There is a substantial ice cream market in the UK. In recent years it has been transformed by the development of new product lines and by the entry of new firms into the market. This case study focuses on a particular sector of the ice cream market - impulse ice cream - and outlines some of the challenges Mars has faced in entering this market. The impulse ice cream market consists of single wrapped, items of industrially-manufactured ice cream, sold for immediate consumption.The Unilever group of companies is the market leader in impulse ice cream products in most Member States of the European Union.
Before reading the case study materials, make a list of problems which Mars might have encountered in seeking to enter the impulse ice cream market. In business, particular markets often become associated with particular producers and product lines. These producers build up a competitive advantage usually as a result of listening to consumers and providing customer-focussed products. However, in the course of time, the market may change because, for example, new producers enter the market, or because consumer tastes change. This often means that existing producers become very defensive and try to hold on to their position of dominance. It is as if the existing producers are protected by a ring of competitive advantage. Initially this ring will be strong, but it will weaken as competition emerges.
Existing producers then try to re-strengthen the ring in order to restore their competitive advantage, e.g. by cutting prices, developing new innovative lines, resorting to anti-competitive practices, etc. Sometimes, they succeed, but at other times, they are forced to recognise that times have changed.
Change in the ice cream market
The ice cream market provides us with a fascinating example of a transformed market. In the late 1980s, Walls ice cream stood as the established market leader. Walls is a household name, with a long-established reputation for providing family ice cream. It was able to produce large quantities of ice cream at low cost. In business we talk about firms developing a competitive edge through 'the experience curve' i.e. businesses with the largest market share are able to produce large outputs at relatively low costs.
It must have appeared to Walls at the time that its position could not be threatened. However, it had not accounted for the way in which food technology is transforming food production in this country. Who would have dreamt in the late 1980s that you could transform chocolate bars into ice creams. The market for confectionery ice cream did not exist at the beginning of 1988. Today it is the fastest growing sector of the ice cream market.
In 1994 the total market for ice cream was worth £908 million. It is in this market's fastest growing sectors that the confectionery manufacturers Mars and Nestlé are having the biggest impact.
Mars´ ice cream products
At the end of 1988 Mars launched its ice cream in the UK and Ireland. The ongoing success of this product has led Mars to take advantage of its technological breakthrough to produce a wide variety of ice cream products. Here are just some of the brands produced by Mars:
- GALAXY DOVE
- MILKY WAY
- OPAL FRUITS
Penetrating the market
It is not always easy to penetrate an existing market. Although Mars has transformed the ice cream market, it had initially to compete against established relationships and vested interests in this market. The biggest stumbling block for Mars was in getting its Mars ice cream bars into retail outlets.
Walls, which had the giant's share of the impulse market (lollies and ice creams bought from shops for immediate consumption) and Nestlé's Lyons Maid, supplied freezers free of charge to small retailers and corner shops on condition that they stock only their ice cream in the cabinet. Not only did they supply freezers to shops; they also maintained and serviced them. The shop just had to pay the electricity bill.
Mars was understandably frustrated about the restraints on free competition resulting from freezer exclusivity in the impulse ice cream market. Since the launch of Mars ice creams in 1988, Unilever (which owns Wall's) has sought to prevent retailers from stocking competing companies products in their exclusive freezers. A brief summary of the legal dispute between Unilever and Mars is set out below:
- May 1989 - Launch of Mars ice cream.
- January 1990 - Unilever in Ireland starts legal proceedings against Mars alleging it is giving inducements to retailers to break their exclusive arrangements with Unilever.
- April 1990 - Unilever obtains injunction preventing Mars from selling ice creams from Unilever freezers in Ireland.
- Sept 1991 - After failure to reach agreement with Unilever, Mars files two complaints with the European Commission and complained not just about freezer exclusivity but also about shop or outlet exclusivity in the German market which was later prohibited.
- March 1992 - European Commission stops main German manufacturers of ice cream from imposing exclusive supply arrangements for retail outlets in Germany. The Commission argues that exclusivity practices substantially restrict access to the market.
