Ice Cream Wars: Nestlé vs. Unilever

The $59 billion industry is dominated by two global giants looking to expand in Asia and Latin America

Editor's Note: The original version of this story, published Aug. 24, 2007, mistakenly stated that Nestlé acquired Häagen-Dazs. In fact, the Häagen-Dazs brand is owned by General Mills. Nestlé has a license to sell Häagen-Dazs only in North America, while General Mills sells it in the rest of the world, by itself or with partners.

Witness the lines of tourists snaking their way toward the famous Berthillon ice cream counter on the Ile Saint-Louis in Paris, and you know that in the dog days of summer, nothing beats the heat better than a refreshing scoop of ice cream. From rich, super-premium flavors such as Ben & Jerry's Chunky Monkey, to reduced-fat offerings from Dreyer's, to Berthillon's to-die-for pear sorbet, sellers have blanketed the market with confections to suit every taste and budget.

What many consumers may not realize, though, is just how big a business ice cream has become around the world. The days of mom-and-pop parlors and local brands are fading fast. Today, the $59 billion ice cream industry is dominated by two global giants: Switzerland's Nestlé (NESN.DE) and Anglo-Dutch conglomerate Unilever (UN). Together, they control more than one-third of the worldwide market—and half of ice cream sales in the U.S.—and they're looking to expand as they move into developing regions in Asia and Latin America.

It's a high-stakes battle in a growing and profitable business. Researcher Euromonitor figures that global ice cream sales are rising 2.5% annually and will hit $65 billion in 2010. Western Europe, the world's largest market, gobbled up $21.5 billion worth of frozen desserts last year, while North Americans devoured $16.3 billion worth. The most promising markets for growth are in emerging economies such as China and Brazil, where annual sales are soaring 8.5% and 8%, respectively.

Rich Pretax Margins

Neither Nestlé nor Unilever had nearly so much presence in ice cream two decades ago. But starting in the 1990s, both began aggressive acquisition campaigns. In 2001, Nestlé obtained the rights to sell Häagen-Dazs in the U.S. and Canada from General Mills (GIS), which owns the brand and sells it in the rest of the world. Nestlé also bought Dreyer's and Swiss maker Mövenpick. Unilever gobbled up Ben & Jerry's in 2000 for $326 million and also acquired Breyers Ice Cream. Today, Nestlé boasts a 17.5% share of the world market, while Unilever is close behind with 16%.

The rest of the market is highly fragmented: The No. 3 maker in the U.S., Wells' Dairy, has just 5% share. Other marques of note around the world are General Mills, Baskin-Robbins (a unit of Dunkin' Brands), and Japan's Lotte, which remains No. 1 at home. China's top maker, Inner Mongolian Yili Industrial Group, has 17% domestic market share and will be the sole dairy sponsor for the 2008 Beijing Summer Olympics.

The decision to target ice cream has paid off handsomely for both Nestlé and Unilever. The Swiss company got nearly 20% of its $42 billion in first-half 2007 revenues from its milk products and ice cream division. With pretax margins of 10.5%, the unit kicked in nearly $900 million in profits, up more than in any other part of the company. Unilever's ice cream and beverages division supplied just over 20% of its $26.7 billion in first-half revenues. Analyst Ian Kellett with brokerage Numis Securities (NUM.L) figures ice cream alone accounted for 10% of Unilever's $3 billion of first-half profits.

To stoke growth, both companies have relied on getting consumers to pay more for frozen treats. With their tit-for-tat moves on American icons Häagen-Dazs and Ben & Jerry's—a once-homegrown brand now distributed around the world—the food giants have helped lead a consumer trend away from down-market, mass-produced brands to more profitable superpremium products. "By focusing on superpremium brands, both companies have increased the value of their products," says Euromonitor packaged food analyst Francisco Redruello.

Responding to Health Concerns

Rising economies around the world should further the trend, as people have more money in their pockets to spend on goods such as up-market ice cream. "The focus on quality, indulgence brands has been integral to our growth," says Jean-Marie Gurné, head of Nestlé's ice cream strategic business unit. Gurné predicts Nestlé's worldwide ice cream sales should increase by 3% next year.

At the same time, both Nestlé and Unilever have been alert to growing health consciousness, particularly in Western Europe and North America. The industry has responded by rolling out lower-fat, lower-calorie products. Nestlé's $2.5 billion takeover of Dreyer's Grand Ice Cream in 2002 helped it secure the lion's share of this increasingly important market in North America. Dreyer's low-fat "Slow Churned" line, with 50% less fat and 30% fewer calories, has proved a runaway success, even forcing Unilever to roll out similar products under its Ben & Jerry's marque.

"Better-for-you ice creams have been a real boost," says Carl Short, an analyst with Standard & Poor's, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP). "Nestlé and Unilever are both focusing on this growth market in an attempt to attract new customers."

Targeting Street Sales in Asia

While such healthier options have helped boost sales in developed markets, the biggest growth prospects lie in Asia, where the ice cream business is set to increase by double digits over the next five years. Total revenue from the Asia Pacific region reached $11.6 billion last year, with $3.7 billion in China alone.

For now, market penetration remains low, although both Unilever and Nestlé are gearing up in countries such as the Philippines and Indonesia in hopes of attracting increasingly affluent consumers. Because many homes in developing countries don't have freezers, the companies are focused on selling single-serving portions through street vendors. That should help expand their markets in countries where refrigeration remains an out-of-reach luxury.

As of now, Nestlé and Unilever appear evenly matched, though analysts say Nestlé has shown a greater willingness to innovate in local markets than its Anglo-Dutch rival. Either way, the increasing globalization of the ice cream industry makes it hard for local makers to take on the big boys. With their massive distribution networks and rich marketing budgets, Nestlé and Unilever have an edge. And both have said they may make more acquisitions, particularly in Asia, in the future.

No question, the days of the local ice cream shop have passed. But as long as the European food giants provide a tasty treat to help people cool off in the summer heat, no one particularly seems to mind.

Check out BusinessWeek's slide show for a look at ice cream across the globe.