Segment Spotlight, June 2009; Frozen Yogurt, Take Two

With tangy flavors and an emphasis on healthy living, the frozen yogurt segment has reemerged as a category to watch.

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Fans create websites dedicated to the frozen treat. Aficionados "tweet" excitedly on the social media site Twitter when operators announce new flavors. Characters flaunt spoonfuls of it on trend-conscious television shows such as Gossip Girl. So what's with all the renewed fuss about frozen yogurt?

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This time around, it's tangier, perhaps healthier, and served in slick, minimalist stores with designer furniture and natural lighting. In the last few years, particularly in Southern California and New York City, such changes have reignited interest in this quick-service category.

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Of course, frozen yogurt is hardly new. The difference during this resurgence is how companies, particularly segment leaders Pinkberry and Red Mango, seek to build an experience around frozen yogurt similar to what Starbucks created in the coffee segment. "We're a radically different environment for a QSR," explains Todd Putman, vice president of marketing for Los Angeles-based Pinkberry. "We know for a fact that it's a distinctive experience."

At Pinkberry, the distinction comes down to the details, from the pebble-tile flooring ("reminiscent of a beach," Putman says), to the Phillipe Starck-designed chairs and the flattering lighting. "There are just a million positive design cues that are linked directly to our brand," Putman says.

Another very compelling reason for frozen yogurt's current popularity wave: Its healthful profile. By containing live active cultures typically found in refrigerated yogurt, tart frozen yogurt may also be a source for pre- and probiotics, the "good" bacteria said to aid digestion, among other benefits. Some frozen yogurt brands, such as Red Mango, carry a seal of approval from the National Yogurt Association that says its product contains "live, active cultures."

"People who eat it every day know that it's a product with positive health benefits," says Dan Kim, president and CEO of Red Mango. "It's part of a healthy lifestyle."

A banner of health can attract consumers, particularly women. According to FE&S sister publication Restaurants & Institutions' 2009 New American Diner Study, 33.1 percent of consumers say the term "low-fat" makes them more likely to order a menu item.

Women in particular say they gravitate toward the terms "low-fat" and "all natural," according to the study. So perhaps it's no surprise that 70 percent of Red Mango's customers are women, the majority of whom are between 18 and 28 years old.

So far, this formula – offering a high-quality consumer experience that targets a young, health-conscious audience – continues to attract investors. Venture capital firm Maveron, co-founded by Starbucks CEO Howard Schultz, invested $27.5 million in Pinkberry in 2007. The company secured an additional $15 million from an undisclosed source this March.

Meanwhile, Red Mango received $12 million last August from investment firm CIC partners and John Antioco, the former CEO of Taco Bell. The yogurt chain, which moved headquarters from Sherman Oaks, Calif., to Dallas this year, grossed $12 million in 2008.

Even before the brands began expanding beyond Los Angeles, the popularity of Pinkberry and Red Mango spurred competition. Entrepreneurs beyond California have been quick to create new brands, giving rise to Freshberry and Berry Chill in the Midwest, U-Swirl in Las Vegas, and That Cool Cafe in south Florida, among others.

Frozen yogurt isn't a recession-proof treat, as is evidenced by the fact that several shops closed earlier this year in southern California, including two Red Mango locations. Still, some industry watchers remain cautious about the segment's potential to succeed this time around due to these brands and their product offerings.

"You're going to see growth rates of about 5 percent to 10 percent," anticipates Darren Tristano, executive vice president for Chicago-based market research consultancy Technomic. "A big part of that will be through unit expansions." Some growth will be at the expense of other frozen dessert concepts such as Cold Stone, he predicts.

Acceptance of this tart style of yogurt isn't for everyone. Yet those who like it tend to get hooked. "We have seen an increase in frequency of visitors in a single unit over time," explains Red Mango's Kim.

"If you've tried the yogurt, you either like it or you don't," Tristano says. "If you like it, you might crave it, not unlike how people respond to Starbucks."

History Lessons

Chains such as Salt Lake City-based TCBY led the first wave of frozen yogurt growth. The attraction back then was sweetness: A low-fat frozen product that lacked the traditional sour tang of yogurt. And its popularity was significant: TCBY grew to 1,200 stores in 7 years. In contrast, by the end of April, Pinkberry had 73 stores and Red Mango 50.

But earlier frozen yogurt concepts suffered from competition as ice cream manufacturers found ways to produce creamy low-fat options. Ubiquity and lack of innovation also hurt these early concepts. When soft-serve yogurt became available in convenience stores and college cafeterias, for example, consumers didn't have as many compelling reasons to visit TCBY locations.

While access to frozen yogurt expanded, the products themselves grew stale. "Everyone stuck with chocolate and vanilla, and that's how the appeal was lost," says Executive Chef J.D. Webster, who runs the Sodexo foodservice accounts for several Midwestern hospitals, including Mercy Hospital in Independence, Kan.

