The Return of Frozen Yogurt

Why fro-yo’s making a comeback 

ALEX SHNAIDER WASN’T LOOKING FOR NEW business opportunities when he first strolled into a Menchie’s. It was last spring and the Toronto tycoon was busy enough juggling the varied dealings of his multinational holding company, The Midland Group, while also fending off a legal challenge from disgruntled investors in the Trump Tower, the 65-storey hotel/condo Shnaider started developing in 2004. It was Shnaider’s first foray into luxury real-estate, and with it his first step into the limelight. Until partnering with Donald Trump on one of the swankiest real-estate deals in the country, Shnaider was a largely unknown, yet savvy young investor who quietly made his fortune in high-stakes commodities trading in post-Soviet republics. He flipped cheap steel-mills and factories in the Ukraine, bought the national electricity distributor in Armenia, and made billions by age 36. Today, the 44-year-old Russian-born entrepreneur is known, in the way billionaires are, for his indulgences—the cars, the yacht, the private jet—for buying a Formula One racing franchise, for his longstanding reign as a steel magnate and maybe the next king of frozen yogurt.

Shnaider’s young daughters were the ones who introduced him to Menchie’s, the trendy Californian self-serve frozen yogurt chain currently stamping its way across Canada. He liked the concept and bouncy vibe well enough, but didn’t give it much thought. Yet, the name kept popping up in conversation—first with a friend who asked Shnaider’s opinion on the value of a Menchie’s franchise, then over lunch with another friend who, along with a team of co-investors, was looking to sell the chain’s Canadian master franchisor rights.

His interest piqued, Shnaider did some research and met with the owners of Yogurtworld Franchising Corp. “I started to see this is a bigger opportunity,” he explains. “Yogurt is a multibillion-dollar industry that has been growing by significant amounts every year for the past few years.” And projections for the future made it all the more tempting.

Frozen yogurt is still a mere sliver of the frozen-treats category, but experts predict significant growth as the product rides the coattails of traditional yogurt, which is experiencing dizzying popularity. According to market-research firm NPD Group, Canadian per capita consumption of yogurt more than doubled over the past decade, with the product implanted in all meal categories—snacks and desserts included. By touting the low-fat, less sugar, probiotics angle, yogurt companies are tapping the shift into healthful eating. “Frozen yogurt fits in with that healthy trend,” says Neil Lester, a restaurant and franchise consultant with First Oak Consulting in Oakville, Ont. “Even though it’s considered an indulgence, the healthful-eating market has grown enough to support it.” And the self-serve model gave it a fresh twist.

Entrepreneurs were quick to see the potential. So much so that today, the “froyo” market is like a city bus in summer: hot, narrow and crowded. As new players come on board and U.S. chains pile into Canada’s relatively uncluttered market, real estate will drive the race to dominate what has become one of the fastest-growing food categories. Shnaider’s connections with Canadian commercial landlords give Menchie’s a crucial boost. But he’s up against the homegrown stalwart, Yogen Fruüz, which is expanding fast in this new fro-yo era. That leaves smaller independents facing the classic fad-chasing scenario: join a potentially lucrative market well established by the big players, but at the risk of getting sideswiped as the majors battle to control a fickle, and finite, category. Some may even recall the lessons from the last time fro-yo was cool.

Like many fads, the first frozen-yogurt craze, in the 1980s and 1990s, was immortalized in a sitcom. With low-fat being the burgeoning health mantra, Jerry Seinfeld and Elaine Benes gleefully gorge on frozen yogurt, only to realize they’ve gained 15 pounds between them. The episode prompted real-life doubts about yogurt’s health claims, although Shnaider believes the market fizzled because the product was “chalky” and tasted too yogurty for the public’s ice cream-trained palate.

While today’s technology may indeed produce a smoother, tastier product, just as crucial to the public’s current embrace is the aggressive promotion by the likes of Activia of a new benefit: intestinal health. The marketing has entrenched probiotics in the mainstream vernacular, and as consumers flocked to buy supermarket yogurt, the fro-yo market revived alongside it. Probiotics aside, yogurt hits every conceivable food partiality: no fat, low-carb, less sugar, organic, gluten-free, kosher! Crucially, it appeals to both young and old consumers, and does well across most ethnic groups.