- May 1992 - Irish High Court upholds its exclusivity decision.
- June 1992 - The European Court of Justice confirms interim measures for the petrol sector - opening 18,000 outlets to Mars - but suspends measures for other sectors. This decision gives Mars access to 40of impulse sales.
- October 1992 - Office of Fair Trading in the UK announces investigation into freezer exclusivity in the UK.
- May 1993 - The UK's Director of Fair Trading, asks the Monopolies and Mergers Commission to investigate the supply of 'impulse' ice cream.
- June 1993 - European Commission issues statement of objections against freezer exclusivity in Ireland and states intention of fining Unilever.
- December 1993 - Mars proposes a compromise that 50of the freezer could remain 'exclusive' and that manufacturers should not be allowed to force retailers to buy from a specific source.
- March 1994 - The Monopolies and Mergers Commission reports and states that the market has become more competitive and that therefore exclusivity does not present any public interest issue.
- March 1995 - European Commission condemns freezer exclusivity but in Ireland accepts changes which have been made by Unilever. * the introduction of a hire purchase arrangement whereby initially the freezer would be exclusive, but once purchased would be open to all manufacturers. * a scheme whereby retailers who provide their own refrigeration would be given a one off rebate on Walls products providing minimum purchase levels are achieved. Unilever forced to sell a large number of its freezers (>20of the market) to retailers in order to reduce its strangle hold on the market!
- April 1995 - Enquiries were made by the OFT following allegations that the MMC had received misleading evidence from Unilever on the question of exclusive distribution arrangements (March 1994 supra qv). As a result the OFT informs Unilever it is considering criminal prosecution for providing misleading information under section 93B of the Fair Trading Act 1973. The penalties are a fine, a maximum of two years imprisonment, or both.
- June 8th 1995 - The Court of First Instance issues its judgement on the Unilever/Scholler appeal against the EC's decision on outlet exclusivity. The Court rejects the appeals on all main counts and finds for the EC. The CFI also comments adversely on exclusive distribution systems, whether they are operated directly by a manufacturer or controlled by a manufacturer through exclusive contracts: "It is also apparent from the documents before the Court that, in the traditional trade, there are numerous individual retailers whose average turnover is rather low. The establishment of a profitable distribution system therefore presupposes that a new competitor must have a large number of retailers concentrated within a specified geographical area which can be supplied through regional or central warehouses. The fact that there are no independent intermediaries means this fragmentation of demand constitutes an additional barrier to access to the market."
Unilever put forward the argument that 'the provision of brand-linked freezer cabinets is in the best interests of the trade and the consumer because it allows the widest possible availability of impulse ice creams, in good condition, at affordable prices.'
Unilever argue that they need to 'protect our assets from piracy by other ice cream suppliers.' They argue that they are making an 'overall offer' to consumers which includes both the ice cream and the freezer. Mars has faced the same hurdle which has stood in the way of many technological innovations over the years, that of being able to compete on a level playing field. In June 1992 Mars wrote to the impulse trade stating that:
'We are in favour of free competition and consumer choice; the top brands sell faster, you should be allowed to stock them; Mars has three of the top five best sellers; no one but Wall's believes in exclusivity agreements; take the advice of the Ice Cream Alliance and get your own freezer; call the Mars Freezeline if you want help.'
The only way for a market to flourish, Mars agreed, was for the retailer to stock the ice cream brands the consumer wants to buy, not the brands the manufacturer dictates. Freezer exclusivity means that consumer sales values of individual brands are largely determined by the extent of the manufacturer's freezer base. The success of an individual brand consequently is not necessarily the result of popularity or consumer preference. This was highlighted in a recent article in 'European Competition Law Review' which stated that Wall's success in the impulse sector was not a result of superior quality/price mix, but because of the monopoly the company maintains in the impulse sector.
Masterfoods | How Mars transformed the ice cream market