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TAGeX Brands in the News

 

A Bull Market in Frozen Yogurt Shops

September 19, 2012

John Hamburg

 

Was it serendipity I stumbled upon the new frozen yogurt store in my neighborhood the very first day of its commercial existence?

 

Surely, it was a bad omen for the young owner to invite me into his premises as the inaugural customer. When the “team” photographed me and told me I would be recognized on their Facebook page as Numero Uno, they couldn’t possibly have known that I was the chief flame thrower of an often-crotchety restaurant finance newsletter that regularly questions the financial efficacy of these concepts.

 

As a consumer, I admit to liking these self-serve frozen yogurt places. My order of tart vanilla frozen yogurt with strawberries was the first official monetary transaction at this local establishment. (Healthy!) I liked the concept so much I decided an adventurous mix of banana and coconut yogurt with Reese’s pieces would be next. (Not so healthy!)

 

What to make of these self-serve yogurt enterprises multiplying across the land? What a simple little business. I did the math in my head: High margin. Low labor. Small space. Easy system to execute. It sounds intriguing. Plus, the kids at my yogurt shop were so nice and energetic. I want to buy a franchise right now!

 

Then, the 1980’s reality show known as “The Plague That Hit Frozen Yogurt” hit me like a ton of bricks.

 

Suddenly, I wanted to alert this young entrepreneur with stories about the last frozen yogurt expansion that ended so badly. Or, to warn him that McDonald’s is probably testing self-serve frozen yogurt somewhere in western North Dakota with plans to unleash a yogurt blitzkrieg by spring.

 

I didn’t have it in me to spoil the opening excitement by telling these sweet souls that they were simply the first wave of foot soldiers in a Normandy-like invasion of self-serve yogurt places, and that soon there would be competitors across the street, down the street, and right next door.

 

Instead, I remained silent. On that beautiful summer day in Minnesota, I spooned the yogurt into my mouth and smirked for the Facebook photo like a modern-day Judas, knowing full well what lies ahead for these other fro-yo operators: I’d seen it all play out 25 years ago.

 

A cautionary tale

The mid-1980s was the last boom period for frozen yogurt and TCBY Enterprises was the poster child. The first TCBY was founded in 1981 in Little Rock by Frank Hickingbothom, a former schoolteacher and insurance agent. His son Herren Hickingbothom, just out of college, became the first general manager and then, later, president.

 

The Hickingbothoms discovered the power of franchising and quickly built the chain selling licenses to others. By 1984, TCBY had over 100 yogurt stores and went public. (You could do that in those days.) BY 1990, the company owned and franchised over 1,800 locations and its system sales reaches $344 million. Its star-studded board of directors included Hilary Rodham Clinton, a noted Little Rock attorney and Arkansas governor’s wife, and Thomas “Mack” McClarty, an energy CEO who would later go on to become President Clinton’s first chief of staff.

 

There were other frozen yogurt concepts that expanded rapidly during the 1980s. Entrepreneurs Bill and Julie Brice grew the I Can’t Believe It’s Yogurt chain to over 1,500 stores. And former body-builder Heidi Miller started Heidi’s Frozen Yogurt, which reached 120 stores in seven states.

 

By 1991, yogurt shops stalled as several national chains, including McDonald’s, added frozen yogurt to their menus. McDonald’s entrée was the $.39 yogurt cone, which was considerably less expensive than those at any yogurt place. Plus, grocery stores such as Safeway and Kroger added as many as 5,000 frozen yogurt kiosks.

 

Average store sales at TCBY, which peaked at $232,000 per store in 1989, dropped to $190,000 in 1991, a decrease of 18 percent. TBCY expanded its product offering to offset the sales decline. It licensed Mrs. Field’s cookies and began positioning itself as a treat center. It did little to stem the sales decline.

 

In addition to the explosion of frozen yogurt outlets on every street corner, Craig Weichmann, an investment banker and former restaurant securities analyst, remembers many of TCBY’s problems were self-inflicted.

