COMMENT
Making Money From Ice Cream

At the turn of the Millennium, Britons ate almost 550 million litres of ice cream every year. That's almost 9 litres or a smidgen short of 2 gallons of ice cream per person. By next year, we are expected to munch our way through some 670 million litres or nearly 11 litres for every man, woman and child!

In value terms, the UK ice cream market is worth around £1.7b annually. Interestingly, despite attempts to convert consumers to healthier options such as water-based and yoghurt-based ice creams, we remain loyal to traditional dairy-based versions.

Walls, which is owned by Unilever (LSE: ULVR), is Britain's biggest ice cream supplier by value. Unilever, which also owns Breyers and Ben & Jerry's, has a 28% share of the ice cream market, of which a quarter comes from its take-home ranges. These are ice creams that are sold in tubs, which have seen sales increase substantially over the years. The remainder of Unilever's ice cream sales is generated from impulse purchase of pre-packed bars, cones and ice creams on a stick.

Despite Unilever's strong position in the ice cream market, sales of ice cream account for less than 15% of group revenues, and only 6% of operating profits. Consequently, investors looking for a direct play on ice cream may find more interesting opportunities elsewhere.

Richmond Foods (LSE: RFD), which was founded by a Yorkshire farmer Jonathan Ropner, is Britain's biggest ice cream seller by volume. It controls about a third of the UK market for take-home ice creams, and supplies half the ice cream sold by Britain's main grocers.

From its humble beginnings as a local ice cream maker, the company has grown through acquisitions, which has also increased its borrowings. These purchases include Windsor Creameries in 1995, Allied Frozen Foods in 2000 and Nestle UK Ice Cream business in 2001. It also bought Oldfields in 2003 to boost its presence in the growing take-home market.

Richmond's brands stretch from the ever-popular Fab and Mivvie, which are marked under the Nestles' label, to its recently-launched Skinny Cow lower-fat deserts. Profits have grown appreciably over the last four years, and today, Richmond posted a 5% rise in interim profits to £1.9m.

Turnover this year is expected to rise 8% to £155m, which will mark yet another year of improved revenues. Since 2000, sales have more than doubled from £70m. Profits of around £16m have been pencilled in for 2005 rising to £18m in 2006, which values the business at around 13 times earnings. That is not too expensive, though its dividend yield at 1.5% is a little meagre.

Hill Station (LSE: HLL) is the new kid on the block. Founded in 2002 by two former investment bankers, the company specialises in up-market ice creams. This segment of the ice cream market is expected to grow from around £220m in 2003 to £270m next year. Earlier this year, Hill Station posted a 29% jump in sales, but it is still loss making. On every measure, including the price of its products, Hill Station shares are quite expensive.  

David owns shares in Unilever.