New Food Concepts Flood Market

John Vomhof Jr., 8 June 2012, Minneapolis/St. Paul Business Journal

John Mallon and Randy Carmody launched Freeziac three years ago, looking to get in on the frozen-yogurt fad that was taking the West Coast by storm. Now the frozen-yogurt chain has five locations and another that’s slated to open soon.

“I think there could be well over 100 yogurt shops in the Minneapolis-St. Paul area before it reaches its peak,” Mallon said. “I think this is taking the place of the neighborhood ice cream shop.”

Chaska-based Freeziac isn’t the only player eyeing the market, though. The frozen yogurt segment has exploded in the Twin Cities over the past few years, with national and local chains snatching up dozens of storefronts throughout the metro area.

The rapid growth of the frozen-yogurt category and another hot, national trend — the rise of fast-casual sandwich shops — are helping fuel activity in the local retail real estate market. However, skeptics doubt whether all of the new concepts can survive.

“I’m not an expert on yogurt, but this feels a lot like the bagel wars of the 1990s, when there were a bunch of players jumping into the market at the same time,” said Chris Simmons, senior vice president of retail for Colliers International’s Minneapolis office. “As far as I know, Brueggers and Einstein Bros. are the only ones left. Most of the other ones only had one or two stores before they left and went home.”

Frozen yogurt

Self-serve yogurt stores have expanded rapidly over the past few years, generally outperforming the broader restaurant industry amid the slow economic recovery. The trend, which started in California with chains such as Pinkberry Inc., has taken off thanks to increasingly health-conscious consumers and the appeal of customization. The chains offer a wide variety of yogurt flavors and toppings, including fruit, nuts and candy.

The frozen yogurt segment still accounts for just a fraction of the $6.05 billion per year frozen-desserts restaurant category, which is dominated by Edina-based International Dairy Queen Inc.’s $2.45 billion in annual U.S. sales. But analysts say yogurt is starting to steal some market share.

Locally, there are now dozens of yogurt shops in a category that was virtually nonexistent several years ago. The players include:

• Bloomington-based Leeann Chin Inc.’s Red Cherry, which has 35 locations inside Leeann Chin restaurants.

• Broken Arrow, Okla.-based CherryBerry, which has 10 Minnesota stores and 10 more coming soon.

• Freeziac, which has five shops and one more coming soon.

• Salt Lake City-based TCBY Enterprises Inc., which has three locations.

• Yogurt Labs, which has a shop near Lake Calhoun in Minneapolis and has plans for new locations at the IDS Center in downtown Minneapolis and at 50th & France in Edina.

Two of the biggest national chains, Yogurtland Franchising Inc. and Pinkberry, aren’t even in the Twin Cities yet. Two other top players, Menchie’s Frozen Yogurt and Red Mango Inc., only have one location each.

So while it may seem that Minnesota has suddenly become inundated with yogurt chains, the market actually is well behind the curve on this trend, said Darren Tristano, senior vice president for Chicago restaurant consulting firm Technomic Inc.

“In a state like California, we might be starting to see some saturation, but the vast majority of the U.S. hasn’t hit that point yet,” he said. “In fact, many cities are just starting to experience it for the first time.”

While there are many competitors jockeying for space at the same time, Tristano notes that the real estate and labor costs for self-service shops are relatively low. Therefore, a store can be profitable on only a few hundred thousand dollars in sales.

“Some chains will emerge as the clear winners, but the market can support quite a few,” he said.

Frozen-yogurt shops also appeal to franchisees because they’re typically considered “semi-absentee” businesses, said Mike Welch, president of FranNet Minnesota. That means the owner doesn’t have to be on site all of the time.

“They look at it as an investment tool,” he said. “It’s just in lieu of a 401(k) that’s just languishing in the market.”

The key is for franchisees to pick the chains with the strongest business fundamentals in place that point to long-term sustainability.

“There’s absolutely risk, but it’s all about doing the appropriate due diligence,” he said. “If the track is laid well and you’re a good runner, you’re going to make it.”

Sandwich shops

Another hot, national trend that’s starting to take hold in the Twin Cities is the expansion of fast-casual sandwich shops. Firehouse Subs, Which Wich and Jersey Mike’s all have entered the market last year, targeting a segment somewhere between Subway and Panera — and they’re all seeking to grow rapidly.

The sandwich trend is similar to what has happened in other categories in recent years with Chipotle in the Mexican category and chains such as Five Guys and Smashburger in the burger category.

Jacksonville, Fla.-based Firehouse Restaurant Group Inc. opened its first Twin Cities location in Maplewood last August, and has said it hopes to open 54 stores in the Twin Cities within 10 years. It’s the nation’s seventh-largest sandwich chain, with 477 units and more than $284.6 million in sales.

“This is a sandwich for foodies,” said Ron Harris, Firehouse’s area representative for the Minneapolis market. “You pay a little more, but you get more for your money. We give you more meat and our sandwiches taste great.”

Dallas-based Which Wich Inc. opened its first Minnesota store in Blaine last summer. It now has four locations in the market and plans for more.

“It will be competitive, but I think there’s room for more than just Subway out there,” said Garrett Ebling, an Interstate 35W bridge collapse survivor who owns the Blaine location and will open a store in Maple Grove next month.

Manasquan, N.J.-based Jersey Mike’s Franchise Systems Inc. has locations in Coon Rapids and St. Anthony Village. Area director John Griparis, who owns those stores, said the company hopes to eventually have five or six franchisees with a total of 50 restaurants in the Twin Cities.

Of course, those new players will face plenty of competition in the market from chains such as Subway, Jimmy John’s Gourmet Sandwich Shop, Davanni’s, Quiznos, Potbelly Sandwich Works, Erbert & Gerbert’s Sandwich Shop and Cousins Subs Sandwich Shops. The overall U.S. sandwich segment grew 4 percent to $24.09 billion in 2011. Subway’s $11.4 billion in annual sales account for 47 percent of the market.

“That segment actually does concern me a little bit,” Welch said, pointing to competition, relatively high startup costs and labor demands. “A sub shop can cost more than $500,000, and there’s no direct correlation between what the investment is and what the franchisee can expect in return.”

American City Business Journals

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