The $5 Pint

C-stores are revamping their packaged ice cream sections as production and ingredient costs rise

For the second straight year, lack of rain, hungry cows and rising fuel costs have been heating up prices and slowing production of one of America's coolest treats, packaged ice cream. This has prompted convenience stores to emphasize smaller package sizes, switch suppliers and take other measures to minimize the impact on consumers' wallets.

Costs first began to escalate in December 2010. By the end of 2011, all major ice cream manufacturers had raised prices, said Nick Soukas, brand building director, U.S. ice cream for Unilever, which markets Ben & Jerry's and Breyers. Over the past 12 months, commodity prices for feed corn, a staple for cows, have almost doubled. Alfalfa prices also have increased.

The U.S. Department of Agriculture's (USDA) "Livestock, Dairy and Poultry Outlook, July 2012," blames the poor crop yield on inadequate rainfall in many parts of the United States. Plus, high summer temperatures have reduced milk production, leading farmers to cull herds via slaughter.

On the fuel front, diesel prices were at a national average of $4.127 per gallon as of Sept. 3, nearly a 26-cent increase vs. 2011, according to the U.S. Energy Information Administration (EIA). This figure is higher when ice cream is involved since it must be frozen during transport and warehousing. "Transportation increases have been equal to those of ingredients," noted Eric Greiner, director of sales for Weedsport, N.Y.-based Byrne Dairy.

As for sales, Nielsen reported that convenience store ice cream dollar volume increased 3.4 percent on a per-store basis in 2011 compared to a decline of 2.2 percent in 2010. But numbers can be deceiving: 799,681,000 hard ice cream gallons were produced in 2011 vs. 818,792,000 in 2010, the USDA said. "Volume has not kept pace," Soukas added. In fact, production has been declining since 2007 (see chart on page 146).

All dairy categories have been affected by the price shift, but ice cream's high butter fat content and large distribution footprint make it particularly vulnerable. Butter fat comprises about 50 percent of the ingredients. "There are more production and transportation costs than with milk, which is local," said Tim Cote, marketing manager at the 107-store Plaid Pantries chain. "Ice cream retails have gone up 20 percent to 25 percent over two years."

Matt Paduano, vice president of category management at Canasota, N.Y.-based Nice N Easy Grocery Shoppes, said the increased prices have eroded brand loyalty. "It's very promotionally driven, more than other categories," he said. "We were selling ice cream for $2.99 four years ago; now, it's $5.99. People look at what's cheaper. It's not like beer when the Bud Lite drinker sees Miller Lite is on sale."

HIGH-END PERFORMANCE

Premium brands, which have the highest butter fat content, have been hardest hit. Ben & Jerry's now retails for about $5 per pint. But the brand has a strong following, with nine out of 10 retailers reporting healthy sales, said Sean Greenwood, Ben & Jerry's director of public relations. Exciting new flavors, such as Greek frozen yogurt, have driven momentum. Greek frozen yogurt contains more protein and less fat than ice cream, he added.

"We're seeing lots of repeat purchases," Greenwood said. "Other companies are making frozen Greek yogurt, but they're using milk protein concentrate. It's not the real thing."

Ben & Jerry's product, which comes in four flavors, is available in pints and mini cups.

Unlike other suppliers, Greenwood said Ben & Jerry's has not "reduced" the size of its pints to keep costs down. At retail, the impact of this decision varies.

Beaverton, Ore.-based Plaid Pantries reported decreased sales of the brand. "People aren't as loyal to Ben & Jerry's and Häagen-dazs," said Cote. "It used to be [that] you were hurting if you didn't carry them."

Meanwhile at Nice N Easy, which operates 84 locations in upstate New York, Paduano said performance depends on how affluent a market is.

For Whitehouse Station, N.J.-based Quick Chek, premium brand performance has been unaffected. "I'm holding my own with them," said June Connolly, category manager.

She is bullish about the new Greek frozen yogurt, however. "With the trend toward Greek yogurt, we're hoping to capture consumers who don't want to spend money on regular ice cream."

Connolly said the c-store chain's ice cream business has been healthy across all brands. But she has made changes, including eliminating some SKUs to bring in new items. "In 2011, sales were hurting. I work closely with the ice cream companies and they were having a tough year," she acknowledged. "By keeping it fresh, you can drive customers in."

