Today we’re going to talk about one of the world’s most loved ice cream brands, Ben
& Jerry’s.
Ben & Jerry’s is an iconic and interesting company, and we’re going to talk about four
things related to the company.
First of all, we’re going to talk about their history, how they got started and how
they became what they are today.
Then we’re going to talk about the business model that drove some of that historical success.
Third, we’re going to talk about what makes somebody with that kind of business model
successful, and what Ben & Jerry’s did right so far.
And then finally, we’re going to talk about the next season at Ben & Jerry’s.
What could be threats or challenges to their business based on some of these highlights.
So, without further ado, let’s dive in.
Ben & Jerry’s was started in 1978.
And Ben & Jerry’s began as a premium, and in many ways, idealistic company that focused
on super high quality ice cream sourced from producers in their key location in Vermont.
And Ben & Jerry’s built out a large network of self-owned stores where they scooped their
ice cream.
Some of their most famous scooping happens on their free cone day, which is usually on
or around Earth Day in April every year.
And Ben & Jerry’s really developed a strategy to go direct to consumer.
In addition, Ben & Jerry’s built somewhat of a off-the-shelf presence where they sold
through grocery stores, and other places in the pint-size format.
So Ben & Jerry’s became an attractive candidate for a takeover in the 1990s and was purchased
by Unilever in 2000.
After that, Ben and Jerry exited the active management at the company, and it became a
wholly owned subsidiary of Unilever.
When we’re going to look in just a minute at the business model, we only have data from
when Ben & Jerry’s was public pre-Unilever.
And so you’ll see some of the numbers of that bear out what their business model was,
but we can’t actually break them out as of today because it’s now a private version
of a larger organization.
Overall, Ben & Jerry’s has a simple core business model, and when we look at Strategy
Simplified, the first thing that we ask is is this a business model driven by variable
cost, where you have an incremental cost for each unit produced or sold, and in contrast,
is it a fixed cost business.
Both are present in all businesses.
You have variable and fixed cost in both businesses.
But usually you’ll have over 50%, and largely over 50% of your revenues that are dominated
by one or the other of those types of businesses.
So in this case, what is Ben & Jerry’s?
Take a second to think about it.
If you said that Ben & Jerry’s is a variable cost business, you are right.
Ben & Jerry’s is a business where each time they produce a pint, or a larger session of
their ice cream, they are a variable cost business.
Now some of what Unilever was wondering about doing when they purchase the company was about
rationalizing, or closing down a number of the fixed cost retail channels and focusing
on the incremental sales that go through the distribution through their grocery channels.
And that has been one of the core strategies of a business like this.
So they were moving away from a fixed cost base to something that was even more variable
cost focus.
But maybe more importantly, let’s talk about what makes a business that is variable cost
successful.
Ben & Jerry’s is an amazing example of this.
To be successful in a variable cost business, you have to have one of two things, if not
both.
The first is premium pricing power.
The ability to price significantly above your cost so that you have significant margin on
each individual unit that you sell.
The second is the ability to negotiate seriously with your suppliers to get, in this case,
milk, and chocolate, and sugar at a significant discount because of your scale.
And the final thing, which is important for all businesses, whether you are fixed or variable
cost is that you need to, obviously, be able to produce at a significant enough quantity
to pay back at a minimum what your fixed costs happen to be.
So Ben & Jerry’s did that really successfully from the very beginning, and arguably, their
most important piece of management has been maintaining their price premium.
Ben & Jerry’s, over the years, has been one of the most expensive pints per size,
per ounce of ice cream that you can buy.
And the reason that they’ve done that is that they’ve invested really heavily in
branding and in messaging around the quality of their product.
Ben & Jerry’s has also, over time, increased the scale of what they’ve done, and they’ve
improved their negotiating power on the cost side.
But if you had to pick between the two elements of their business model, pricing has been
the one that they’ve really emphasized over the years that they’ve been in business.
And a variable cost business that does the successfully like they have historically does
that really well.
What about Ben & Jerry’s, however, in the future.
The final thing that we’re going to talk about is what will make Ben & Jerry’s successful
going forward.
There is a consistent challenge in the consumer foods, or consumer packaged goods space, and
it has driven a trend that Ben & Jerry’s has not been a part of yet, but it might pose
a challenge to their business model going forward.
If they have rising costs on the cost side, so an increase in the cost of milk, or an
increase in the cost of sugar or chocolate, and they are not able to drive an incremental
price premium, if they are not able to charge instead of $3.99 or $4.99, $5.99, or $6.99
over time for a pint, you have seen some price flattening over the last couple of years for
Ben & Jerry’s.
So even though they’re able to still maintain a margin, if those costs rise, they might
not have the ability to get larger dollar amounts for each of the pints.
And one of the trends that we’ve seen in the consumer-packaged goods space is that
what used to be a 2 quart, or a half-gallon container of ice cream, now sells for the
same amount but it’s 1.75 or 1.5 quarts instead.
And that same trend you have not seen Ben & Jerry’s take advantage of, but it may
be something that they’ll have to think about in the future because they will need
to shrink their package size in order to make sure that the profit per package, or profit
per unit really drives the change of the business.
Ben & Jerry’s does still do a pretty good job of driving margin inside their retail
stores, but as retail foot traffic changes and diminishes, it consistently will pose
a challenge for them as well.
Overall, Ben & Jerry’s is a super strong operator.
Really good at doing what they do in terms of maintaining a price premium, but for a
40+-year-old company to not have the ability to continually increase prices as competition
comes in, and as people have other choices of pint-size, good quality frozen yogurt and
ice cream, you might see some of these changes create pressure on Ben & Jerry’s at some
point in the future.
So now that we’ve just said that they are a variable cost business model, how do you
go about confirming that.
What if that’s your hypothesis, or what if you said it was fixed cost and you wanted
to go check it out one way or the other.
Well, we pulled out Ben & Jerry’s financial statements.
Because they were purchased by Unilever, the last ones that we have available are from
1998.
How’s that for a throwback.
Ben & Jerry’s net sales were $209 million.
Their cost of sales, which in this case represents the stuff that goes into producing ice cream,
milk, sugar, chocolate, packaging, and in many ways distribution.
The only thing that they actually have under that are selling general and administrative
expenses.
And then other income or other expenses, which is a super tiny category.
So they are basically saying that everything that goes into their business is above the
gross profit line.
And you’ll see here that their cost of sales for that $209 million was $136 million.
So over 50% of the revenue is cost of sales.
Their selling general and administrative cost is only about a half of what their cost of
sales is.
So $136 million was the cost of sales, or the variable cost, and then half of that is
about 63 – 63.9.
So about $64 million in the SG & A expenses.
So again, when we look at it, we look at the numbers versus the top line.
So if you see a really high percentage of your revenue going to the cost of sales, that
is one indication that it’s a high variable cost business.
But also, we look at the two together.
When we add all of the cost together, what percentage dominates.
And in this case, the answer remains the same.
It’s still variable cost.
So just to confirm, this is a variable cost business, even in that situation where they
were in even more heavily retail focused business.
They were still a very variable cost-oriented business.
So we can’t break it out exactly like that today, but we can just assume that with that
distribution channel through the grocery stores, we would see even more dynamics just like
this.
If you have questions about this company, Ben & Jerry’s, or if you want to do more
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