The ice cream market remains open to new ideas, formats and flavours, but it has certain characteristics that are often underestimated by new entrants. According to Dairy Foods, in the article industry experts Steven Young and Bill Sipple explain what entrepreneurs should look out for before launching such a business 

Ice cream has always attracted entrepreneurs from all walks of life — whether they have experience in the food industry or not. The good news? There’s always room for new ideas, new business models, new approaches to recipes, new products, new flavours and much more.

Not such good news? Many entrepreneurs are ‘newbies’ to this business (or to business in general) and may not realise that ice cream is fundamentally different from any other food product.

As has been noted on numerous occasions, ice cream and related products are the only foodstuffs that are developed, formulated, manufactured, transported, marketed and sold with the specific aim of being consumed in a frozen state. This makes ice cream a unique product. If these factors are taken into account at every stage — from development to sale — success can be achieved.

However, before diving into the ice cream business, there are a few important points to bear in mind.

Declarables: What do you want to say about the finished product? This should include both technical aspects (e.g. claims regarding content, etc.) and non-technical aspects (country of origin) that create competitive barriers and reasons to buy. The more characteristics there are, along with their corresponding benefits for the consumer, the stronger the product positioning. Compiling a list of claims helps to define clear objectives for the development of the ice cream. Essentially, this is a list of ‘must-have’ features that competitors do not have or are unwilling to implement.

Supply chain: Many entrepreneurs fail to analyse the market. Where do you plan to sell the product? Have you taken existing competitors into account? This includes similar products, national brands and private labels. Will the focus be on the HoReCa sector (restaurants, cafés)? Or on portion-sized products? If the latter, what format: cups, cones, moulded or extruded products? What about flavours? The importance of classic flavours is often underestimated: vanilla (~30% of volume), chocolate (~15%) and their combinations (~60–70% of the range). In-depth market research isn’t necessary, but a basic analysis is essential.

Scale-up: The transition from the laboratory to industrial production is a complex process, as chemical, microbiological and physical parameters, as well as food safety requirements, change.

Manufacturing locations, capacities and capabilities: Where will the product be manufactured? What are the production capabilities? What are the minimum batch sizes? This often becomes the main obstacle to launching new products. Even producing the first commercial samples can be expensive.

Distribution: Who will store and deliver the product? Ice cream logistics are unique due to the need to maintain the correct temperature. There may or may not be room for new products entering the supply chain.

Economics: It is important to understand the economics of ice cream. Between the factors relating to raw materials and specialised finished products lie the costs of raw materials, fixed and variable production costs, and distribution and presentation costs. The good news? All of this can be done at an early stage of any development project to roughly determine any given unit price at which the product will be sold, whether it is a scoop of ice cream in a sauce shop or individual units sold at retail.

Approximate cost breakdown: 

~60% — ingredients and packaging; 
~40% — production and other costs.

Business owners need to understand the concept of ‘line averaging’. That is, the requirement for a uniform price at the point of sale for ALL flavours within a product range. The cost of all flavours is not the same throughout the supply chain. Something has to change. This requires assumptions. Assumptions are only as reliable as the facts or information used to support them. The good news is… assumptions can change, and often do

Margins: Profitability in this business is low. Margins for production, storage and distribution are around 20% each. By comparison, in ready-to-eat cereals, margins can reach 70–80%. Thus, a reverse calculation can be performed based on current point-of-sale prices for other similar products (product quality, characteristics/benefits, declared ingredients, packaging, etc.) to determine what formulation development costs will need to be managed. Formulation development costs may not take the development objectives into account. Some declared ingredients may need to be excluded or modified.

Slotting allowances: Many entrepreneurs are unaware that retailers, particularly large national chains, require certain guarantees that products will sell (both initial and repeat sales). A ‘shelf space fee’ may be required to secure shelf space. The amount and type of such fees will vary between different grocery stores. Ice cream is particularly vulnerable, as ice cream display cases are limited in size and space. This is prime real estate.

Shelf life: Even though ice cream and its distribution are unique, this is ‘good news’. If the product is protected and there are no temperature fluctuations in the supply chain, ice cream can be stored indefinitely at any given temperature. However, this is not something Mother Nature is responsible for. The expiry date of any product, including ice cream, is the point at which a particular property or characteristic of the product first ceases to be suitable. In most cases, the shelf life of ice cream ends when the product no longer delivers its intended textural elements: taste/chew; smoothness/creaminess

Other factors may lead to the expiry of the shelf life. For example, the presence of a health hazard; off-flavours or simply unpleasant tastes; incorrect packaging, packaging defects, and so on. The list goes on. Even for the ‘big players’, the expected shelf life of six to twelve months under standard ice cream distribution conditions can be arbitrary. Best before date or ‘best consumed by’.

Other considerations:

  • The use of readily available ingredients and GRAS ingredients
  • Identity standards? Dairy products? Non-standard dairy products? Non-dairy products?
  • Any thoughts on kosher/halal status?
  • Common and standard names of ingredients
  • Allergens?
  • ‘Implicit’ claims? These may relate to trademarks and the like, which may reflect composition and other factors.
  • The use of ‘processing aids’ and/or ‘incidental additives’.

Understand the message?

The science and technology behind ice cream are absolutely crucial to all of the above. Aspects of marketing, production, the supply chain and point-of-sale pricing are rarely taken into account, particularly by entrepreneurs, even though the ‘big players’ are thinking along the same lines. You are not alone. And you will not be the first or the last. It is a wonderful business, and it needs entrepreneurs who push both technical and non-technical boundaries.

Source: Dairy Foods