The great froyo gold rush
Are frozen yogurt entrepreneurs cashing in on the next big thing — or betting their fortunes on a fad?
JUST AFTER 7 O’CLOCK on a March evening, the lights go down in a function room at Maggiano’s Little Italy in the Back Bay. As a video flickers to life on a projection screen, an upbeat female voice begins narrating. “If you’re like most people, you’ve probably dreamed of what it would be like to be your own boss, make your own schedule, call the shots, and reap the benefits of your hard work,” she says. As the audience picks at stuffed mushrooms and fried zucchini, she chirps on: “There’s never been a better time to take control of your future.”
In Hollywood’s most famous moment of career advising, Mr. McGuire pulls Benjamin Braddock outside by the pool to deliver just one word: plastics. The opportunity being described in this restaurant basement will require four: self-serve frozen yogurt.
The host of tonight’s franchising pitch is TCBY, which opened its first frozen yogurt shop in Arkansas in 1981. Although the chain would introduce the rest of the country to froyo, it had actually been in invented in Massachusetts a decade earlier, when an employee of the H.P. Hood dairy company sent regular yogurt through a soft-serve ice cream machine. A Harvard Square eatery called the Spa is said to have served the world’s first cone of “frogurt” on February 3, 1971.
Frozen yogurt went mainstream during the health craze of the ’80s, only to fizzle over the next two decades — a period in which TCBY franchisees were forced to close some two-thirds of the chain’s 1,500 stores. Now, however, a resurgence is upon us and TCBY is rebounding with a new formula: self-serve stores where customers can mix and match flavors, pick from dozens of toppings, and pay by the ounce. Since 2010, TCBY has opened 124 self-serve stores around the country — it expects to have about 100 more in development by year’s end — but not one in Massachusetts.
That’s why there’s a map at the front of the room, with circles highlighting potential locations all over Boston and the suburbs. There’s now just one TCBY in the state, an old-model counter-service store in Norwell, but the chain aims to open 25 or so new shops in the next three to five years. For an upfront investment starting at about $292,000, the 40 or so entrepreneurs gathered here at Maggiano’s are told they can put themselves on the path to riches, one cup of White Chocolate Macadamia at a time.
American consumers have always seemed particularly susceptible to food fads. For decades these enthusiasms have shown up in home kitchens (as evidenced by your dusty fondue pot) and on restaurant menus (where lobster mac and cheese has given way to lamb belly). Lately the most visible evidence of food faddism has played out in urban shopping districts and suburban strip malls, which are being flooded by stores dedicated to a single type of food. Not long ago, Anna’s Taqueria dominated the local burrito market. Today at an intersection not far from my home, Chipotle, Moe’s Southwest Grill, and Taco Bell somehow coexist within a few hundred yards. Meanwhile, Boston has at least a half-dozen competing cupcake stores and, to judge from the habits of the downtown lunch crowd, nowadays virtually any food can attract a cult following, so long as it’s sold through the window of a truck.
Frozen yogurt just happens to be the craze du jour. Los Angeles-based Pinkberry opened its first Massachusetts store in 2010 and now has 11. The website of Orange Leaf, a chain from Oklahoma, lists 37 locations in this state as either already open or “coming soon.” During the second half of 2012, two competing self-serve froyo stores, iYo and Orange Leaf, opened within several hundred feet of each other in Somerville’s Davis Square — while a third, another Pinkberry, is slated to open on the same block in the fall. “The Boston area is way beyond froyo overload,” the food blog Eater declared in April, and that was before the fancy new Walgreens in Downtown Crossing started selling it.
Yet more stores open. That’s partly because, in the strange economics of retail food, new competitors don’t necessarily eat into one another’s profits. It’s also because of the overconfidence that’s a necessary personality trait for entrepreneurs: Most people opening froyo stores will agree that some stores will fail while simultaneously insisting theirs will succeed.
“Is Pinkberry competition? Sure they are. Is iYo? Sure they are,” says Dave Pierre, co-owner of the Orange Leaf in hotly contested Davis Square. “But we’re unique enough that we can survive. I’m not going anywhere. I will outperform my competitors any day or night.”
