Overview of the Ice Cream and Frozen Yogurt Industries
The beginnings of the ice cream franchise industry can be traced to the late 1940s and the industry has developed in many ways over the years. Franchise models and non-franchised ice cream units now range from kiosks and ice cream truck franchises to store locations in shopping malls and retail centers. Franchises within this industry generally serve their namesake product along with milkshakes, smoothies, and a variety of desserts and toppings. Other related businesses within the industry include gelato, an Italian frozen yogurt similar to ice cream, and shaved ice (snow cone) franchises.
Ice cream’s closely related industry, frozen yogurt (also abbreviated as FroYo), came to prominence in the 1980s. Frozen yogurt franchises experienced considerable success in the United States until a drop off in the late 1990s. In the mid-2000s, the industry began to reassert itself through the founding of fresher, more modern frozen yogurt concepts. An increase in health-conscious consumers was a main contributor to the frozen yogurt booms in both the 1980s and 2000s.
Having Their Cake
Diversity of offerings is important to increase sales for all niche food franchises. One such offering that has become a mainstay of ice cream franchise menus is cake, with many ice cream franchises aiming to make cake ordering easier not only for customers but also franchisees.
Technology adaptation continues to play a key role in streamlining cake ordering, particularly online ordering. As Bill Mitchell, senior VP and chief brand officer of Baskin-Robbins said, “We're trying to make these products easier to execute for our operations team.” He added that an estimated 75 percent of the brand's franchisees didn’t realize that cakes can be customized in 31 flavors with four formats within 24 hours. As a result, the franchise is taking the time to improve its “cake platform” for consistency across the system.
The potential sales increase is clear to Mitchell, “We have the opportunity of not just celebrating the Mother's Days, but to sell products (such as) National Administrative Day and Boss' Day. These are things we'll continue to grow as we differentiate our cake business.”
Another franchise merging cake making and technology with positive results is Cold Stone Creamery.
“We rolled out our online ordering component for our cakes just a little over a year ago, and we continue to see week-over-week growth,” says Dan Beem, president of Cold Stone Creamery. “That tells me our consumers not only want our cakes, but they want our cakes when they want to be able to order them. About 20 percent of our cakes are ordered when the stores are closed. Those are people up late at night, and they take care of it when they have the time. That growth curve in the online cake-ordering program is exciting.”
Frozen Yogurt Finding a Foothold
Frozen yogurt is going through a boom very similar to what it went through in the 1980s. Nonetheless, the industry went through a period of hard times in the 1990s that has some wondering if the bubble is about to burst again.
“Some are selling too quickly,” says Karen Spencer from franchise consulting firm FranSystems. “They’re opening too many franchises too fast. We’ve proven historically that will fail. There will definitely be a shakeout.”
Yet a “shakeout” doesn't necessarily mean an industry-wide recession. It simply means there could be a “survival of the fittest” dynamic affecting how the industry expands. Proponents of frozen yogurt shops believe that this surge in the industry is similar to the coffee shop boom of the 1990s—a surge that has had staying power. Such optimism stems from diverse reasons.
One reason the staying power of frozen yogurt shops is compared favorably to that of coffee shops is the family-friendly atmosphere of frozen yogurt shops. Proponents maintain that if generally more adult-friendly coffee shops can maintain sustainability despite similar industry shifts, then frozen yogurt demand should keep shops stable due to a more expansive appeal including children and adults alike. Another reason for optimism is that frozen yogurt is widely recognized as a healthy dessert alternative which continues to garner attention with health-conscious consumers.
Financially speaking, one benefit of newer frozen yogurt concepts is the self-service format. By allowing customers to create their own frozen yogurt product, units require less staff. This also speeds up the buying process so a store can bring in more sales per day than traditional full-service operations.
The combination of fewer staff members and a faster sales process means potentially lower overhead costs, which can lead to increased revenue. According to IBISWorld research, frozen yogurt shops have average profit margins of 6.4 percent compared to coffee shops, which average 5.8 percent and smoothie shops at about 3 percent.
Additionally, commercial real estate consultant James Sinclair says franchisees are gravitating towards frozen yogurt because of a low barrier of entry for property selection when compared to other franchise concepts. The recession has left many storefronts and strip mall units vacant, which has left landlords eager to rent. “You can throw in a frozen yogurt store; they'll sign a one year lease. For a landlord, they're able to have a tenant while they ride out this market,” says Sinclair.
Investing in an Ice Cream or Frozen Yogurt Franchise
Important Note: The provisions and fees illustrated in this report are only the most common and not a complete listing. Please review the Franchise Disclosure Document (FDD) for all provisions and fees related to investing in a specific franchise.
When many prospective franchisees first consider opening a franchise, their main concerns are finances though there are several factors to consider. One of those factors is discussed here followed by a brief look at two main financial considerations: the initial investment and ongoing fees.
FDD Profiles for Sample Ice Cream and Frozen Yogurt Franchises
Ben & Jerry's
Cold Stone Creamery
Marble Slab Creamery
For most of the country, ice cream and frozen yogurt are largely seasonal treats for obvious reasons. Who wants ice cream when there’s a foot (or more) of snow on the ground? The difference between the peaks and valleys of ice cream and frozen yogurt demand throughout the year isn’t as large as it once was though it continues to impact the industry. As a result, some franchises expand their menus to keep customers coming through the door year-round. For example, Dan Beem, president of Cold Stone Creamery, says that the franchise is experimenting “with very indulgent bakery items with a solid coffee program” to help maintain sales in colder months. Other franchises, like Baskin-Robbins, attempt to sell their products through additional channels such as grocery stores to keep sales stable.
Investment costs vary for different franchises depending on the particular business system and execution requirements. The following charts comparatively demonstrate initial costs associated with opening one of the 10 sample franchises presented.
Initial costs associated with opening a franchise include the franchise fee, training expenses (such as travel and living expenses, not the actual training courses), grand opening marketing costs, and more.
A significant cost within the initial investment is the franchise fee. This part of the overall initial investment grants franchisees the right to use the franchisor’s trademarks, service marks and other branding. It also provides access to the franchisor’s business system, including training opportunities.
One major variable in the initial franchise investment is the cost of real estate.
Some franchisors may not include land or real estate costs in estimates because of price variations between locations and whether their franchise system requires a new rather than leased building. For example, Dairy Queen includes an estimate for real estate costs in the graph below while several of the other franchises do not.
Estimated Initial Investment Ranges for Sample Ice Cream & Frozen Yogurt Franchises
The length of the initial franchise agreement term for the 10 sample franchises ranges up to 20 years with 10 years being most common. Franchise term length is dependent upon not only the franchise system, but whether a franchisee is seeking a traditional or non-traditional location. Some franchise term lengths also depend on franchisee lease terms.
Throughout the length of the agreement there will be costs for being a part of the franchisor’s business system. These costs include items such as royalty fees, charges for technical support and marketing costs. The most common is the royalty fee and below is a look at royalty rates for each of the sample franchises.
In addition to regularly assessed fees, other fees are charged on an “as needed” basis such as audit fees or costs for additional training. Prior to investing, prospective franchisees should do their research and carefully review a franchisor’s FDD for more detailed information on all systems, procedures and costs.