Wall's ice cream monopoly proves hard to melt away

Nestlé is selling up to Richmond, which hopes to mount a more effective market challenge by building up greater mass

By Nigel Cope,City Editor
Saturday 15 March 2014 04:12

It'S August, the weather is warm (well warm-ish) and ice cream sales ought to be soaring. Only they're not.

The poor weather during much of the school holiday period has led to another disappointing season of sales for the main ice cream makers with the market in the first six months of the year down by 11 per cent on last year. And last week saw a major development when Nestlé announced that it was giving up on the ice-cream business in Britain.

The company is in advanced talks to sell its UK division, which makes brands like Orange Maid and Zoom as well as spin-off products from its chocolate ranges such as Kit-Kat ice cream and Smarties Pop-up. The buyer is Richmond Foods, a company which specialises in the manufacture of own-label ranges for supermarkets.

It may seem odd that Nestlé, the world's largest food company, can't make a business in ice cream work here. In fact, the company has been losing money in UK ice cream ever since it entered the market nine years ago. But it is not the only one. Mars, the confectionery giant, has also been losing money in UK ice cream since its first foray into the sector in 1988.

The reasons for the pain are three words displayed on freezer cabinets in newsagents up and down the country: Birds Eye Wall's. Wall's is the ice cream subsidiary of Unilever, the consumer products giant whose brands include Persil detergent and Dove soap. The company's UK market share in ice cream is so much larger than anyone else's that all its rivals are struggling.

Graham Millar, group finance director at Nestlé UK, made the point last week when the company ran up the white flag. He said: "We have tried for nine years to develop our ice-cream business but have not been able to make it big enough to compete in a difficult and competitive marketplace. Combing with Richmond should create a large enough business to compete effectively."

A look at the market share figures tells the story. Data compiled for the last Competition Commission investigation into the ice cream sector last year showed that as of May 1999 Wall's held a 71 per cent share of the so-called "impulse" market for ice cream, that is product bought on impulse in newsagents and convenience stores rather than tubs and multi-packs in supermarkets. Mars was the second-largest player with 15 per cent followed by Nestlé with 11 per cent.

This summer has seen some changes. It is the first summer season since the Competition Commission investigation which ruled that Wall's should no longer be able to force retailers to whom it supplied free freezer cabinets to stock only Wall's brands. Instead, Wall's must now allow retailers to allocate 50 per cent of their freezer space to rival brands.

This has had some impact. Wall's says its share is now 63 per cent. Nestlé's share is now reported to be 16 per cent though some say its share has been sliding recently. Other winners include Cadbury, a relative newcomer to the market which has been enjoying some success with spin-offs from its chocolate brands. Treatts, the branded division of Richmond Foods, also reports that its share has increased.

However, a look in some newsagents freezers shows that many still stock mostly Wall's brands such as Magnum, Solero and Cornetto. This is not because they are forced to, but because they sell. And this is despite high prices which include more than £1 for a Magnum. As one City analyst says: "A lot of it comes down to product development and marketing. Even after the abolition of freezer ties, Unilever has eight of the top 10 impulse brands in the country."

City analysts say Unilever is the market leader in ice cream in most of the main European markets such as France, Germany and Italy. But the difference is that Nestlé has managed to establish itself as a credible number two in these countries, something it has never achieved here. The economics of the ice cream business are such that distribution costs are a fundamental part of the overheads. These fixed costs mean a company with only small sales will struggle. In the UK, only Unilever has managed to achieve those economies of scale.

Unilever has such a dominant position that the UK ice cream market has been the subject of no fewer than four competition investigations in 1979, 1994, 1998 and 2000. But though changes have been made, Unilever's dominance has remained unchallenged.

This is not to say that new entrants cannot make a mark. McDonald's has gained market share with its launch of soft, whipped ice cream a couple of years ago, with its huge chain of restaurants providing a ready-made distribution channel. Birds Eye Wall's has since launched its own "whippy" style ice cream from machines in newsagents and corner shops.

Where is the market heading? One worry is the overall sales decline which is not just down to poor weather. Another factor in the 11 per cent fall in the impulse market on last year is the declining number of small convenience stores and independent newsagents. These are the lifeblood of the impulse sector and they are increasingly losing out to the big supermarket chains.

As for the big players. With Nestlé's ice cream business in Britain now set to be combined with that of Richmond, which accounts for 70 per cent of supermarket own-label ice cream, it may be able to give Wall's a better run for its money. Richmond will manufacture the Nestlé brands under licence whilst stripping out overlapping costs to improve margins.

A further challenge might come from Mars. Privately owned and able to take the long-term view, it has a stable of brands that are capable of making a mark. For the time being, though, Wall's is sitting pretty with a market share more powerful than virtually any consumer brand apart from Coca-Cola. Its biggest fear is probably another Competition Commission investigation.

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