to choose from Sam does his best business in the summer grossing $15,000 a month between June to August but business dips as low as $4,000 a month during the other three seasons his shop on average grosses $81,000 a year and he pays $3,000 a month or $36,000 a year in rent the business is so simple that Sam doesn't know his margins just that he makes more than he spends ultimately the shop is just a supplement the majority of Revenue comes from street fairs where they gross on average $120,000 a year these fairs drop to 50,000 people and Sam can bang out 10 orders a minute over the course of a single night he and his brother travel every summer to over 100 fairs across the Northeast where they can gross $2,000 in a single night compared to the shop which can only pull in $500 on a good day combined Sam's fried ice cream grosses a little over $200,000 a year for a venture that sells itself and where the greatest input is time just a block away is Manhattan's latest independent scoop shop smooth christe is one of the owners she studied Finance has an MBA and works a day job at a hedge fund on Wall Street her ambition is greater than just serving a single neighborhood as she scaled smooth to a second location in California in just 3 years by winning customers one scoop at a time christe's goal is to build a brand that can eventually break into the high volume wholesale our ice cream is focused on Asian Inspire flavors so our most popular flavors is wub and we also have like other American flavor like fuy Peppo birthday cake and I think we specialize in the tea flavors we have Peach ulong uh matcha Thai tea and jasine tea is also very popular our target audience are mostly focused on teenagers to uh young professionals like age around 15 to 35 getting into wholesale requires proof that your brand is proven as supermarkets demand assurance that if they buy your ice cream they'll be able to sell it for more because unorthodox flavors these days are more the norm rather than the exception smooth in Christy's mind must sell a broad product mix to survive at smoo ice cream here is sold in a cup on croissant waffles in bubble tea or blended into milkshakes I think for ice cream the advantage will be of course in a hot day summertime the business is really good that people want ice cream but also this also a weakness that is a SE no product so especially in New York City uh we have a really long winter and due to the winter time I think that's really hard for business like us to uh be surviving in this market um that's why like we also always need to be Innovative to add more new stuff into our menu including like hot items like the quaffle and hot drink for the summer I feel like if just only ice cream is not like attractive enough for the recent trend because like people love a variety of dessert so I feel like adding ice cream plus like the trendy drinks like boba tea drinks and also crawle will be really helpful for my Brands we are thinking this age group that they really into the Boba Tea space as well as ice cream so that's why the concept with the collaboration between bber tea and Ice Cream came up to into smooth and we have this uh trink product called Roba flow and that's one of our best selling item here so the idea of the crao I did research from the internet and I saw it would like really popular in Korea and I found it like it will be really good to combine with ice cream and toppings ice cream and Boba floats are the main sellers in the summer whereas the crawle peaks in the winter Christy isn't doing it all herself she handles finance and operations and her Partners handle product she looked at a variety of food and beverage Concepts before settling on ice cream as her first Venture the startup costs are significant and help keep the barrier to Industry low an industry standard ice cream machine these days cost $50,000 a blast chiller cost $10,000 and freezers are several ,000 each these costs are only compounded in New York City where space is a luxury yet once you get the equipment and process in place ice cream is inherently scalable as production can be isolated and the marginal cost of expansion is low we make ice cream in the BC season we make it like twice a week and and in the winter time we probably just do it once a week so I think that type of thing we can save our labor that we don't have to have this manufacturing process every single day just like other like tea shop and our drink is can bee preix and we can also store for like one day so the marginal cost for ice cream shop will be much lower because the Machinery you need to buy for the next store is only going to require like a trust freezer and a display freezer we only need one ice cream in this Central Kitchen location and we can manufacture like almost a 100 top of ice cream per week so we also can tap into the wholesale space much faster to scale up the business the bottleneck for Independence is not production but rather demand they have the capacity to produce more ice cream today and wholesale is the only way to unlock greater volume in the future to hedge against winter and Walkin volatility smooth leans into catering and popups at Anime Con Comic Con and dragon Fest from May to August across the shop and events smoo grosses $65,000 a month in the other8 months they gross just $30,000 for a total annual revenue of $500,000 store level operating margin sits on average at 13% and fluctuates between 10% in the winter and 15% in the summer just like Sam at street fairs smooth Nets higher margins at conventions making their own ice cream has given Chrissy the confidence to price their products on par with Van Luan while Asian flavors and product mix are smooth found its footing Christie believes that the business will ultimately come down to Brand Equity you have to find a really right position to position yourself in this competitive market so I feel like just having one type of product is not good enough we put a lot of effort in in the social media and put us on different social media platform like Tik Tok uh Instagram is the biggest one Facebook and if we time to time we will invite influencer to our tasting event yet her headache has been the market beyond the cost of rent in Manhattan Winters here are just too long and too harsh and it's difficult to assess true product Market fit when there's hardly any customers and the shop is barely breaking even 4 to 6 months out of the year every year the only way to test smooth's potential is to try a warm weather market like California where people enjoy ice cream all year round rather than build on their existing infrastructure in the Northeast Christy has chosen to reinvest on the opposite Coast with a second location in Silicon Valley the latest shop gross $60,000 in its first month and there are talks of a third shop in La as we see from the big brands on the independence every dollar counts and you must maximize earnings in the Summers to survive the winters you have to be an opportunist and you can't push pricing in a volume game when the bottleneck is demand now production there's not much room for principles in a business as seasonal and low margin as ice cream manufacturers chains and neighborhood scoop shops all come and go and it takes a truly special type of character to last in this industry it's 2: a. m.