By 2005, companies with obnoxiously cute names and colour palettes began proliferating in California, all using a new self-serve, pay-by-the-ounce concept. Customers love it because they’re in control of portions and toppings; store owners love it because the business model lowers labour costs and ratchets up the average purchase because people inevitably overpour.

The new yogurt obsession spawned brands like Menchie’s, Pinkberry, Red Mango and 16 Handles (to name a few), alongside an explosion of mom-and-pop yogurt shops. Between 2006 and 2011, the number of frozen-yogurt outlets south of the border increased by 57%, prompting many chains to expand northward. Canada’s fro-yo market soon surged as well, sprouting homegrown companies such as the largely West Coast Qoola, YoYo’s in southwestern Ontario and Yogurty’s, a chain owned by Yogen Früz, Canada’s frozen- yogurt giant launched in 1986 by the Serruya brothers.

With some 1,400 locations worldwide, Yogen Früz remains the fruit-blended frozen yogurt you remember from malls and movie theatres. Yogurty’s is like its hip younger cousin. The Serruyas bought Yogurty’s from Baskin Robbins back in 1991. The deal was largely a real estate grab: Yogen Früz outlets replaced all Yogurty’s locations, and the latter brand became defunct. As the new fro-yo trend crept north, Yogurty’s relaunched in 2011 in the same snazzy, self-serve model trending in California. “We thought about going self-serve with the Yogen Früz brand, but it’s too well known for the one-arm machine that you pull down,” says Aaron Serruya, president and CEO of Yogurty’s and Yogen Früz Canada. (All Yogen Früz locations, however, are slated to add a “Ü-Serve” option to the standard staff-blended products.)

The rebirth of Yogurty’s was a savvy— some say necessary—manoeuvre by the Serruyas. “It’s a competitive blunting tactic so companies like Menchie’s don’t eat into their core business,” says consultant Lester. “And it’s easy for Yogen Früz to do. They have the contacts and a good franchise base.” The company’s deep franchising roots in Canada give it a good network to draw on for expansion—something Menchie’s lacks, Lester points out.

Although Menchie’s is a relative newcomer (the first location was opened in Los Angeles in 2005 by a husband-and-wife duo), it has asserted itself as the fro-yo buzz brand. There’s a Pinterest board devoted to photos of celebrities eating at Menchie’s, from a pregnant Drew Barrymore to Justin Bieber and the Kardashian sisters. With 250 locations, Menchie’s has become the dominant U.S. chain in market share.

Menchie’s made its Canadian debut in a Toronto suburb in September 2010, and today has 32 locations across the country, with plans for another 30 within the year. That puts it neck-and-neck with Yogurty’s, which also has 32 Canadian outlets and a goal of 60 by year’s end (with a focus on Quebec and Western Canada). According to Serruya, Yogurty’s franchisees will be largely owner-operated. “The right way to do it is with an owner who has all their skin in the game, rather than a 16-year-old employee who—we hope—smiles when a customer walks in,” he says, coyly referring to his competitors. Asked about Menchie’s, Serruya practically scoffs. “I’m not worried at all,” he says. “They’re really skewed to little kids with the free toys and stickers. They want to be the Happy Meal of the yogurt industry, whereas we want to be the quality.”

Menchie’s and Yogurty’s may be the biggest players, but they hardly have the market to themselves. Pinkberry, another U.S. chain, also has several Canadian locations, while YoYo’s continues to pop up new outlets around Ontario. Qoola is in seven B.C. locations and two in the Philippines. Warrick Chu, a former Goldman Sachs financial advisor, started Qoola in Vancouver in 2008 with the idea of offering fresh, less sugary frozen yogurt. The company is small, but growing; Qoola just launched in Calgary and, by summer, will move into the more crowded Toronto market.

