PRINT THIS STORY:

CHANGE TEXT SIZE:

COLD COMPETITION

UPSTART PINKBERRY IS RAPIDLY EXPANDING TO CHALLENGE FROZEN-DESSERT RIVALS

By Molly Knight

Only a few years ago, the frozen-yogurt business was in need of some thawing. Now there is a cold-dessert war heating up, as TCBY plans an overhaul of stores and offerings while upstart rival Pinkberry raises its own profile.

Frozen-yogurt sales were sweet in the 1980s and early '90s, and then things soured. U.S. frozen-yogurt production fell 45 percent to 65 million gallons in 2005, down from 118 million gallons in 1990, according to the International Dairy Foods Association. The industry suffered a significant loss of sales in the mid-'90s, after the government permitted ice-cream companies to label their products "reduced fat." TCBY's same-store sales were falling about 10 to 15 percent per year between 1997 and 2004, for which the Salt Lake City-based chain blames competition from lower-calorie ice-cream brands as well as its own misadventures in ice-cream land. TCBY was forced to close 2,000 of 3,000 units worldwide over the period.

But the public is gaining awareness of the health benefits of yogurt, sources say. "This industry was in big trouble until the scientific community started getting the word out on how yogurt does things like boost the immune system and helps people lose weight," said Steven Young, a food technologist who runs a consulting firm in Houston. "All of a sudden - bang! - a young company with a fresh concept, like Pinkberry, starts going nuts."

"Nuts" is one way to describe the Pinkberry phenomenon. In 2005 South Korean immigrants Shelly Hwang and Young Lee opened their Pinkberry frozen-yogurt shop in a 600-square-foot garage in West Hollywood, Calif. Eschewing the traditional sweet-tasting frozen yogurt, Pinkberry offers a tartier taste in two flavors, original and green tea, with such toppings as almonds, coconuts, mangos and raspberries. At 70 calories per half cup, the Pinkberry product gained quick popularity among fitness-obsessed Los Angelinos. The store's minimalist decor and loud, upbeat music contributed to the fame.

In one month the store turned a profit. After a year business was so fruitful that frustrated neighbors contemplated suing Hwang and Lee because of the cars parked illegally out front each day and the volumes of frozen-yogurt cups discarded on their lawns. (Hwang and Lee cut the hours of operation and had workers clean the trash from the yards.) Since then, Pinkberry has opened 29 additional units in the Los Angeles area. All but three of these units are franchised.

Pinkberry's quick ascension to cult status raised worries among some that the product would flame out. But Pinkberry's ability to sustain growth got a huge vote of confidence in October 2006 when Starbucks Corp. Chairman Howard Schultz invested $27.5 million through his Maveron venture capital firm. "Pinkberry has an opportunity to build a national and a global footprint," Schultz told the Los Angeles Times in October. "It's very rare to see a retail company, so early on, create the kind of customer loyalty and emotional attachment that they've been able to create. In 30 years, I can count on one hand the number of times I've witnessed it."

Schultz has said that he will help with strategic expansion and recruit executives to help Hwang and Lee manage growth. And Schultz knows a thing or two about growth. When he joined Seattle-based Starbucks, it had four units; now it has 15,000 worldwide.

Schultz's investment almost certainly signifies that Pinkberry will cease franchising and seek more control going forward, says Paul G.W. Fetscher, CLS, a restaurant and retail consultant and the president of Great American Brokerage, Long Beach, N.Y. "Schultz has better control on his product than anyone in this industry ever has," Fetscher said. "I'm sure he'll want to stop franchising, because then Pinkberry will get to create uniformity in recruiting and hiring and training of its employees. That's one of the big reasons why Starbucks has been so successful."

By the time Schultz invested in Pinkberry, the company had already reached the East Coast. In late 2006 Hwang and Lee recruited Daihwan Choi, an old friend, as exclusive franchisee in New York and New Jersey. By the end of last year, Choi had opened 11 units in the New York metropolitan area and signed leases for four additional stores that are slated to open by April. "He [Choi] is absolutely on a tear," said Mark Kapnick, managing director of New York City-based Robert K. Futterman & Associates, Pinkberry's exclusive leasing agent in the state. "And he's not gonna stop at 15. Eventually, we feel that for every 10 Starbucks, there's room for one Pinkberry. Schultz really validated the category and the brand."

The plan is to open as many units as possible in Manhattan over the next 12 months, possibly 10 to 15, says Kapnick. Then, Choi will go into secondary markets in the other New York City boroughs to open an additional 10 to 15 units there. Kapnick says he looks for 500-to-1,300-square-foot spaces near schools, hospitals, movie theaters and fitness centers. "Pinkberry's business is driven by the stroller set, so we like to be where women are," said Kapnick. "Its customer is not afraid to plunk down $5, $6, or even $8 for a treat that tastes great and is good for you."

This is the sentiment TCBY is hoping to cash in on too, as it seeks to revamp existing stores and open new ones. Last year TCBY launched a line of yogurt-based smoothies and renovated 100 U.S. stores. Eventually, all of TCBY's 1,000 units across 30 countries will be renovated, the company says. The company also has an aggressive expansion plan to return the number of TCBY stores to 3,000, starting domestically with a focus on San Diego, Las Vegas and Phoenix. This year the company will open 50 to 100 stores in the U.S., says Steve Willes, TCBY's director of marketing. The new units, like the current ones, will measure between 1,200 and 1,400 square feet.

Willes says TCBY realized that with the success of new brands like Pinkberry, the yogurt industry is on the upswing, and the time to expand is now. "Pinkberry is a great competitor," said Willes. "They've brought energy and excitement to the category, which we see as a good thing." TCBY will even follow Pinkberry's lead by adding tart-flavored yogurt with fresh toppings to its current lineup this year. Willes also confirms that TCBY is finished with ice cream, which it had offered between 1996 and 2004. "Strategically, that was a big mistake, because we walked away from our roots," said Willes. "Now we look forward to returning to them."

Still, some worry about how well frozen yogurt can sell when the weather turns frigid on the East Coast. "No matter how good it is, this isn't something people are going to want to buy when it's 30 degrees outside," said Fetscher. "I'd like to see Pinkberry's year-over-year numbers for New York in December 2008. I bet once the hype dies out, the profits will be down."

Perhaps Pinkberry has something besides frozen yogurt up its sleeve, Fetscher and Young speculate. Is Schultz's involvement a sign that Pinkberry will expand its offerings just as Starbucks came up with dozens of ways to order a cup of coffee? "It would be a good idea for Pinkberry to start doing that to feed its customers' ego needs and to challenge TCBY," said Fetscher. "A lot of people probably walk in and don't like vanilla or green tea."

Neither TCBY nor Pinkberry would put numbers to their success claims. But Fortune magazine speculates that each Pinkberry unit brings in about $250,000 per month, and Chicago-based consultant firm Technomic estimates that the typical TCBY store posts about $200,000 a month.

It seems, then, that yogurt culture is very much alive.