As a result, in the last decade per-capita consumption of frozen yogurt dropped considerably, from 3.4 pounds in 1995 to 1.3 pounds in 2005, according to the USDA Economic Research Service. Ice cream remains the big leader in the category. In 2006, for example, 60 percent of the $23 billion frozen dessert market came from ice-cream sales. Only 4 percent came from frozen yogurt sales. By 2008, TCBY had trimmed its unit count to 884.

While the rest of the nation experienced a frozen-yogurt slump of sorts, in Los Angeles the competition was heating up. In 2005, Pinkberry opened its first store in West Hollywood, Calif., with two flavors: plain and green tea. Red Mango, which originated in South Korea and also offered plain and green tea flavors, opened a Los Angeles location in 2007.

Before long, similar concepts with same-sounding names and products were sprouting up throughout the region. By February of this year, the Los Angeles Business Journal reported that there were 250 individual frozen-yogurt shops in Los Angeles County alone.

As far as competition goes, however, the more may be the merrier. A critical mass can attract attention to a segment better than a single store. "It has become part of the culture in LA, says Masako Kawashima, owner of three-unit Sno:la, based in Beverly Hills, Calif. "It's something that when people think about dessert, they think about frozen yogurt."

Operational Advantages

One reason the segment contains so many stores is the simplicity of the operating model.

"It's a relatively easy business to get into," Tristano says. "It's a small store. The equipment is not a barrier to entry. The ability to franchise a smaller platform store is much easier than franchising a Burger King."

In addition, the return on investment can be attractive. A Red Mango franchisee invests, on average, between $200,000-to -400,000 for a single unit. Average unit volume can vary from $500,000 to $800,000 a store, with the busiest locations reaching $1 million in sales. But labor costs are low. A unit can run with only one or two employees per shift.

Frozen yogurt's low-fat, healthful profile was the initial draw for Sno:la's Kawashima, a Los Angeles-based concert promoter who opened her first store in 2007. Lack of a foodservice background wasn't a deterrent, either. Sno:la was the product of Kawashima's home experiments with a small soft-serve machine. When she became more serious about opening her own store, she started working with a food-product developer to achieve the consistency and the flavor she was after.

Today, her stores, including the additional locations in Santa Monica, Calif., and Kyoto, Japan, have three soft-serve machines offering six flavors such as mango, pomegranate, espresso, sour cherry and plain. Toppings are extensive, too, with 35 options ranging from toasted almonds to nata de coco, a chewy jelly-like sweet made from coconut water.

"Operating a Sno:la store doesn't involve any kind of cooking," she says. Most of the kitchen prep work involves mixing the yogurt base, which sits 10 minutes before being frozen, and cutting up fresh fruit.

Apart from the soft-serve machines, Kawashima also uses drop-in cold food storage units for the fruit toppings and sauces, a water filter in order to offer guests filtered water, and a water heater for preparing tea or French-press coffee. For Sno:la's packaging needs, she buys biodegradable cups and spoons to complement the earthy, healthy feel of her stores.

A streamlined design represents an integral part of the plan. "When you walk in, there's a natural feeling in the room," Kawashima explains. "The whole concept is based on serving something that is healthy, simple and organic."

So is a return on investment. Kawashima is aiming for a 15 percent to 20 percent return on her stores.

"It's appealing economics," concedes Technomic's Tristano. "It's a scaleable business model that requires minimal investment."

The economics can be especially appealing when foodservice operators dust off older soft-serve machines and put them back to work.

Sodexo's J.D. Webster found success by reviving little-used soft-serve machines at the hospital foodservice accounts he oversees by merely cleaning them with sanitizer.

"The machines don't change that much, but what's beneficial about using older machines is the cost savings," Webster says. (A new machine can cost around $16,000.)

He worked with a vendor on offering refreshed flavor profiles, from plain frozen yogurt to sweet, flavored varieties such as bananas foster. The vendor also provided new side paneling dress up older machines. At Mercy Hospital in Independence, Kan., the self-service frozen-yogurt machine is the focal point of the dessert bar.

"Before we started working with frozen yogurt [with the vendor], we went through a gallon of frozen yogurt each week. Now we go through 10 gallons a week and we rotate the flavors every five days," Webster says.

What's Next?

Growth seems likely for the leading chains in the segment. To hit its goal of opening 40 more stores by the end of the year, Red Mango is looking to expand aggressively in Texas and the Midwest. Pinkberry, whose stores are currently clustered around Southern California and New York City, has global expansion aspirations.

Meanwhile, older frozen dessert companies haven't been ignoring the growing popularity of tart-tasting yogurt. Baskin Robbins now

emphasizes that its frozen yogurt contains live active cultures. So does TCBY, which also offers a line of "Beriyo" yogurt smoothies.

Despite the economic slump, the relatively low entrance barrier, and the risk of being a fad that fizzles out, yogurt pros are optimistic of the chances of the segment to succeed for the long term.

"I don't believe it's a trend this time because the drivers that are building momentum are sustainable drivers," Red Mango CEO Kim says. "Those drivers are health, great taste and a sense of style."

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