We came across this story out of New Orleans about Pinkberry, and how it’s leaving the market this year after the franchisee there opted not to renew its agreement. It gives us the perfect avenue into one of the weirdest restaurant bubbles in history, the second frozen yogurt craze.
Old people like me will recall the first one, which emerged in the 1980s when people yearned for supposedly healthy treat items and made popular plastic-tasting things like carob that tasted slightly like delicious things. Frozen yogurt chains emerged and grew in malls around the country, became too numerous, cannibalized one another’s sales and then collapsed.
Surely, we thought, investors won’t make the same mistake again. We were wrong. A second frozen yogurt craze emerged 15 years ago, buoyed by overeager venture capitalists, an easily replicated model, an industry prone to copycat ideas, product companies eager to sell more frozen yogurt mix and a franchising model fueled by post-recessionary demand from would-be operators. And all of it can be traced to the founding of the aforementioned Pinkberry.
Before we set about mocking an entire business sector, we must provide this caveat: We love frozen yogurt. We enjoy an occasion where we can fool ourselves into thinking that this creamy, sweet treat topped with sugar bombs is actually good for us. We also have long thought that there was enough organic demand for non-frozen yogurt that a concept done correctly could have turned out reasonably well. Alas, that was not to be the case.
Pinkberry was founded in West Hollywood, Calif., by Shelly Hwang and Young Lee. It would quickly prove popular among the Southern California hip set and quickly drew throngs of customers. It opened two more locations the next year and then attracted some venture capital, including a $27.5 million investment from none other than the fund started by one Howard Schultz. Soon, Pinkberrys would be everywhere.
This is the restaurant business, however, and no such idea is too good not to be copied. Frozen yogurt is particularly easy to replicate because the product is fundamentally simple and all people needed was a bright color scheme and a lease for an inline location and a few soft-serve machines. It became even easier when people realized you could simply put a bunch of frozen yogurt machines in the lobby, charge by the ounce and have the customers do all the work.
Pinkberry's unit count
Source: Technomic
Two other things fueled the sector’s growth: franchising and frozen yogurt makers.
At one point, a frozen yogurt maker in Oregon created a workshop called “YoCream University” to instruct people on how to run a yogurt shop.
All of a sudden, brands with names like Cherry Berry, Red Mango, Orange Leaf, 16 Handles and others emerged.
They all started franchising, too. This is what really put this business on a rocket ship. Franchising speeds the growth of any concept, at least those with the right combination of salesmanship and circumstance, because it relies on many people to finance growth, rather than one person.
In this instance, froyo was a hot fad. And the economy was struggling to come out of the recession, which meant there were a lot of people out there with a little savings and eager to run their own business. And the government was pushing small business loans to get the economy moving. And sales people were all too eager to help.
Between 2011 and 2014, these brands grew like crazy. One could not walk the exhibits at the National Restaurant Association Show without coming across a frozen yogurt machine. Franchise expos were loaded with froyo brands. Many of these concepts soon had hundreds of locations. Some drew some interesting investors—Orange Leaf attracted an investment in 2014 from the NBA player Kevin Durant.
Amid this growth, Pinkberry would soon fall behind other brands like Yogurtland and Menchie’s Frozen Yogurt. The brand peaked at 154 locations in 2014.
Yogurt brands sales since the pandemic
Source: Technomic Top 500 Chain Restaurant Report
In 2015, Pinkberry was sold to the brand collector Kahala Brands—notable for its odd purchase of the 14-unit cereal concept Cereality in 2007. One year later, Kahala was sold to the Canadian mall chain owner MTY Group for $300 million.
Pinkberry finished 2021 with 71 locations, half the number it had at its peak, and many of the closures appear to be non-renewals like the one in New Orleans. Pinkberry dropped off the Technomic Top 500 Chain Restaurant Report in 2019 and last year generated $34 million in system sales.
The decline is clear with every other brand in this sector, however. The business grew too rapidly with too many brands that were entirely too similar. Much like the first frozen yogurt craze, it outgrew its demand and quickly faded.
Red Mango, Cherry Berry and Orange Leaf, to name a few, are all down at least 60% or more from their peak. Much of that decline is due to closed locations.
The three largest frozen yogurt chains—Menchie’s, SweetFrog and Yogurtland—finished 2021 with system sales down an average of 14% from pre-pandemic levels. In each case, the brands generated far better average unit volumes than in 2020. But they all continued to close units. The three brands’ unit counts declined an average of 9% last year. Menchie’s, the leader that peaked at more than 500 global locations three years ago, is down to 400 now, according to Technomic. It closed more than 15% of its locations in the U.S. alone last year.
What’s the lesson here? Any investor, be they a venture fund or a franchisee, should be leery of any kind of fad concept, and certainly one that people would use only occasionally, which is always true with dessert concepts.
At the very least, be wary of an idea that already grew too quickly once. It probably won’t succeed the second time.