Explaining the economics of ice creamfrom @maxxrosenblum

Transcript

Is nobody talking about the fact that we've basically hit peak ice cream price? Because if you look around yourself right now, ice cream is basically a rip off, and you're right to be angry. You're just angry at the wrong thing. But surprisingly, a half gallon of ice cream costs 8% less than it did last year, but a single scoop at the right shops can cost $8 or more. But ice cream worse told became a luxury good. It's a tidy story, but it's also rank. Because if we're saying ice cream got expensive because its ingredients did, the ingredients should also be expensive. An ingredient like cocoa peaked near $13,000 a ton and then fell 78%. And vanilla is in a glut so deep that Madagascar is buying its own crop off the market to prop the price up. And the dairy, sugar, and milk solids in a four ounce scoop worst about 15¢. The commodities are 2% of what you pay. They're not what you're buying. Because the average cone is up more than 35% since 2019, but everything else is up 31. But strip out the inflation and the infuriating rise of the $8 cone is about 3% over seven years. That means ice cream has really only kept pace with the speed of the economy. Its energy is coming from somewhere a price index can't see. And there's a documented rule here rank it's counterintuitive to what most people think actually happens. It's the rule that explains that when a heat wave sends demand through the roof, the average ice cream price surprisingly falls because the marginal hot day buyer is price sensitive and reaches for the cheap stuff. This tells us that in peak demand times, the average price is lower. Economists call it countercyclical pricing, and it explains why the supermarket freezer doesn't gouge you every time it hits July. But it also depends on one thing, the cheap option has to exist in the market, and that's what's vanishing. Mr. Softy cut its fleet from thousands of trucks to about 600 Dairy Queens, Thrifty's, and Baskin Robbins are closing stores like crazy. But Rank Leeuwen and Salt and Straw are opening 20 more stores at $8 a scoop. And keep in mind that nobody has to raise a price for the average to climb. All that needs to happen is that the cheap sellers stop existing as a result of consumers who consistently opt for more premium options in the market. Call it survivorship inflation. The affordable end of the market disappears while the survivors set the average. Except the data says we're starting to become more price sensitive. Premium ice cream sales are down 6% in the last two years while the category itself is flat. So when we take that data together, I think it's coming down to something called a reservation price or the maximum price a consumer is willing to pay before they walk away. So my take on peak ice cream is that that in this market, more than ever, premiumization looks like pricing power, but it's often the opposite. Because all premium ice cream is, mechanically, is the decision to whip less air into a carton and charge you for the difference in in weight. The $8 cone is one of those cases where the market is a hollowed out middle where the cheap scoop disappeared and we just call it inflation.