Feeding the Addiction
Froyo operators race for share, betting sector won’t melt away
Jeff and Trisha Fendt knew they had something special long before they opened the doors to their first Red Mango frozen yogurt shop. They’re part of the sector’s second surge, which they hope lasts.
Jeff and Trisha Fendt had been working night and day to get their Red Mango store up and running in the spring of 2011. Their location, at the base of a condo for seniors in downtown LaGrange, Illinois, was directly across from a Cold Stone Creamery. Yet nearly every day, people walked in for self-serve frozen yogurt.
Customers’ daily visits eased Jeff’s mind, the pessimist among the two, and he became enthusiastic once he saw the long line when the store first opened, on June 11. “It was a constant line for, I’d say, four months,” Jeff said. “The first day was scary. But once the customers started coming in, and business happened, I thought this was a good thing. We made the right move.”
Three months later they began looking for another location. And after opening a second unit, they looked for another. And then another. Today, 18 months into their lives as franchisees, this former plumber and his ex-social worker wife have four units, and they’re not stopping. “It was almost addictive,” Jeff said. “We would see so much success coming from that first store that we wanted more.”
But something else was at work, too, driving their need to build more units: Others were also addicted to the lure of a quick burst of low-cost frozen yogurt sales. Frozen yogurt chains had started popping up all over the area. The Fendts believed they had no choice but to build more. “We wanted to secure our spots, before they got taken,” Jeff said.
This is the frozen yogurt industry in a nutshell: a product surging, franchisees eager to cash in on the sales boom, fueling competition to secure market dominance. It’s like a modern- day gold rush. Dozens of chains have emerged in the past five years to get a piece of the action, and now several boast more than 200 locations, including Pinkberry, Red Mango, Menchie’s, Yogurtland, Orange Leaf and Cherry Berry.
The explosion has generated skepticism from observers who feel the fad will fizzle almost as quickly as it emerged, echoing similar franchise industry booms like the 30-minute fitness chain and, yes, the previous yogurt boom. Yet there are signs that this time is different.
Yogurt products started becoming popular in the 1970s, and frozen yogurt shops weren’t far behind — TCBY opened its first shop in Arkansas in 1981. By the late 1980s, frozen yogurt shops were everywhere. Eventually, restaurant brands replaced their soft-serve ice cream with frozen yogurt, and grocery stores began employing self-serve frozen yogurt dispensers.
Frozen yogurt production peaked at 152.1 million gallons in 1995, according to federal statistics. And then it began dropping as consumers shifted to the next new thing. Yogurt shops closed. Several went bankrupt. By 2004, frozen yogurt production was a third of what it had been less than a decade earlier.
In other words, the frozen yogurt boom was followed by an equally impressive meltdown.
And then in 2005 a young woman named Shelly Hwang and her business partner, Young Lee, opened up a small frozen yogurt shop in North Hollywood called Pinkberry. Business took off, generating huge lines of customers including people like TV talk-show host Ellen DeGeneres and Starbucks founder Howard Schultz.
Another boom was born. The next year, in 2006 in Fullerton, California, Phillip Chang started selling frozen yogurt in his Boba tea shop—he eventually allowed customers to serve their own yogurt, with toppings, and then renamed the shop Yogurtland in what is believed to be the first self-serve shop. The next year, Dan Kim, an investment banker, opened a Red Mango shop near UCLA.
“You have to give a lot of credit to the Pinkberry folks and Red Mango for bringing us tart yogurt and a flavor profile that was different, and doing it in a stylish way,” said Huntley Castner, executive vice president at Yogurtland. “They definitely deserve a lot of credit for that.”
By 2007 and 2008, frozen yogurt shops were popping up everywhere in Los Angeles and then in New York. “It was almost a blur,” Kim said. They’ve spread quickly everywhere else, including chains like TruBerry, Orange Leaf, 16 Handles, and others. According to Los Angeles-based market research firm IBISWorld, frozen yogurt shops now generate $1.6 billion in sales every year.
At first, the concepts were replicas of Pinkberry, with servers providing the yogurt, but most have since emerged as self-serve models like Yogurtland and Menchie’s. The self-serve shops are similar, with eight yogurt machines, each with two flavors, plus topping bars with candy, cereal, fresh fruit and nuts. The chains can go into small spaces, with flexible, low-cost models.
The shops cost little to open, with initial investments ranging from $330,000 to just less than $500,000 and an average of about $400,000. That, plus the simplicity of the business and the product, keeps luring more competitors—one estimate puts the number of frozen yogurt brands at more than 50. Most of them are self-serve shops, and Red Mango is now focusing on a self-serve model.
Many brands boast strong unit economics. According to their latest franchise disclosure documents, unit volumes average from $510,000 for Red Mango to $783,000 for Yogurtland. Yet actual unit volumes vary widely, from $200,000 a year to more than $1.3 million annually. And in many cases, they can employ just a few people. Labor costs at Orange Leaf, for instance, can run less than 20 percent.
“The unit-level economics allow our concept to work in a lot of different markets and different opportunities,” said Reese Travis, CEO of Oklahoma City-based Orange Leaf Frozen Yogurt. “We wouldn’t be growing the way we are if franchisees were not making money.”