 

“TCBY never concerned themselves with franchisee profitability. They required franchisees to buy the yogurt mix from a TCBY-owned plant in Texas and that meant expensive shipping costs to get the product to the franchisees. TCBY was more concerned about the yogurt plant’s profitability than the franchisee’s profits,” said Weichmann.

 

The main difference between today’s frozen yogurt concepts and the 1980’s format is self-service and more tart flavors. Concepts such as Menchies, Yogurtland, Red Mango, and others, allow customers to serve up their own yogurt from multiple dispensing machines and top them off with fruits and treats. The self-serve format generally results in a higher check average, higher store volumes and built in cost control by virtue of charging by the ounce. The type of frozen yogurt has also changed to a more tart product, popularized by the “Greek-style” yogurt which contains less sugar. The new chains also promote low-fat, all-natural and gluten-free products.

 

Menchies now has over 200 stores and predicts 300 by the end of 2013. Yogurtland, with almost 200 stores, too, is growing rapidly and advertises a $780,000 average unit volume. Red Mango is close to 200 locations, as well. Pinkberry, although not a self-serve operation, has approximately 150 stores in the U.S. and an additional 63 stores throughout South America, Europe, the Middle East, and Asia. It’s even drawn investment dollars from Starbuck’s founder, Howard Schultz. In addition, there are hundreds of other independent and franchised yogurt concepts either open, or in development across the country. Even TCBY, a shadow of its former self, still has 353 outlets and recently jumped on the self-serve bandwagon, advertising the new format to prospective franchisees on satellite radio.

 

Franchising is the model for frozen yogurt, and it can be a profitable strategy, especially for the franchisors. Franchise fees range from $30,000 to $45,000 per store and royalties are around 5 percent of sales. For franchisees, there is a lot more risk. Buildout and equipment costs can run to $400,000 per location, and the sites that can deliver big volumes may cost operates $30 to $50 per square foot annually, or higher. High-traffic sites are imperative in a frozen yogurt operation.

 

I’m doubtful the latest frozen yogurt boom will turn out any differently than the last one. Why so skeptical?

 

First of all, frozen yogurt is a product, not a concept. It can easily be added to menus at McDonald’s, Starbucks, Burger King, Safeway, 7-11 or any other restaurant chain or grocery store. And don’t think it won’t be added if the segment really heats up.

 

Neal Sherman, CEO of the Advantage Group, a restaurant equipment remanufacturer in New York, remembers how easily grocery stores added frozen yogurt kiosks when the product was hot, and how quickly they pulled them out when the craze ended.  “The genesis of our business in the late 1980s was liquidating thousands of frozen yogurt machines,” said Sherman.

 

Second, there is nothing to differentiate frozen yogurt concepts from one another. Most of the current generation of shops are cut from the same style of pink and light green color schemes, Euro music, shiny new Taylor machines and candy and fruit bars that contain the same toppings.

 

Third, the seasonality of frozen yogurt has not changed one iota with the recent advent of global warming. It still gets cold in many parts of the U.S. and people cut back on frozen treats during the winter. Just ask Dairy Queen, which has spent the better part of a decade converting its stores to the Grill & Chill concept, a year-round food and treats operation.

 

And finally, the biggest hurdle against the new frozen yogurt concepts is what restaurant experts refer to as the importance of a concept being at the “center of the plate”. Hamburgers, steaks, sandwiches, pizza, pasta and burritos, so-called center-of-the-plate items, are eaten more frequently by consumers than products from treat-based businesses. That’s a fact.

 

“You can only drive revenues so far when you aren’t center of the plate,” says Weichmann.

Publisher & Editor of the acclaimed Restaurant Finance Monitor John Hamburger believes Burger King's demise in the soft-serve market should prompt a call to TAGeX Brands to get rid of equipment.