The chain has reduced margins "a bit" and been aggressive about promotions, such as offering two pints for $9. "This encourages shoppers to upsell a bit to get the reduced price," she said. In many stores, Connolly also decreased the space devoted to 48-ounce tubs (formerly 64 ounces) and is focusing on Turkey Hill and other top sellers. While large sizes do well in affluent Jersey Shore communities, many consumers have switched to smaller sizes. Smaller containers also let Connolly provide more variety.

Some retailers are emphasizing even smaller package sizes, such as Edy's $1 "Dixie" cups. This item "had kind of disappeared," noted Greiner of Byrne Dairy.

Jacksons Food Stores, whose 215 locations are mainly in Idaho, Oregon and Washington, has added a slightly larger 8-ounce cup that comes with its own "ready to eat" spoon, reported Rich Faw, category manager. Portion control is another benefit of smaller packages.

Faw said ice cream prices rose by about 4 percent in February. Some increases were absorbed "if our margin was healthy," others were passed on to consumers. He said both frozen novelties (cones and bars) and take-home items are doing well, although take-home is growing faster. On a cost-per-ounce basis, novelties are generally more expensive.

Kum & Go LC has experienced the opposite. While premium items like Magnum ice cream bars have increased in price, there has been a "slight shift" away from take-home in favor of novelties, according to Stephanie Poitry, category manager of grocery for the Midwest convenience store chain. She is also emphasizing pints over gallons and half-gallons.

Nice N Easy has been focusing on six- and 12-pack novelties for 18 months. "These are a better value than individual novelty items," said Paduano. In newer stores, novelties are merchandised in coffin-style freezers near entrances. "It's colorful and makes them more of an impulse. Customers can look down and see the flavors. It's easier than looking through a frosted door," he said.

Plaid Pantries' c-stores are doing well with Nestlé's frozen dairy desserts, which contain less butter fat than several other products. "Customers don't seem to care if they're frozen dairy desserts or ice cream," Cote explained.

FINDING EFFICIENCIES

Some companies have been able to cut ice cream costs by changing their distribution structure. Plaid Pantries, for one, switched from Dreyers, a direct-store delivery (DSD) brand, to the warehoused Blue Bunny program from Core-Mark.

But this does not work for everyone. At West Des Moines, Iowa-based Kum & Go, which operates 400-plus stores in 11 states, "the same manufacturer isn't the leader everywhere," Poitry said. So, some stores receive warehoused products while others get DSD.

Reducing inventory can hold down prices, particularly for suppliers. This only works for companies with excellent replenishment technologies and efficient distributors. "Instead of two months of inventory, you can have less product in warehouses," said Greenwood of Ben & Jerry's. "But this can cause problems if retailers are out of stock." He also pointed to the importance of backhauling.

Private label is another strategy. Byrne Dairy operates 50 c-stores plus its own dairy plant. It also supplies several hundred other convenience stores. In its stores, 70 percent of offerings are national brands, while the other 30 percent are private label. Its private label brands are 20 percent to 30 percent cheaper and have been taking market share away from the national ice cream brands, said Greiner. His business in larger containers continues to be robust.

Byrne's brand is doing well in other c-stores, too. A half-gallon retails for $3.49 compared to more than $5 for a national brand. "Shoppers are happy with the alternative," Greiner added.

While private label brands are cost efficient, few convenience stores are large enough or have enough square footage to develop the necessary SKU count. This is not so in milk, juice and other categories, but it is the case in the ice cream category.

"I have private label milk," said Paduano. "But that's four packages. In ice cream, you need a minimum of eight or 10. You must also invest in artwork and cartons. Grocers can do this, but I don't think many c-stores can meet those minimums."

In some larger stores, Nice N Easy offers River Valley, a "secondary tier brand," alongside national labels like Edy's and Perry's. As Paduano noted, "I can do this where demand is stronger."

Some large c-store players do offer private label ice cream. 7-Eleven, for instance, features popular ice cream flavors like mint chocolate chip under its 7-Select label. Circle K also has a private label, which it introduced this June, according to its Facebook page.

Kum & Go is "seriously considering" private label, said Poitry.

According to the USDA, cow feed prices are expected to remain high for the balance of this year and into 2013. But further ice cream price increases will probably not hit retail until early next year. While milk prices can change monthly, ice cream "tends to be a once a year type of increase," said Jacksons' Faw.

Retailers and suppliers stressed that despite higher costs, ice cream is still an inexpensive indulgence compared to other "feel good" purchases like alcohol or apparel.

"In the past, we've found that during tougher economic times, people who may not go on vacation will buy a treat," said Greenwood. "That's the niche that Ben & Jerry's fills."