Food Fight

The Ice Cream Wars

ice cream AP
Ice cream shops like this one are generally run by small entrepreneurs who make their own flavors. Companies like R&R and DMK produce the treats on a mass scale and sell them to big discounter stores.
  • Why it matters

    Why it matters

    DMK and R&R are in a high-stakes battle for supremacy in the frozen food aisles of Europe’s largest supermarket chains, a business worth billions.

  • Facts

    Facts

    • Gotthard Kirchner sold Rosen Eiskrem to competitor DMK in 2012, and in 2013 sold them his remaining 10 percent stake.
    • Gotthard Kirchner’s new employer, R&R Ice Cream, based in Leeds, is the second-largest ice cream producer in Europe.
    • Supermarket labels account for about 50 percent of ice cream sales in Germany.
  • Audio

    Audio

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DMK, Rosen and R&R are companies hardly anyone knows. And yet almost every German has licked their creations, sold in the frozen food aisles at major supermarkets like Aldi, Lidl and Penny under flowery brand names like Gelatelli, Grandessa and Mucci.

An equally surprising and titillating personnel change has now created turmoil in the consumer products industry: Gottfried Kirchner – who sold Rosen Eiskrem, Germany’s biggest manufacturer of ice cream, to Deutsche Milchkontor, or DMK – is now taking a job as head of German operations for a British company, R&R Ice Cream, the biggest competitor in the industry.

The changeover comes at a bad time for the Bremen-based dairy products maker and Mr. Kirchner’s former company. DMK’s ice cream division is ailing, and the company hasn’t even identified synergies from the Rosen purchase yet.

R&R is taking advantage of the company’s current weakness to launch a counterattack, with Mr. Kirchner’s support. It’s a high-stakes battle for supremacy in the frozen food aisles of Europe’s largest supermarket chains, a business worth billions.

Supermarket ice cream labels increasingly dominate the sector, accounting for about 64 percent of volume and close to 50 percent of sales in Germany.

The supermarket ice cream labels increasingly dominate the sector, accounting for about 64 percent of volume and close to 50 percent of sales in Germany. Only in the case of impulse ice-cream purchases – the classic ice cream on a stick – do well-known industry brands like Langnese (Unilever) and Mövenpick (Nestlé) dominate the market.

By hiring Mr. Kirchner, R&R has secured the services of a true expert. The tall manager with a high forehead is viewed in the industry as a fan of quick decisions. Mr. Kirchner is a friendly, relaxed man who likes chatting with friends about his greatest passion, next to his family and the ice cream business: Borussia Mönchengladbach, a top-tier club in Germany’s national soccer league, the Bundesliga.

The 50-year-old executive has known the ice cream business since childhood. In 1967, his father August bought an ice cream parlor, the Café Rosen, from his uncle Karl in Heinsberg, a town near Aachen in western Germany. From then on, the Kirchners expanded their production from meeting the café’s needs to delivering ice cream to local households.

It was a booming business, and the company had its breakthrough in 1974, when August Kirchner created the Cassie brand and began selling it in supermarket frozen food aisles. The wholesale division of food and coffee retailer Edeka added Rosen to its list of suppliers, and Cassie ice cream was featured in about 150 stores.

After earning a doctorate in business management from the University of Paderborn in 1990, Gotthard Kirchner joined Rosen, where he helped his father run the company. In 2001, Mr. Kirchner received all shares in the company.

In early 2007, he catapulted Rosen to new heights, when it acquired two ice cream factories from Nestlé subsidiary Schöller. The Swiss multinational food producer had decided to focus on its premium brands, Mövenpick and Schöller, and no longer produce supermarket brands.

Rosen, on the other hand, specializes in these products. As a result of the takeover, the family-owned operation became Germany’s largest ice cream producer. Sales quickly jumped from €90 million ($117 million) to €170 million, and the work force grew from 300 to 750.

“R&R makes quick decisions, the employees are highly competent, and there are very clear structures that even I found surprising.”

Gottfried Kirchner, ice cream executive

But the takeover became a financial burden for Mr. Kirchner, from which he would not recover. In addition to the Schöller acquisition, he spent €8 million to build a new plant for popsicles at the company’s headquarters. Meanwhile, sugar and milk prices were skyrocketing, and a substantial increase in orders led to additional capital requirements in 2012.