TO UNDERSTAND the life cycle of food fads, consider the humble cupcake. Moms have baked them for decades, but they blipped into the cultural consciousness in a new way in 2000. It happened during an episode of Sex and the City, when Carrie dished to Miranda about her latest crush while the two ate cupcakes outside Manhattan’s Magnolia Bakery. Cupcakes were suddenly hot — and it happened in much the same way paparazzi shots of a Kardashian can send Uggs sales soaring and a Dr. Oz endorsement can cause a run on mangosteens. Before too long, Magnolia was turning up on Saturday Night Live and reality TV and being joined by competitors such as Georgetown Cupcake and Crumbs (both now have Boston-area outlets). At weddings, cupcakes seem to have become as established a part of the festivities as the white dress and the bouquet toss.
The first time that Dave LaLiberte really understood the power of cupcakes was at a friend’s wedding in New Hampshire in the spring of 2009. The longtime Needham resident, former head trader of Fidelity’s Magellan Fund, had retired from Jeff Vinik’s hedge fund at age 45. But four years on, he was already bored. He worried his layabout ways might prevent his young children from developing a work ethic of their own.
LaLiberte had been searching for a new business to run for about a year —he just wasn’t sure exactly what kind until he saw the cupcake tower at the wedding. “It really struck me that everybody was talking about the cupcakes,” he recalls. “It was then that I was sure that cupcakes were the way I was going to go.”
LaLiberte opened Treat Cupcake Bar in downtown Needham on July 4, 2010. While Treat offers varieties found elsewhere (with names such as Creamsicle and Peanut Butter Overload), it also features a build-your-own cupcake bar where kids can choose a flavor, an icing, and various candy toppings. The store has grossed around $500,000 in each of its first three years.
On April 5, LaLiberte opened his second location in The Street, the renamed Chestnut Hill Shopping Center where the first Boston-area Shake Shack had just debuted to great fanfare. But twelve days later, LaLiberte awoke to a dire headline in The Wall Street Journal: “The gourmet-cupcake market is crashing.” The article cited the falling stock price of publicly traded Crumbs, whose shares had dropped from $13 in mid-2011 to less than $2, and quoted independent store owners who said sales are falling. LaLiberte’s timing couldn’t have seemed worse.
Yet speaking to me a few weeks later, LaLiberte remains unfazed. “Cupcakes aren’t a fad,” he says resolutely before launching into a litany of the treat’s virtues. “They’ve been around [forever]. You had them at your birthday party. . . . This is a better way to give you a small piece of individual cake that’s to your liking.” He agrees the market is becoming saturated in Boston, but points out that he’s working in the suburbs.
Indeed, the more LaLiberte explains his business strategy, the more it makes sense. He tries to make each of his locations the only cupcake store for at least 4 or 5 miles, limiting proximate competition the way chains like McDonald’s sometimes do. And, like many Dunkin’ Donuts, Treat supplies its outlets from a centralized kitchen. Leveraging LaLiberte’s investment in the Needham bakery, Treat uses a customized van capable of carrying 1,000 cupcakes to haul products to its Chestnut Hill shop and its kiosk in the Natick Mall. In its first three weeks, the Chestnut Hill store alone grossed $2,000 a day.
So far Treat is running at break-even, but LaLiberte says it would be profitable if he managed day-to-day operations himself; instead, he hired two well-paid managers to run it, allowing him flexibility to spend more time with his family (he wasn’t that bored). If sales at his new locations increase, those fixed labor costs as a percentage of sales should drop, creating profits. He’s also finding new ways to boost sales. Lately he’s expanded his gluten-free offerings, and his bakers have re-created Treat’s whimsical cupcake flavors in larger cakes targeted to customers planning weddings and bar mitzvahs. He’ll continue to choose future locations carefully.
“There’s something about cupcakes,” he says. “I don’t see it as a fad at all. And hopefully I’m right.”
THERE IS NO DISAGREEMENT about the basic factors driving the froyo market. The serve-yourself aspect gives customers control over portions and price — eat a lot, spend a lot; eat a little, spend the same. The customizable nature of the flavors and toppings lets people express creativity and get exactly what they want. Froyo seems abundantly healthy, at least without the candy, and some of the chains have tried to make it even healthier: TCBY, for instance, unveiled the first high-protein Greek frozen yogurt in 2012, and a high-fiber version called Super Fro-Yo a year earlier.
