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Reason
Reason
Jack Nicastro

No Ice Cream Price Gouging Thanks to Substitutes

Following anemic sales growth of 1.8 percent in 2023, Unilever announced its separation from its ice cream division on Tuesday.

Increasing its share of the ice cream market from 16 percent to 20 percent over the past decade, Unilever's ice cream brands included Ben & Jerry's, Magnum, Wall's, and Cornetto. Unilever's ice cream division accounted for 13 percent of its revenue in 2023, with the rest coming from consumer staple brands like Dove, Comfort, TRESemmé, Vaseline, Liquid I.V. (a favorite of college students who totally respect the legal drinking age) and—Hellmann's Mayonnaise?

Unilever has quite the diversified (and eccentric) portfolio of products.

Despite its impressive market share, Unilever's ice cream division experienced the firm's highest input-cost inflation last year, making it more of a liability than an asset. In an attempt to remain profitable, Unilever instituted cost-cutting measures and across-the-board price increases.

The first strategy proved ineffective: Despite 7 percent growth in the consumer staples sector between 2019 and 2024, Unilever's own share actually decreased by 8 percent.

The second strategy also fell flat: After raising the average price of its offerings by 13.3 percent in 2022, sales decreased by 3.6 percent and 1,500 of its 128,000 employees were fired. Although consumer welfare was initially reduced by Unilever's price hikes, so too was producer surplus in short order.

Unilever's decision to fire 7,500 more employees coupled with its divestiture from its ice cream division constitutes its latest bid to cut costs, saving the company a projected $870 million over the next three years. Given CFO Fernando Fernandez's nod to the importance of artificial intelligence in Unilever's "comprehensive technology program," it comes as no surprise that CEO Hein Schumacher anticipates layoffs impacting those in "predominantly office-based roles."

What may come as a surprise to Federal Trade Commission (FTC) Chair Lina Khan and the neo-Brandeisians (mis)managing the FTC is the fact that even huge, horizontally integrated firms like Unilever cannot raise prices without decreasing quantity demanded. This is especially true when it comes to those goods for which demand is relatively elastic.

Consumers will happily hand over a couple bucks to sate their Chunky Monkey craving, but they're not going to pay much more than that; they'll satisfy their sweet tooth with cheaper ice cream, substitute with a Kit Kat, or forgo the (relative) luxury altogether.

In markets where own-price elasticity is high and substitute goods abound, market share does not translate to market power.

Speaking of Chunky Monkey, Unilever's sale of Ben & Jerry's bodes well for those uneasy about the increasingly politicized marketplace. Ben & Jerry's opted to differentiate their overpriced, punny ice cream flavors through active participation in the political controversy du jour: vocally supporting Black Lives Matter in 2021 and refusing to sell in the "Occupied Palestinian Territory" in 2022. The Vermont ice cream chain went so far as to sue Unilever to prevent it from selling distribution rights to Israeli licensees.

Apparently, hot political takes don't pair well with cold ice cream.

Though Ben & Jerry's corporate activism undoubtedly contributed to its relationship with Unilever melting, it was probably not determinative. Pointing to "lack of overlap on supply chains with the rest of the company," Schumacher explained the benefits of horizontal disintegration from all of its ice cream brands, not just Ben & Jerry's. When cost-saving synergies no longer compensated for increased input costs, the profit motive naturally incentivized Unilever to downsize and delimit its focus.

Less of an instance of "get woke, go broke," Unilever's divestiture from its ice cream brands is more so evidence that the size and extent of a company has little to do with its pricing power. 

FTC, take note.

The post No Ice Cream Price Gouging Thanks to Substitutes appeared first on Reason.com.

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