Business

The Evolution of Ice Cream: Unilever’s Sweet Challenge in the Frozen Aisle

At the conclusion of the American Civil War, William Breyer meticulously hand-cranked his inaugural gallon of ice cream in Philadelphia, creating a delicious blend from cream, cane sugar, and nuts. This labor of love established a legacy of quality, with Breyer's ice cream requiring vigorous churning in a sizable bucket by turning a handle that manipulated an internal paddle, with the final product being sold to appreciative neighbors.

Jumping ahead nearly a century and a half, Breyers, following numerous recipe changes, finds itself a member of a sluggish €17 billion ($18.4 billion) ice-cream division that its current owner, Unilever Plc, is exploring options to offload, either through sale or by spinning off the entity.

The challenge of timing looms large for Hein Schumacher, Chief Executive Officer of Unilever, a global powerhouse, dealing in everything from soap to stock cubes. As Schumacher plots to divest from the world's most expansive ice cream enterprise, he confronts the daunting reality that private equity group PAI Partners is simultaneously aiming to either sell or take public their half of Froneri, the second-largest ice cream conglomerate known for its innovative ethos and commendable management.

For Unilever, the stakes couldn't be higher. A division once renowned for its dynamic growth, with legendary brands like Magnum and Cornetto under its umbrella, has witnessed a lackluster performance for five consecutive quarters. Prior leadership grappled unsuccessfully with halting a decline in volume, and the company has been unable to mitigate the fallout from contentious statements made by Ben & Jerry's, one of its most recognizable brands. As Unilever has remained stagnant, it has ceded market territory to Froneri, purveyor of Haagen-Dazs among others, which celebrated close to a 20% revenue growth in the most recent year it reported.

Chirag Pandya, a partner at consulting firm McKinsey & Co., voices a critical perspective, noting, "It’s an interesting time for Unilever to decide to do this. Froneri is going to be much more attractive to investors." He points out that while Froneri can tap into new markets and channels, Unilever has already achieved global reach. He attributes Unilever's problems to operational difficulties and suggests that any potential for value creation for Unilever will hinge on enhancing operational efficacy.

However, Schumacher, who stepped into his role after activist investor Nelson Peltz, known for agitating for corporate breakups at major companies such as PepsiCo and DuPont de Nemours, joined Unilever’s board, remains confident in the ice cream division's appeal to investors.

Holding a substantial 20% slice of the global ice cream market share and boasting three of the world's top five ice cream brands as per market intelligence firm Euromonitor, Unilever commands the category. The company has a dominant presence in the United States, where the average American consumes upwards of 16 pounds of ice cream each year. It has recently introduced an animal-free version of Breyers ice cream, utilizing precision fermentation, which marks a step towards catering to growing consumer demand for sustainable and ethical food choices.

Unilever’s manufacturing prowess extends to China, where its factory in TaiCang, located in the Jiangsu province, delivers 2 million units of Wall’s, Magnum, and Cornetto ice creams daily. The site has been lauded for its state-of-the-art technology. Similarly, Unilever has invested in smart freezers and AI-generated flavors at its Colworth research facility in England, a site that historically contributed to the humble frozen pea's development.

"Ice cream is genuinely a unique sector," expressed Schumacher earlier this month as part of the announcement about the divestiture concurrent with a plan to ax 7,500 jobs, aimed at revitalizing growth and enhancing profitability for a conglomerate that has seen stagnation over the past five years.

Schumacher has wasted no time in restructuring the management of the underperforming ice cream unit, aggressively cutting costs by reducing the number of product variations and overhauling supply chains across Europe and the USA. Though changes have been rapid, the anticipated benefits are projected to emerge later in the year.

While Schumacher considers a spinoff to be the most feasible path forward — perhaps simpler to execute than a sale — certain private equity firms, including KKR & Co. and CVC Capital Partners, exhibit curiosity in the ice cream division, seeing potential for a business overhaul. A banker, wishing to remain anonymous, indicated that KKR and CVC have declined to comment on such matters.

David Samra, managing director of Unilever shareholder Artisan Partners Asset Management Inc., suggests that the independence of the ice cream division might engender proper incentives for leadership and allow it to pursue the right investment strategies for future growth.

However, potential investors may be deterred by more profound uncertainties surrounding Unilever's ice cream business and Froneri alike. Market disruptors such as weight-loss and diabetes drugs like Wegovy and Ozempic are pressuring Big Food companies to pivot their strategies, aligning with shifts in consumer preferences and food desires.

Another source of anxiety for potential investors is Unilever's acrimonious relationship with Ben & Jerry's independent board. The brand, often seen as "woke" through its public stances on issues from the Gaza conflict to the war in Ukraine, has drawn Unilever into public relations predicaments. The board's controversial decision to halt ice cream sales in the Occupied Territories even led to divestment actions from some U.S. pension funds in 2021, in protest against perceived infringements on Israel's boycott clause.

When Unilever acquired Ben & Jerry's in 2000, a unique agreement conferred the brand's independent board with influence over the company's social mission and product quality. It remains unclear whether such autonomy will persist post-divestiture. Dev Patnaik, CEO of strategy firm Jump Associates, insists that a wise new owner would appreciate the brand appeal to an emerging socially-conscious demographic, cautioning that treating Ben & Jerry's merely as another ice cream brand could erode its value.

Even with Schumacher's separation strategy, there are reservations among investors, many of whom are fatigued by Unilever’s extended period of suboptimal performance and futile merger and acquisition ventures. "While it is positive to see the company accelerating their strategic ambitions, this is a high-growth category where they have leading market share," remarks Tineke Frikkee, head of UK equity research at Waverton Investment Management, expressing mixed emotions about the proposed split and concerns over potential growth impediments.

Disposing of segments isn't a silver bullet for addressing foundational performance and growth challenges. A botched turnaround could tag the assets with a stigma, as suggested by Dan Coatsworth, an investment analyst with AJ Bell. "Unilever’s ice cream division is being jettisoned partly because it has a lower growth profile than the rest of the group," he says, which may immediately place a negative label on the division if it were to go public.

Despite many challenges, Schumacher's vision for Unilever's ice cream segment remains forward-looking and determined. His efforts to rejuvenate a critical part of Unilever's portfolio are being closely watched in a fluctuating market where innovation, adaptability, and public perception can dictate the success or failure of giants and underdogs alike.

For a historical insight into Unilever's CEO's strategy and the complex state of affairs in the ice cream business, click here.

As Schumacher forges ahead to streamline Unilever's ice cream operations, the world watches and waits to see whether this 160-year-old industry can evolve and satisfy the cravings of a new generation while navigating the treacherous waters of business restructuring and brand management.

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