Two years ago, Trisha Fendt’s brother Travis, a former ice cream shop owner, told his sister about the yogurt craze. Trisha, a longtime social worker, had just lost her job when the state of Illinois eliminated the gang delinquency intervention program she had run in Chicago.
Meanwhile, Jeff had been a union plumber, working on a children’s hospital downtown, when he lost his job. They had been looking for an opportunity to get into business for themselves, and Travis’s frozen yogurt idea seemed like a good one. “Rather than wait and collect unemployment and whine about it, Jeff and I thought hard about what we wanted to do,” Trisha said.
Unable to get a loan, they used their entire life savings, and relied on Jeff’s construction background to do some of the work themselves. They opened their first unit on June 4, 2011. It cost them about $450,000.
“We poured every dime we had saved into it,” Trisha said. “We took a roll of the dice. We weren’t wealthy. We didn’t have money, extra capital or anything. We’ve just always worked really hard.”
Frozen yogurt shops are aggressively selling franchises, pushing the simple business model and the low-cost investment. And the shops have their pick of operators, thanks to a high unemployment rate that typically fuels the franchise sector.
Consider: Red Mango, Menchie’s, Yogurtland and Orange Leaf all reported sales growth exceeding 42 percent last year. Orange Leaf alone grew by more than 200 percent, according to Technomic in Chicago. All those concepts are now as large or larger than the old standby, TCBY. Pinkberry boasted annual sales of $115 million last year.
Frozen yogurt makers are helping fuel the growth. Portland, Oregon-based YoCream now has a two-day workshop it calls “YoCream University.” The company’s website promises attendees can “learn everything you need to know to run a successful yogurt shop.”
“Distributors got smart and started enabling competition,” Kim said.
Will history repeat?
To many observers, the sheer number of concepts that have emerged, and the immense growth many are experiencing, cannot be sustained for long. At some point, and maybe not long from now, stores will close and sales will fall.
“Some are selling too quickly,” said Karen Spencer, a partner at Atlanta-based franchise consulting firm FranSystems. “They’re opening too many franchises too fast. We’ve proven historically that will fail. There will definitely be a shakeout.”
As it is, the concepts are taking business away from existing chains. Golden Spoon and TCBY, two holdovers from the ‘80s-era frozen yogurt boom, both saw sales declines last year, according to Technomic. And sales at 12 of 21 frozen dessert chains on Technomic’s Top 500 restaurant chains saw declines last year.
But this doesn’t necessarily mean the sector will go through another collapse of mid-1990s proportions.
During that era, Spencer noted, much of the frozen yogurt served was as an add-on menu item. “It was a fad,” she said. “Everybody jumped on the bandwagon. It was a menu extension.” This killed a lot of frozen yogurt concepts, and then as the fad faded, the menu items disappeared, too.
And there’s evidence that the mid-1990s collapse left many consumers wanting for frozen yogurt. While frozen yogurt consumption plunged after the mid-1990s, production of regular yogurt did not. In fact, it kept growing as retailers discovered new ways to get consumers to buy the product. Yogurt makers came out with drinkable yogurt, yogurt in tubes, Greek yogurt, yogurt with granola.
While frozen yogurt production fell by two-thirds from 1995 to 2004, non-frozen yogurt production actually grew by two-thirds. It’s still growing, according to federal statistics.
The challenge for the brands and their franchisees is whether they can stand out with so many other brands around.
“We’re not afraid to go into a market if it’s saturated,” Travis said. “Obviously, competition is a challenge, but we do navigate it.”
Yogurtland’s Castner takes issue with the idea that running a self-serve yogurt shop is simple, and he said the best brands will stand out operationally. “Actually implementing it on a day-to-day basis is difficult,” he said. “You have to keep your machines clean, rotate product in and out, serve high-quality fresh fruit. It’s much easier said than done.”
Kim said Red Mango is focused on innovative products, and he develops many of the chain’s flavors as it now manufactures its own products. The company recently has had flavors such as Nutella. Still, the company is hedging its bets. It’s testing coffee and hot chocolate and pastry cases in its New York and New Jersey locations.
Red Mango operators ‘get up and fight’ every day
For Jeff and Trisha Fendt, the draw was simple. “Everybody has $5 for Red Mango yogurt,” Jeff said. “It’s doable. They’re going to get that treat as a reward for themselves. This is almost recession-proof.” The one-time doubter is now a full-fledged believer.
They also say the self-serve is a major draw. “People love to control their portions,” Jeff said. “That is the complete seller. People tend to put 20 to 30 percent more product into their cup. It’s two-fold: Not only is that a selling point, but it sells more product.”
Red Mango mulit-unit franchisees Jeff and Trisha Fendt, with founder Dan Kim in the middle.
They’ve learned to staff by “trial and error,” seeking to cut staff hours during down times and increase them during busy times and by getting to know their workers’ abilities. The pair agree running a yogurt shop is easier said than done. It’s particularly difficult to staff correctly, given the singular nature of the product and its extreme seasonality, especially in a Midwestern location like Chicago. Some hours, they said, can bring in $5 in revenue. Others, $1,000.
“The day-to-day operations is not easy,” Jeff said. “There’s always a problem that arises every minute, every week. We tended at the beginning to get overwhelmed with our problems. Then we decided to tackle them one at a time. Every day we’d get up and we fight, but you have to, to be in business.”