Economics: Frozen Yogurt Practice

HW Due Monday November 1st!!

Frozen yogurt trend far from cold                            (From Marketplace – PRI 10-20-10)

Kai Ryssdal: Since the economy first started going backward three years ago, clothing boutiques, restaurants, electronics stores, retailers of every kind have closed up and moved out.  But if you take a chilly real estate market, top it with recession cravings and a self-serve obsession, and you've got a business.

Stacey Vanek Smith: At a Froyo Life yogurt shop in Los Angeles, 27-year-old Jessica Robinson is making her ritual late afternoon visit.

Jessica Robinson: I got pumpkin and cake batter frozen yogurt with Cinnamon Toast Crunch on top, and it's a definite good choice.

And, when it comes to frozen yogurt, Robinson is all about choice.

Robinson: I love Froyo Life, I come here a lot. I do love 21 Choices, but I haven't been in a while, 'cause it's kind of far away. I go to a place called Menchies also, which is in Santa Clarita; I go to a place called Yogurtlicious. I guess I'm pretty passionate about it!

And, the way the industry's been growing, it's going to need all of the Jessica Robinsons it can get. There are now around 22,000 frozen yogurt stores in the U.S. Pinkberry touched off a craze in 2005 -- then things slowed down -- but yogurt's getting a second wind.

Commercial real estate consultant James Sinclair says entrepreneurs are flocking to froyo because, unlike most businesses...

James Sinclair: The cost of entry is very quick; the build-out is quick and cheap. The lack of skill set you need to become a frozen yogurt operator, again, ties into the ease of entry into this market.

Sinclair says it can cost less than $10,000 to open a frozen yogurt shop, and with so many vacant storefronts, landlords are eager for the business.

Sinclair: 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.

Sinclair's business partner Jim Husted says that has spawned a frozen yogurt bubble.

Jim Husted: If you're a successful location, that means three others are coming. It doesn't mean that you've taken over the market; everyone's scared because you're going to beat them. It's 'Oh my god, they're doing great, lets open up three more right next to them.'

One of the fastest growing chains is Red Mango. Dan Kim is the founder and CEO.

Dan Kim: We have a lot of interest from franchisees and developers who want to get into the business. And it's been a lot stronger this year than it was in 2008, 2009.

After closing stores during the recession, Red Mango is launching new locations all over the country. But Kim says they're tweaking the model for today's yogurt enthusiast, like at the original Red Mango near UCLA in West Los Angeles.

Kim: This actually started as a full-serve store back in 2007, and earlier this year, we converted it to a self-serve store.

Customers get their own yogurt, top it...

Frozen yogurt attendant: You know what's good with the pumpkin spice is graham cracker crumbs and dark chocolate chips.

...and weigh it.

Attendant: Fourteen ounces of yogurt.

Self serve is a down economy dream, says Darren Tristano, with food industry research firm Technomic.

Darren Tristano: You get greater control in the consumer's hands, which is something that we all want because we have a lot of anxiety about reduced spending and what's going on in the economy.

And we like to feed our anxiety dessert. Tristano says people eat sweets more often when the economy is bad. He thinks the frozen yogurt craze is far from over.

Tristano: We think this trend it going to continue, because it's very high demand. We believe it's going to start to integrate more into full service restaurants. One of the big fears is what if McDonald's starts to serve frozen yogurt?

Tristano says that could put a lot of smaller shops out of business, but not if Jessica Robinson has anything to do with it.

Robinson: There's never going to be too many frozen yogurt places in my opinion.

After reading the radio interview, please answer the following on a separate sheet of paper.

1. What is the market structure for frozen yogurt shops? 
2. Explain why the barriers to entry are so cheap and few.
3. Draw a supply and a demand curve on the same graph and demonstrate why the price of renting a storefront has decreased during the recession. 
4. ‘Oh my god, they’re doing great, let’s open up three more right next to them’.  Explain the logic behind this economic enigma.
5. When Red Mango converted to self-serve, what happened to the supply curve? The price of the yogurt? Draw the change on a graph.
6. Why is the demand for frozen yogurt inelastic? Which characteristics does it meet?
7. What would happen to the supply curve (and to the price) if McDonalds did decide to enter the Frozen Yogurt market?  Draw and explain.