In 2011, when Mr. Kirchner began negotiating the extension of a €70 million loan, a few banks in the consortium balked because Rosen was unable to abide by all of the terms of its loan agreement. For instance, in 2011 the equity ratio dropped by almost seven percentage points, to 23 percent, falling short of the target ratio.

With a bridge loan, Mr. Kirchner managed to secure short-term financing needs for the 2012 season. But the banks demanded that he inject €20 million in additional equity capital or funds similar to equity capital. Instead, Mr. Kirchner gave up and, in November 2012, he sold Rosen Eiskrem to DMK, retaining 10 percent of the company and his position as chief executive.

DMK, Germany’s largest creamery, with sales of €5.3 billion, was created in the spring of 2011 through the merger of two major dairy product makers, Humana and Nordmilch (Milram). Humana contributed the Sanobub ice cream brand to the new company, which became the DMK Eis division.

But the chemistry between the enormous creamery, with its roots in milk cooperatives, and the agile family-owned business, wasn’t right from the start. “DMK’s investment in Rosen created the opportunity for both companies to use many synergies,” Mr. Kirchner told a regional daily newspaper at the time. “But as it turned out, opinions on future corporate strategies differed too widely.”

 

aldi lidl dpa
The company makes ice cream for discount rivals Lidl and Aldi. Source: DPA

 

Mr. Kirchner finally pulled the ripcord when he realized that he was about to be shunted into an advisory board that hadn’t even been established yet. In mid-July 2013, he terminated his contract as chief executive and exercised his option to sell his remaining 10 percent of shares to DMK.

A few months later, he received a call from Ibrahim Najafi, the chief executive of British ice cream maker R&R, headquartered near Leeds. After a few meetings, Mr. Najafi initially offered his former competitor a position as an adviser, which Mr. Kirchner accepted. There was no non-compete clause in his contract with DMK.

According to company information, R&R, with 3,500 employees and sales of €900 million, is the second-largest ice cream maker in Europe. It has always been Rosen’s main competitor and is now the main competitor for DMK Eis.

The German Federal Cartel Office approved the Rosen takeover by DMK in mid-2013, noting: “There are no indications that DMK Eis and Rosen are each other’s closest competitors. Instead, there are very clear indications that R&R is the most important competitor for each of the two companies involved in the merger.”

At its plant in Osnabrück, the British company produces both supermarket brands and well-known licensed ice cream brands such as Milka, Kitkat, Toblerone, Oreo and Daim for Mondelez (formerly Kraft Foods), as well as Landliebe Eis.

DMK is Germany's largest creamery, with sales of €5.3 billion.

It’s ironic that Mr. Kirchner is now contributing his experience to R&R. He and his new employer apparently hit it off right away. Effective August 1, his position as an adviser turned into a full-time job as chief executive of R&R’s German business, a new position, with about €200 million in annual sales. Mr. Najafi had previously managed the German division from his office in Leeds.

The Rosen and DMK era is over for Mr. Kirchner, who has no further comment on his experiences with the two companies. Referring to his new employer, Mr. Kirchner says: “R&R makes quick decisions, the employees are highly competent, and there are very clear structures that even I found surprising.”

The British company, owned by PAI Partners, France’s biggest financial investor, is also in excellent financial shape. “A comparison of the cash flow statements of DMK and R&R shows that R&R can dispose of a significantly larger cash flow than is the case at DMK,” the Federal Cartel Office concluded in its ruling on the DMK/Rosen merger.

Meanwhile, industry insiders report that things are not going smoothly in DMK’s ice cream business and that the division is losing money. A DMK spokesman confirms that, almost two years after the takeover, “both companies are involved in an ongoing integration process, and integration teams are currently analyzing and trying to identify synergies and potential for improvement.” But DMK anticipates positive results for 2014.

By next summer, competition is likely to be heating up in the frozen food aisles of German supermarkets.

This article originally appeared in WirtschaftsWoche. It was translated by Christopher Sultan. To contact the author: mario.brueck@wiwo.de

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