Ice Cream Prices: Greedflation or Genuine Costs?

The recent surge in ice cream prices, with increases as high as 38%, has sparked a heated debate about "greedflation"—the idea that companies exploit economic crises to unjustifiably raise prices. But is this really a case of corporate greed, or are there legitimate economic reasons behind these price hikes?

The Power of Branding and Pricing

Established brands like Cornetto and Solero, owned by multinational giants such as Unilever, have long enjoyed brand loyalty. This loyalty gives them significant pricing power, allowing them to charge premium prices even when variable costs—such as those for ingredients like milk and sugar—rise. However, as prices soar, consumers are increasingly turning to own-label brands, like those from Aldi and Lidl, which are cheaper and sometimes even tastier, according to consumer group Which?.

For instance, a six-pack of Cornetto strawberry cones rose from £2.57 to £3.55, a 38% increase, while similar supermarket alternatives cost significantly less. This pricing discrepancy raises questions about the balance between brand loyalty and perceived value. Are consumers simply paying more for a brand name, or is there genuine added quality? The Which? taste tests suggest the former, indicating a potential decline in consumer surplus—the difference between what consumers are willing to pay and what they actually pay.

Cost Pressures or Profit Margins?

Unilever and other manufacturers point to rising costs in energy, labour, and raw materials as the main drivers of price increases. Indeed, the variable cost of producing ice cream has climbed, with the Office for National Statistics reporting a 27% rise in factory gate prices over two years. However, the fact that the price increases for some products, like Solero Exotic ice-cream lollies (up 35%), outstrip these cost hikes suggests companies may be expanding their profit margins.

The situation is complicated by seasonal factors. Ice cream sales are highly sensitive to weather, with hot summers boosting demand and cold, rainy seasons dampening it. The summer of 2022 saw a surge in ice cream purchases due to a heatwave, but this was not enough to offset the overall decline in sales volume caused by poor weather and tighter household budgets.

Market Dynamics and Consumer Behaviour

The shift towards supermarket own-label ice creams highlights a key change in consumer behaviour. As branded products become more expensive, shoppers are exploring more affordable alternatives. This shift could erode the market power of big brands, forcing them to reconsider their pricing strategies. If consumers find that cheaper alternatives meet their taste and quality expectations, the traditional advantage of brand loyalty may diminish, reducing the pricing power of these brands.

Is It Really Greedflation?

The term "greedflation" suggests that companies are taking advantage of economic conditions to unjustifiably increase prices. However, the reality seems more nuanced. While there are certainly cases where price increases exceed the rise in costs, not all price hikes are purely about profit maximization. Companies face legitimate challenges, such as rising production costs and fluctuating demand due to seasonal and economic factors.

Discussion Questions

1. Do you think the concept of "greedflation" is justified in this context, or are the price increases primarily due to rising production costs? Explain your reasoning.
2. How does brand loyalty affect consumer behaviour, and what impact does it have on pricing power in the ice cream market?
3. In what ways might the increase in own-label brand purchases influence the strategies of large ice cream manufacturers?
4. What are the potential consequences for consumer surplus when the price of branded products increases significantly more than the cost of production?
5. How might seasonal demand fluctuations affect the pricing strategies of ice cream manufacturers?

Glossary of Key Economic Terms

• Brand Loyalty: The tendency of consumers to continuously purchase one brand's products over another.
• Consumer Surplus: The difference between what consumers are willing to pay for a good or service and what they actually pay.
• Greedflation: A term used to describe price increases that are driven more by companies' desire for higher profits than by increased costs.
• Market Power: The ability of a firm to influence the price of a good or service in the market.
• Own-Label Brand: Products that are manufactured and sold under a retailer's brand name, usually at a lower price than branded products.
• Pricing Power: The ability of a firm to raise prices without losing customers.
• Profit Margin: The difference between the cost of producing a good or service and its selling price.
• Seasonal Demand: Fluctuations in consumer demand for products based on seasonal factors like weather.
• Variable Cost: Costs that vary with the level of output, such as raw materials and labor.