So it seems the number of Frozen Yogurt shops have been multiplying! CUPS, a popular froyo shop in Clifton, is opening up a new location in Secaucus. Love and Yogurt, a brand new entrant into the frozen yogurt market, just opened up their first location in Hoboken and are gearing up to open another in South Orange. Then theirs Lets Yo! which is new in Montclair (they are going for the hipster, techie angle) and of course theirs familiar Red Mango which seems to be also expanding into new locations (one in Hoboken is coming soon!).

CUPS is by far the most fascinating one in this bunch. CUPS consistently has lines around the corner every night. They even have red ropes to keep the line in check. It’s quite a spectacle. Do check them out the next time you’re in Clifton.

According to the Huffington Post:

Between the fall of 2010 and the fall of 2011, the number of retail frozen yogurt shops in this country climbed from 3,624 to 4,765 – a 31 percent spike. According to Tristano, sales reported by frozen dessert shops, in general, have hovered at $6 billion per year, but “consumers have just shifted from ice cream to frozen yogurt.” Frozen yogurt chains, in fact, have experienced some of the highest growth of any of the chains he tracks.

The question becomes, is frozen yogurt here to stay or is it just another fad? We all remember Cold Stone don’t we? Remember how exciting it was to mash an entire brownie into a scoop of ice cream?? Whatever happened to those days? FYI, Cold Stone now offers frozen yogurt.

I did a little bit of research on frozen yogurt franchises. This is quite a high risk business with a big bottom if the craze is indeed just a fad.

So lets examine my absolute favorite frozen yogurt spot: Red Mango.

Initial Investment: Around $360,000 (but could be higher depending the cost of the build-out)

Breakdown of those Costs (estimated by Businessweek.com and franchisedirect.com)

Initial Franchise Fee: $35,000  

Real estate lease: $5,000 to $10,000
Architect, engineer, drawings: $10,000 to $15,000
Permits: $2,500 to $5000
Interior leasehold improvements: $90,000 to $125,000
Signage: $5,000 to $10,000
POS System: $15,000 to $20,000
Equipment and furniture: $60,000 to $70,000
Inventory and uniforms: $3,000 to $5,000
Grand opening advertising: $2,000
Training expenses: $7,500 to $10,000
Lease and security deposits: $5,000 to $10,000
Insurance: $1,000 to $2,000
Legal fees: $2,500
Working capital (three months): $20,000 to $40,000

Other Ongoing Costs:

Royalty Rate: 6% of Gross Sales.

Advertising Fee: 4% of Gross Sales 

Also factor in training costs for staff, cost of website maintenance, franchise audit costs, and other costs.

You’ll also need: $200,000 liquid assets / $350,000 net worth

So what about Sales, you ask?

In 2010, the average store did $522,580 in gross sales, with the range being $139,036 to $1,315,246. Unfortunately, this is the latest available public data and no further detail is given in terms of the distributions of these sales (so its unclear the frequency of a $522,580 grossing store).

So lets take the data at face value, and say we can expect our Red Mango to gross $525,000. Lets do some quick back of the napkin math. Lets say it takes two years for our Red Mango to achieve average sales. 

Year 1:

Initial Investment: ($360,000)

Sales in Year 1: $250,000

Less Royalty: ($15,000)

Less Advertising: ($10,000)

Operating Expenses: My best guess would be 65% of sales, so ($162,500)

Net Profit in Year 1: $62,000

Net Cash Flow in Year 1: ($297,500)

Year 2:

Sales: $525,000 (Red Mango Average)

Net Profit in Year 2: $131,250 (assuming all the same margins)

Total Cash Flow in Year 2: ($166,250)

Payback period would about be 3.5 years if you could maintain these sales and profit margin levels. The payback period could be even longer if you consider the opportunity costs of keeping $200,000 of your assets liquid.

This type of payback period is quite common in most franchise businesses, but in this example we assume we can ramp up to average sales and then maintain that (big assumption). To put it in perspective, to generate $525,000 in frozen yogurt sales, that would mean you need about 87,500 people coming to your yogurt shop per year!! – assuming each person spends $6.00. That’s 240 people per day. Everyday. That sounds like a lot of people…but I love the fro-yo craze I hope it sticks around for good and I hope more and more entrepreneurs take on the risk!