No economic meltdown seen for frozen yogurt chains

LOS ANGELES Fri Aug 29, 2008 9:03am EDT

LOS ANGELES (Reuters) - The coffee at Starbucks has gone cold and Mrs. Fields' Cookies have crumbled. But one segment of luxury food retailing is still being eaten up by consumers despite the slumping U.S. economy -- the southern California favorite, "fro-yo."

Sellers of frozen yogurt such as Red Mango, Pinkberry and TCBY are all seeing stronger sales amid what some see as an economy headed towards recession that has caused many U.S. restaurant chains and food companies to suffer slumping profits this past year.

"We're at a stage where demand from customers is still high and the (economic) impact hasn't had that much of an effect on our bottom line," said Red Mango Inc founder and CEO Dan Kim.

Frozen yogurt stores have sprouted in different pockets of the U.S. within the past three years, primarily in Southern California and New York. Lines of eager customers snake outside the doors of mod and sleek yogurt stores, all for a cup of creamy, tart yogurt decorated with fruit or cereal.

Throughout 2008, high-end coffee seller Starbucks (SBUX.O) has struggled with fewer customers visiting stores. Its CEO, Howard Schultz, who is also on the board of Pinkberry, has blamed the dip, in part, on lower spending and the economy.

Starbucks, which in its most recent quarter reported its first-ever net loss, is closing more than 600 underperforming U.S. stores, slashing jobs and reshuffling management as it fights to drive more traffic to its domestic coffee shops.

But the trouble didn't stop at Starbucks. Mrs. Fields Famous Brands LLC -- TCBY's parent -- filed for Chapter 11 bankruptcy protection this month, citing declining sales at the cookie chain throughout the past year. It is considering selling TCBY, which is enjoying a resurgence of success.

Ron Paul, president of restaurant consulting firm Technomic, said he expects more than 1,000 restaurants to be shuttered throughout the United States this year.

Pinkberry Chief Executive Ron Graves has told Reuters that while larger fro-yo chains should make it through the slump, smaller "mom-and-pop" stores will close some locations in months ahead as competition heats up.

EATIN' UP THE FRO-YO

The fro-yo market has been expanding in recent years. Helped in part by higher prices, U.S. sales grew to $177 million in 2007 from $170 million in the prior year, according to market research firm Mintel, which expects sales to rise to $200 million by 2012.

Kim said the average number of customers who visit one of its nine Los Angeles Red Mango stores ranges from 500 to 750 people per day and customers spend about $5 to $7 each visit.

Foot traffic is even higher at Red Mango stores outside of Los Angeles, where market competition with other "fro-yo" rivals isn't as fierce. Red Mango's Northern California, Seattle and New York stores serve about 1,200 customers a day.

The owners of Pinkberry and Red Mango each plan to add another 15 more stores this year, primarily in California and New York. Kim plans to end 2008 with about 50 U.S. stores, while rival Pinkberry plans to have more than 75.

Reliving its popularity from the 1980s, TCBY's same-store year-over-year sales are up this year from 2007, according to TCBY spokesman Steve Wiles, varying widely from its struggling parent, Mrs. Fields.

With demand high, yogurt shops say they aren't worried about fluctuating dairy prices, a problem that's impacted Starbucks. And curiously, the sluggish U.S. economy may be causing customers to crave the tangy, low-calorie treat even more, Kim said.

"There's this theory or belief that ... as the economy goes down, people want to feel happier and want to do things that can improve their overall morale and how good they feel about themselves, so consumption of foods that are good for you actually increases during economic recessions," Kim said.

(Additional reporting by Lisa Baertlein and Emily Chasan; Editing by Phil Berlowitz)