ICEE USA Poised to Expand Market : Anaheim Maker of Slush Drinks Set to Begin Period of ‘Explosive Growth’

Mix flavoring with carbon dioxide and “millions of tiny globules of ice” and what have you got?

An Icee, product of Anaheim-based ICEE USA--a healthy example of a company that has ignored diversification, doesn’t bother to advertise and typically offers consumers just two flavors of its “semi-frozen carbonated drink” at any given time.

Despite this, the company has posted sales increases for each of its 18 years, including gains of 20% in each of the past five years. “We’ve done all this by word-of-mouth,” said A. Walter Rognlien, the 73-year-old founder, chairman, chief executive, principal stockholder and patriarch of the company. “It’s not a fad.”

Bolstered by a successful initial public offering earlier this year that raised $3.2 million, the company believes it is poised for “explosive growth” and plans further stock offerings. The company has about 1.5 million common shares outstanding and is traded on the American Stock Exchange. ICEE stock sold for $7 a share at its initial public offering and closed Monday at $5.25, down 12 1/2 cents.

“ICEE has been a sleeping giant out there for years,” said Edward Steele, president and chief operating officer.

For years, ICEE sales lumbered ahead as the company increased its distribution in discount store chains such as K mart and Zodys. However, Steele said the company now is targeting its product at fast-food chains, movie theaters and military bases, all of which it regards as more lucrative prospects for Icee sales than discount stores, where its product is “an impulse buy” strongly linked to the ebb and flow of retail sales.

Only a few military bases and theaters have installed Icee dispensers to date, the company said. ICEE executives declined to identify the fast-food chains that are considering installing its machines but said that about a dozen of them already are test-marketing the product. The future holds “so many opportunities its almost overwhelming,” Steele said.

Overseas Expansion

In addition to its domestic growth, the company has begun expanding into Canada and also plans to have 80 machines dispensing Icees in Mexico within the next three months.

ICEE’s growth in the last five years has come chiefly through acquisition of some of its franchises, Steele said.

For the first nine months of this year, the company posted net income of $706,690, down 6.3% from $754,232 in the same period a year earlier. Nine-month revenue was $10.4 million, up 14.3% from $9.1 million last year. Net income for all of 1985 is expected to decline slightly from the $801,738 posted in 1984, chiefly because of the cost of the company’s expansion into Canada and an overall decline in business at the discount stores that sell Icees.

Next year, however, ICEE should have “very substantial growth in sales and earnings,” said Dave Allen, a broker with Sutro & Co. in Los Angeles. Allen, who also does some stock analysis for Sutro, is projecting 1985 net income of about $580,000 for ICEE, on revenue of $13.7 million. Allen said his 1986 projection is based on the expectation that ICEE, which now has 1,800 company-owned machines, will have about 200 more machines in operation next year. Net income should reach about $1 million on revenue of about $18 million.

So far this year, the company has been registering gross profit margins of about 70%, officials said.

Instant Slush

The refrigerated ICEE machine takes flavoring and water and mixes the blend with carbon dioxide in a sealed chamber about the size of a scuba tank. Agitators in the chamber keep the mixture moving to prevent it from freezing until it leaves the dispenser and instantly turns to a slush with what the company describes as a “feathery, very light taste” with a carbonated “zing.” Company officials say they don’t know how the first Icee machine came to be--Rognlien had not acquired the company at that point.

Besides spurning diversification and advertising, ICEE also has ignored the food industry trend toward a wider range of product flavors. An Icee machine dispenses just two flavors and the older machines dispense just one. Flavors are rotated, the company said.

“We felt we had our hands full with Icee,” said Rognlien, explaining the company’s decision not to diversify. And the company now finds itself with two generations of Icee drinkers, despite never having launched a large advertising campaign because the corporate budget wouldn’t allow it.

Nevertheless, institutions apparently like ICEE’s growth prospects and purchased “more than half” of the 920,000 common shares that were offered in January. Company officials could not identify their institutional shareholders because the stock generally was purchased by brokers on behalf of their clients. Company management still controls about 55% of the outstanding common stock.

To finance its plans to expand and purchase more of its existing franchises, ICEE plans further stock offerings “as soon as possible,” Rognlien said.

Some Competition

ICEE’s only real national competition comes from 7-Eleven stores, which sell a similar slush drink called Slurpee. Southland Corp., 7-Eleven’s parent, paid royalties to ICEE for several years after it launched Slurpee with borrowed ICEE technology.

Despite the simplicity of its operations, ICEE sweats the details. Faced with complaints that a spilled Icee created a sloppy mess, Steele said the company “spent several years” developing a domed lid with a hole in the top into which the dispenser tube is fitted. And no matter where in the United States an Icee machine is, a serviceman is available seven days a week, said Rognlien.

ICEE also is dabbling with more natural fruit flavors for its product and plans to retain its sole sidelight, the 271 popcorn machines it operates in K mart stores.

The company has just 35 employees at its headquarters, where it overhauls many of its 1,800 Mexican-built Icee machines, and a national total of about 140 employees. Including franchises, there are about 7,500 Icee machines around the nation, each dispensing Icees ranging in size from 9 to 24 ounces and ranging in price from 45 cents to $1.