Chu claims to be unfazed by the muscular expansion plans of the industry’s two top rivals. “I’m not a billionaire and I haven’t been in the market since the ’80s, but we want to become one of the major players,” he says. Chu is betting that product innovation and good branding will assure longevity for Qoola, “regardless of what happens with yogurt trends.”

Those trends are looking cloudier than Shnaider’s original sunny forecasts. While Canada still offers room for growth, the brilliantly simple business model has lured too many to the fro-yo party. “There are a ton of players out there right now,” says Lester. “Clearly, there’s going to be some consolidation.”

Success for these brands, he says, will come down to location. With Yogen Früz retaining its prize positions in malls and cinemas, Serruya’s plan is to keep Yogurty’s strictly a street presence. “A lot of frozen yogurt consumption is happening after 7 p.m.,” he says, “so we are positioning ourselves as the alternative to the coffee shop. I mean, how many Tim Hortons and Starbucks can you go to after dinner?”

Menchie’s, too, is on the street, but expansion plans include big-box locations and strip malls, especially in the suburbs. This is where Shnaider’s real estate connections will undoubtedly help, and he’s already working on securing some prime spots in and around Toronto. “Alex is friends with some of the largest developers in Canada,” says Michael Shneer, who ran Menchie’s former Canadian master franchisor before one of the partners’ health problems pushed Yogurtworld to divest. “Overnight, he has been able to open doors that used to be harder for us to get through.”

Still, even if a brand secures solid locations, buzz and market share, in a narrow food category, there’s always the risk that a giant like McDonald’s or Tim Hortons will start to peddle your product. “The distribution of [frozen yogurt] could expand aggressively,” says Robert Carter, a food trend analyst at NPD. “It’s a very specific menu focus—it gives you only one reason to come to the store; it has one offering for one daypart [industry-speak for a regular meal and snack time]. So, unless these companies start to expand beyond their core offerings, they’re really going to be challenged.”

Serruya has hinted about new products coming to Yogurty’s, while Qoola recently added hot Belgium waffles and soon will roll out frozen-yogurt cakes. Menu expansions in this category haven’t strayed far from the core product, however—and probably won’t. Smoothies, parfaits, coffee and tea are easy additions, while crepes and waffles don’t require much extra equipment. The trick, says franchise expert Lester, will be to broaden the menu without undermining what makes the business model so successful: its simplicity.

Beyond product expansion, smaller businesses are attempting to stand apart from the chains by being more affordable, more involved in the community and more eco and health-conscious. Qoola and YoYo’s boast of using liquid, not powdered yogurt, while Toronto’s deKefir offers kefir, which supposedly is a healthier relative of yogurt. Qoola goes so far as to disclose the bacterial culture counts, which Chu claims are the highest on the market. It’s all part of crafting a distinct character, or “soul,” says Chu. “We are boutique artisans,” he says. “Many people want to support local companies and not chains.”

Even if the fro-yo market makes room for both the quaint Qoolas and the slick Menchie’s, a broader, more menacing consumer trend may prove to be the ultimate spoiler. According to Carter, Canadians are migrating back to restaurants. During the past several years, the slow economy curbed consumers’ spending on eating out and pushed it into the less expensive snacking category. That was a boon for niche products such as frozen yogurt. “Once people go back to restaurants for lunch or supper—and we’re starting to see it already—it will hit yogurt hard because when one daypart grows, it takes from another,” says Carter. In other words, most Canadians won’t go out for dinner and hit up a Menchie’s in the same 24 hours. “You may have a great business model,” Carter says, “but you will hit a ceiling.”

For now, Canada is far from the fro-yo melting point that’s hit the saturated market in the southern U.S. What’s more, despite our cold climate, Canadians consume more frozen yogurt than Americans. But just as the cupcake and Krispy Kreme sales (not to mention, fro-yo of two decades back) ballooned in popularity before losing air, this craze’s climb will inevitably level out, industry watchers predict. In the meantime, big and small providers alike face a battle that will be anything but sweet and smooth with sprinkles on top.

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