Prutha Patel, a 21-year-old Boston University graduate who oversees marketing for the five Orange Leaf stores her family owns in Rhode Island and Massachusetts, says froyo is growing because of its versatility: A customer can go into the store and choose a healthy option by topping it with fruit, or a decadent one by loading it up with candy and chocolate sauce. “I see people coming in two or three times a week,” Patel says. “It’s not seen as this kind of fattening dessert — it can be as unhealthy or as healthy as you like.”
Broader economic trends are driving froyo forward, too. Most of the people at the TCBY franchising pitch appear to be in their 40s and 50s. Some are established entrepreneurs, but at least a few are laid-off corporate types in search of their next opportunity. That’s fairly typical. Buying a franchise “is almost like buying a job,” says Chris Tripoli, president of A’la Carte Foodservice Consulting Group in Houston, so it makes sense that baby boomers who’ve suffered through a recession might look toward franchising in larger than usual numbers. One expert compares it to the way applications to law schools and MBA programs go up during recessions: It’s not that more people necessarily want to go to grad school, but that grad school becomes more appealing as other options dwindle.
The recession has also driven down real estate costs, a key expense for retailers. While locations on froyo-dense Newbury Street and in Davis Square remain costly, commercial real estate in many suburbs is widely available. “When the rent is cheaper, people play around more [with concepts], so you’ll see different kinds of businesses entering the market,” says Amanda Kludt, editorial director of Eater, a network of blogs covering the food scene in Boston and 21 other US cities. Froyo stores often require only about 1,200 square feet — about half the size of a Qdoba — which reduces costs and increases flexibility.
Inside the store, the microeconomics of yogurt sound compelling. Compared with opening a traditional restaurant franchise, froyo seems simple: There’s no cooking, for one. And TCBY franchisees pay around 4.5 cents per ounce for yogurt, which they can resell at 40 to 50 cents per ounce. “That’s a high-margin product, and it’s what allows our yogurt stores to be highly profitable,” says Brooks Speirs, the main TCBY speaker at Maggiano’s (he’s since moved to Moe’s Southwest Grill). The self-serve concept also drives down labor costs, typically one of the biggest expenses facing food sellers. “At 2 p.m., you can have one person running your business,” Speirs says. “Go into a Subway at 2 p.m. and they have four employees there, whether there are any customers or not.” While the equipment to make frozen yogurt is expensive — machines cost independent shops approximately $12,000 each, and many have five or six of them — the overall capital expenses are lower than many types of businesses.
What about competition? For a time at least, it may hurt these businesses less than you’d think. For franchises, shops in the same region can pool advertising dollars, cooperate on promotions, and work together to buy supplies more cheaply. And many people don’t appreciate the benefits even rivals can gain from locating near one another, says Jonah Berger, an assistant professor of marketing at the Wharton School and the author of Contagious: Why Things Catch On. Consider the Italian restaurants in the North End or the auto dealerships on Route 1 or the beauty salons on Newbury Street. “There are advantages to having people go to one place,” he says.
The more people see froyo stores, the more they’re likely to think about froyo, which could cause the overall segment to grow (and perhaps steal share from other impulse-buy snacks, such as, say, Cinnabons). “The situation reminds me of coffee shops,” says Raphael Thomadsen, an assistant professor of marketing at UCLA. “There has been some fear that Starbucks would crowd out local coffee shops. However, there is some evidence that in some cases the presence of a Starbucks has actually helped the local coffee shops by expanding demand for coffee.”
Yet that phenomenon only lasts up to a point. The counter-service yogurt chain BerryLine opened in Boston back in September 2007, making it perhaps the first shop to herald the second wave of froyo popularity. The only real competitor at the time was an old TCBY in Belmont, and that eventually closed. But BerryLine, a local operation, now faces alternatives at all three of its locations—in Harvard Square, Porter Square, and Fenway—and shuttered a fourth on particularly froyo-dense Newbury Street earlier in 2013. It just never did much more than break-even business, says BerryLine co-owner Matthew Wallace.
“I wouldn’t be surprised if you see a big peak in the frozen yogurt market here in the next year or two,” Wallace says. “There are going to be a bunch of closures.”
Then again, that shuttered BerryLine shop on Newbury? Wallace sold it contents to Chicago’s Forever Yogurt chain, which is looking to open in the same location.