on a Thursday and while everyone is fast asleep the king of ice cream in New York City is starting his day as soon as he gets in he makes ice cream orders ingredients prints invoices takes orders schedules production plots the delivery route and loads the finished product onto the truck all of this has to be accomplished before the 8: a. m. delivery every day even in his 60s he does this every day and has done this every day every week Monday to Thursday for the past 22 years this is John the owner of ill laboratorio de gelato who has outlived every Trend in this industry from Cold Stone and rolled ice cream to soft serve and Japanese tayak not a fan of the trendy I think there's a reason things can be classic and um there's a reason why people gravitate toward vanilla and chocolate and strawberry there's a reason why the classics stick around and have stuck around is because they're they're tried and TR whereas something that's trendy might be gone tomorrow or might beone next week or or next month his family has been in this business for generations and the unwavering value in which JN operates are how he's maintain his success for so long in an industry that incentivizes volume over Precision yet Jon is not a traditionalist who religiously serves only vanilla and chocolate IL laboratorio de gelato in name and practice is a laboratory with over 250 flavors where every square foot is occupied by freezer or ice cream machine this has just been a very um personal journey of F I mean from the outset and my my when I opened uh uh that many years ago when I do something I I'd like to do it the right way if I was going to start an ice cream company it was going to be something quite unique because that's what drives me that's what gets me up in the morning um to be doing something that 22 years later I still take a lot of pride in this place and what I built and what you know my staff has helped me build and really I think what drives all of my staff everyone who works here is really the quality you're standing next to boxes of plums and peaches and pineapples and we use a lot of fresh fruit here in our and we don't skimp on that um that Plum sorbet will be um about 85% Just fresh plums and then a little water and a little sugar it's easy to accentuate the profit can add a little more water and most places do while everyone chases B Toc JN has achieved his longevity through B2B he's built his Empire on a segment more valuable than the tourist or the yepy the New York City restaurant Jon's primary customer base are professional chefs who cherishes standards and quality to buy in gallons not pints John is the exclusive supplier for nearly 400 restaurants across Manhattan including celebrity favorites like manetta Tavern and Porter House these restaurants transform his ice cream into their own desserts which are then sold to guests all year round thus mitigating the issue of seasonality with this customer base there's no need for Jon to whip in air cheap out on ingredients and cut Corners which are all measures that most brands need to turn a buck While most of the facility is dedicated to production there is a small Corner that serves as a retail storefront the clients are professional chefs with the quality of what we do here we have a wonderful experience to be working with some of the best chefs in New York when you're open to the public there's it's a it's a whole different Dynamic um you're selling a cup at a time if I have a chef coming to me and they want me to create a new flavor for for them but they don't want many gallons I will generally always make a full batch and then we sell it in a retail shop one of the great things about that is that that we've kind of become known as a destination for unusual flavors people show up here and we have 48 flavors in our retail shop and they come to expect the unusual here and anything we're selling to restaurants and chefs is making its way into our retail shops so that's kind of a beautiful thing it also allows us to push the product out the door if we have leftover you know something that a chef maybe bought half a batch well we know our retail customers are going to eat it up so there's a nice symbiosis of wholesale and Retail and production and Retail to this day John refuses to sell his ice cream to supermarkets or to license to Outsiders while both would open up significant revenue streams he cannot compromise on the principles and the meticulousness in which he's built his business he has zero interest in expansion or franchising I'm always very scared of how people take care of things and when I go into a a supermarket or a market and I see I'm always looking in their freezer section at least 50% of the time I notice that their the temperature of the ice cream freezer is is not cold enough um and ice cream is all about the shelf life of ice cream is all about temperature and variation in temperature if it's plus five maybe two or three days before it starts to crystallize and there's a problem with texture I don't like my product being someone else's hands having that control over the quality that's going to have my name on it and every you know every every one of those pint containers is uh digitally signed but with my name on it while the typical retail customer spends just $12 per visit the average Wholesale customer spends $550 every month John gross is on average $190,000 a month selling to restaurants for a total annual revenue of $2.

3 million from the wholesale side on the retail side the storefront grosses on average $480,000 a year and Peaks to as high as $70,000 in the summer and dips as low as $25,000 in the winter he attempted to scale retail in the past by experimenting with a second shop a mile away in greenwitch Village but found the juice not worth the squeeze that shop before covid gross just $27,000 a month on average for a total revenue of3 $324,000 a year annual operating margins for his scoop shops clock in at 9% while his wholesale business enjoys slightly higher margin at 10% without a hard dependence on retail to sustain his business Jon offers the greatest pricing value relative to smooth and Van Luan the artificial surge of Van Luen salt and straw and Jenny's is nothing new to Jon it's a familiar pattern to him where back in 2010 similarly positioned Artisan emerging Independents from Brooklyn like ample Hills milkmaid and Finn and feebs all imploded under the weight of venture capital look I I love when uh anyone comes onto the scene and is doing something unique and and of quality I have no issue with that at all whenever I see anything coming on kind of in a big way where there might be some like funny money behind it or or an infusion of cash from a VC uh firm to get get them up and running like van lein sort of seems to me to have that kind of uh situation where they're just they were just opening stores it's slowed down a bit now I think maybe they're doing it in other cities in a big way I'm not sure but when they were just opening left and right it just seemed like something's off here because it is a low margin business um you can't do that without a lot of risk um so there they were probably it was probably an investor that popped in there was probably an investor um you know behind that that was like uh you know do your thing here's here's $10 million uh and uh and those things generally I've I've been around a while generally don't last it's only watching John work in the dead of the morning from 3:00 a. m. to 8:00 a.

m.