Franchising Insight

Rough Sailing Greets Smoothie Franchises

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It's easy to sell a cold, sweet beverage on a hot summer day in California, but what about in January in Chicago and New York? Here's a look at how smoothie chains are tackling this question.

Smoothie franchisers are looking for the answer.

When they began to spread through the sunny West Coast and South in the 1990s, companies selling the blended fruit drinks had dot-com-era dreams of quick riches. With visions of Starbucks's success at turning a single product into a business concept, young entrepreneurs flew into the business.

The smoothie chains experienced strong growth the first few years, whetting analysts' and marketers' appetites for what looked like a sweet and juicy business concept. Category leader Jamba Juice Co.'s systemwide sales doubled in 1999, accounting for its acquisition of rival Zuka Juice Inc., and it grew more than 65% in 2000, according to the company. Jamba Juice, which owns most of its locations, had sales of more than $200 million in the fiscal year ended June 24.

And, more than a decade after the first smoothie franchise appeared, overall sales in the industry are still growing and chains are opening more stores every year, with U.S. sales topping $880 million in the fiscal year ended June 30, according to the Juice & Smoothie Association, a unit of Juice Gallery Multimedia, of Chino Hills, Calif.

Darker Skies

But stores are entering cooler climates and consumers have become more blasé about the product, clouding the market potential. The inherent seasonality of a cold, sweet beverage didn't impede the early growth of smoothies because most of the companies were founded in Southern California and the Southeastern states. But the companies say it has become one of the primary obstacles to nationwide growth.

When David Van Meter opened a franchise of what's now known as Juice Stop Branding Corp. in Boulder, Colo., in March 1998, customers flocked to his store, with lines extending out the door and onto the sidewalk. But sales would drop even on overcast, windy days, says the 57-year-old writer and former television producer, and in December and January sales fell to about half his business in the peak spring and summer months.

Mr. Van Meter says he "anticipated that sales would decline during the cold weather months, maybe 25% tops, not 60%, which is what we actually experienced."

"I'd grossly underestimated" the effect of weather on sales, Mr. Van Meter says, adding: "Whoops."

To win customers in more temperate areas -- and keep them coming back during the winter months -- franchisers are seeking to build brands that customers can identify with something other than just a cooling treat on a warm day, such as health, nutrition or fun. They are also choosing locations more carefully -- indoors to avoid the cold and in food courts to offer a "healthy" choice among fast-food restaurants -- and adding food items to their menus.

Smoothie King Franchises Inc. has positioned itself as a health-food retailer, targeting health and fitness enthusiasts with products like a low-carbohydrate, high-protein smoothie that comes in chocolate, vanilla, strawberry or banana flavors, and "Power Punch," with a carbohydrate mix and nutritional yeast added. The Kenner, La., concern started franchising in 1989, and founder Stephen Kuhnau, who owns the company with his wife, Cindy, claims to have coined the word "smoothie" after developing the drink for himself in the late 1960s in response to food allergies.

Smoothie King has about 340 locations open, says Mr. Kuhnau, including several in Seoul, South Korea, and opened 52 new locations in 2002. Mr. Kuhnau says that his positioning of his product as a meal replacement in an age of epidemic obesity avoids the seasonality problem.

"If we're in Alaska, people are still going to want to replace the fat stuff," he says.

Indeed, the manager of a Smoothie King franchise in New York's Pennsylvania Station says that sales there do not drop sharply during frigid months. "It's not cold down here," says Jennifer Schofield. "People bring them to their offices or on the trains."

Mr. Kuhnau says his favored location is in food courts, where his products will compare favorably with McDonald's and other fast-food fare to health-conscious shoppers.

Jamba Juice's chief executive, Paul Clayton, like his competitors, thinks that a strong brand identity can go a long way toward overcoming frigid temperatures. The company's first Chicago unit opened in 1999 in October, just when the cold was arriving, and had more than $1 million in sales its first year in operation, he says.

Although sales in the colder months decline, with a strong brand "we can do the volumes that make this attractive" year-round, says Mr. Clayton.

Sustenance to Go

Companies have also been expanding their menus, adding snacks or "grab and go" food items to attract customers to the store for items other than smoothies. Juice Stop locations sell soups, wraps and pretzels, and Mr. Clayton says Jamba Juice plans to add food to help counter the seasonality problem, but he doesn't yet know what menu offering would best suit the brand.

Michael Haith, owner and chief executive of Maui Wowi Inc., a Littleton, Colo., smoothie franchiser, takes another approach. He sees his brand as a fun, impulse buy rather than a health product, mixing smoothies with alcohol at some locations, and adding gourmet coffees to the menu. He puts smoothie kiosks and carts in impulse-buy locations like convention centers and stadiums.

But even with stronger brands and a long list of smoothie choices, customers often may not be willing to go to an outlet when they can get one at a closer location, such as a convenience store or ice-cream shop.

"How much out of your way are you going to go to get that sixth, seventh, and eighth flavor?" asks Ron Paul, president of Technomic Inc., a Chicago food-service industry research and consulting firm.

Indeed, the market for prepared smoothie mixes, bought by restaurants to serve their customers, jumped 78% in fiscal 2003 to about $600 million, according to the Juice & Smoothie Association, while sales from smoothie stores grew about 17%.

Too Many Stores

Even in those markets where smoothies have been booming, there may be a danger of saturation.

"It's not really a wise choice to have two different juice bars across the street from each other," says Larry Sidoti, founder and vice president of business development of Irvine, Calif.-based Juice It Up! Franchise Corp., which has more than 55 franchises, mostly on the West Coast. "They'd end up canceling each other out."

Mr. Van Meter says he thinks that after the Atkins diet resurfaced and the novelty of the product wore off, "people began to think of these things as desserts," rather than a healthy snack. Soon after he opened his store, a handful of other operators were fighting tooth and nail for prime area real estate and the limited number of smoothie fans. He sold his Juice Stop franchise to a former employee in October 2002 after four consecutive years of net losses.

"Boulder is the perfect place for a smoothie bar," he said. "Unfortunately, a bunch of other people had the same idea."

Copyright © 2004 Dow Jones & Company, Inc. All Rights Reserved

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