ON A MONDAY AFTERNOON a week after the Maggiano’s event, Bryan Poisson stands behind the cash register at iYo, an independent froyo cafe he and his partner opened in Davis Square in August 2012. A 44-year-old architect, Poisson designed the space to include lots of exposed brick and a large back room he opens to community nonprofits. “We didn’t want people to come into this glaring, pink, plasticky kiddie place,” he says. “We wanted something more sophisticated, some place adults could come after dinner.”
The froyo business isn’t as carefree as some expect, Poisson says. The machines require frequent and intensive cleaning, as well as monthly testing on behalf of the local health department. And to serve customers from 8 a.m. to 11 p.m., he now employs a staff of 18 people.
But a few weeks before opening his shop, Poisson was doing paperwork at City Hall when he saw that Orange Leaf had filed an application for a location just down the block. He had expected competition, but he hadn’t expected it to arrive so quickly. After looking over Orange Leaf’s paperwork, he pointed out an inconsistency in the proposed address to Somerville planners, who required Orange Leaf to correct the error.
“I didn’t really know about iYo prior to that,” says Dave Pierre, who co-owns four Orange Leaf franchises. Pierre opened his shop in October, about a month later than planned.
Despite the initial welcome, Pierre thinks there’s room enough in town for both shops. “As far as I know, we’re very different business models,” he says. “iYo does coffee and waffles and bagels and muffins — their frozen yogurt, to me, it’s an afterthought. I don’t look at them as a direct competitor.”
Poisson doesn’t seem too concerned, either, joking about how all the national chains — Pinkberry, Red Mango, Orange Leaf — seem to have a name based on a formula: a color, then a plant. But he does want everyone to play on a level field. That was the issue with Orange Leaf’s address error, he says. He believes each competitor should have to correctly follow every step in the process.
So when Pinkberry announced in the fall of 2012 that it also wanted to come to Davis Square, Poisson was in the audience at the public meeting. There, he argued that Somerville’s zoning rules clearly state that a food establishment should only receive a special permit if there’s a “need” for it in the community, and it’s difficult to see why they would need a third froyo place in one-10th of a mile.
Pinkberry withdrew its application ahead of an official decision and set to work drumming up support. After more than 400 Somerville residents signed a petition, Pinkberry reappeared before the zoning board in April — at a meeting Poisson says he didn’t hear about until the last minute — and got a unanimous OK. “We enjoy responding to the request Somerville residents have made for us to enter and be an active part of their local community,” a Pinkberry spokesperson explains in an e-mail that also touts Pinkberry’s distinctive qualities and the company’s job creation record.
Pinkberry doesn’t expect its new location to open until the fall, but Pierre says he has already spoken to the man in charge of it. They agreed that they, too, have different business models — Pinkberry is counter-service, has fewer flavors, and, as Pierre puts it, “they are double the price of our yogurt.”
Still, Pierre isn’t sure Pinkberry will make it in Davis. “We’ll all do well in the summer,” he says. “It’s the winter — who can survive the winter? We just went through our first winter, and it’s brutal. That’s where it’s going to get interesting.”
Poisson, for his part, remains skeptical of the idea that more frozen yogurt stores will simply lead people to eat more frozen yogurt — demand isn’t limitless. “That’s why we are who we are,” he says. The menu at iYo includes coffee and espresso, soup and sandwiches, pastries and other desserts. By selling a broader product line, Poisson says, “we’ve designed ourselves to be insulated from the fad.” The frozen yogurt machines and the expansive toppings bars now take up a big chunk of floor space. But if froyo once again goes from hot to not, his shop should be flexible enough to find another niche.
And make no mistake, there are new things coming. “These impulse [snack] segments move much more quickly than other segments,” says Tripoli, the food-service consultant. That’s partly because people are more willing to make a risky $4 purchase between meals than drop $100 on a wildly different dinner spot. And, according to Kludt, the Eater editorial director, there’s already a clear contender to replace froyo: “A lot of our cities are writing about hip new doughnut places that serve flavors like bacon caramel,” she says.
Come to think of it, that sounds a lot like Union Square Donuts, which opened in Somerville a few months ago and has already moved to a larger storefront. Its flavors include Maple Bacon and Chocolate Chipotle. Given Americans’ shifting tastes, it seems like a concept that could play coast to coast. At least for a while.
Daniel McGinn is a senior editor at Harvard Business Review. Send comments to firstname.lastname@example.org.