In 1986, when entrepreneurs Aaron and Michael Serruya were twentysomethings, they opened their first Yogen Fruz store, in Toronto. Today, the brothers have more than 1,000 locations around the world. With American tastes changing and tangy&mdas;has opposed to sugary—frozen yogurt becoming popular, the Serruyas are planning to push into the U.S., starting with Chicago. Aaron Serruya spoke to Smart Answers columnist Karen E. Klein about his strategy of entering a crowded franchise market by targeting existing small business owners. Edited excerpts of their conversation follow.
Your frozen yogurt has a successful following in Canada and Europe. Why hasn't Yogen Fruz tried establishing its franchises in the U.S. before now?
Our yogurt recipe is full of probiotics and safe for those who are lactose intolerant. Around the world, frozen yogurt has always tasted like yogurt and we've done well. But in the U.S., it started out tasting as much like ice cream as possible. It might have had some live cultures, but it wasn't always nonfat or low in sugar.
So, until just the last couple of years, our product wouldn't have worked in the U.S. Now the market in America looks to be consuming more natural yogurt at the supermarket level, and people are getting more educated palates. We see our product as a great addition to what's happened in the natural food category in the U.S.
In the last three or four years, there have been multiple new U.S. frozen yogurt franchises cropping up that sell the tangy, natural-tasting product. As a relative latecomer, how is your approach going to be different from your competitors?
We're looking at new markets and finding different ways, like approaching mom-and-pops or older ice cream or frozen yogurt chains that don't have as much support as they once did. We're giving them some ammunition they can use to compete in their marketplace. When there's little or no real estate available, this is the way to do it.
Have you tested this strategy globally?
Oh, absolutely. Internationally, almost every brand is owned by two huge corporations, Nestlé (NSRGF) and Unilever (UN). Local, independent companies, for the most part, don't have the wherewithal to fight head-to-head with these giants. When we start fighting with these guys around the world, we go to the number seven or number eight competitor in a market, someone who's on his last leg, and help him survive by making him our exclusive co-packer. Then we bring the operation up to the franchise level and take the marketing and branding up a notch.
How do you approach franchise operations going into a country as large and diverse as the U.S.?
We see that it's going to happen piece by piece. For instance, we're just now going into California. We see that the frozen yogurt market there is becoming more mature and a couple of guys have started building multiple stores. There are about a dozen companies in this category already, and a lot of people opening up mom-and-pop shops. Our goal will be to go in there and find real estate that is already there but losing customers. Sometimes these are older franchisees that have equipment that is lagging behind technologically. So we do some renovation, we fine-tune the equipment, and this makes our entry costs lower than going in fresh to something like a bank space.
When you approach franchisees or independent stores that are struggling, what's typically been the problem?
They just didn't do something right. It could be their name recognition was low, their marketing wasn't aggressive, their product didn't taste right, or maybe they had employee problems. Sometimes it's not at all the fault of the business owner. It's just, if you're not on top of your game, and competition is tough in your area, it's very easy to lose your business.
Some of these guys have 10 or 12 competitors, and even wonderful mom-and-pops get hurt by the big chains.
How do you approach an independent or franchisee about converting to your brand?
Our first goal is to see if we can find an operation that is up for sale or not doing well. Then we propose a deal to the owner where they don't have to buy new equipment, but they would pay for the reconstruction and rebranding of the store and open up as one of our franchisees.
What kinds of reactions do you get?
It varies. Sometimes the owner isn't interested in working with us because he just wants to get out of the business. Sometimes they are about to lose the equity in their home because they've got a home equity line of credit. Other times, someone might be skeptical that we could make it work if he couldn't.
What do you do when there's resistance?
If they don't want to work with us, but they're interested in getting out of the business, we will buy the business and move one of our franchisees into the space. Typically there's a nominal cost to buy them out. If we really love their location, and they want to work with us but can't afford to, we will even go so far as to help them finance the renovation.
What about existing franchise agreements that might already be in place in these shops?
We have to look at those closely from a legal standpoint. Most franchisees can get out of their franchise contracts. Some of them have noncompete clauses in their franchise agreements. The biggest obstacle we run into is locations where the franchisor holds the lease on their real estate because some commercial landlords don't want to lease to individuals. If the franchisor is on the lease, they might be able to prevent the franchisee from changing his brand. Or they might get first right of refusal when a new lease is negotiated, though they may not opt to exercise that.
What advantage do you get from buying an existing location rather than setting up your franchise in a new location?
By going in and buying the lease, we're getting a store that's already set up for ice cream or frozen yogurt. It's got the layout, it's got the freezers and other equipment, and it's got the market share in people's minds. It's a space that consumers already associate with ice cream or dessert.
Do you find small business owners are grateful for your offer?
Not always, but from a lot of independent entrepreneurs' points of view, we can be the light at the end of the tunnel. A lot of independents—even those who want to stay that way—have a tough time. It's incredibly hard to do well in this business, and they need some wherewithal to compete with the guy across the street. We can help them revitalize their business or get out of what they got into without it becoming a disaster.