investiledysfunction

Yesterday’s NY Times Dealbook contained information about a $12 million Series A round raised by Red Mango “led by a former chief executive of Blockbuster and the Dallas-based private equity firm CIC Partners. The announcement came 10 months after Pinkberry unveiled a $27.5 million round last October, spearheaded by Maveron, a venture capital firm co-founded by Starbucks chief executive Howard Schultz.”

versus

For those who don’t know about Red Mango or PinkBerry, they are hot new retail concepts hawking high-end frozen yogurt.  Uber-cool hipsters in NYC and LA love PinkBerry and paying really high prices for ‘tangy’ yogurt.  I must admit it’s pretty tasty.

Taste and naming unoriginality aside (color + fruit), here is why this won’t end well.  I’m not talking about this not ending well for series A investors who may be rewarded for their early stage risk taking, but I’m talking more about late stage investors - the series C/D guys or even the public stockholders if they ever IPO.

Why?

Primarily because one hit wonders have a pretty terrible track record in the market (see chart at end of this post).  While people point to Starbucks as an example, there will never be a need for ubiquity amongst frozen yogurt shops no matter how tasty.  Let’s remember some of the much hyped and now struggling, dead or soon to be dead brethren of Red Mango and PinkBerry.

• Cold Stone Creamery - Poor franchising
• SmoothieKing - the original JambaJuice
• JambaJuice - the new SmoothieKing
• TCBY - Anyone remember them?
• The Cheesecake Factory - Limited market for 4000 calorie meals
• Pizzeria Uno’s - Today’s Wall Street Journal talked about impending bankruptcy

A friend of mine knows the PinkBerry folks and per him, their desire is to stay exclusive and grow in high-end locales (places like Dubai, NYC, Vegas, Paris, etc I’d imagine).  If they can do that, PinkBerry could turn into a very solid, profitable business.  The problem is the $27.5 million venture capital round they raised.  With that money comes expectations of growth and lots of it, e.g., there are strings attached.  And that means aggressive over-expansion unfortunately.  And the uber-cool won’t like PinkBerry so much when the local mall has it and your uncool aunt and uncle are talking about it.

Starbucks which has been lauded as a growth company did the same thing.  The thing Starbucks had going for it, however, was a massive and growing appetite for coffee so the ceiling at which growth would stall was very high.  But nevertheless, they hit the ceiling.  To keep up with Street expectations of growth, they kept expanding.  Instead of saying to the Street, “we’re going to slow down our growth and as a result, you should lower your view of us from a growth company to a value or GARP (growth at a reasonable price) company”, they said “we’ll just keep growing.”  Nothing grows indefinitely.  Never happened - never will.  PinkBerry and Red Mango will have the same expectations of them and this will lead to bad things at some point.  I’m not smart enough to know when but it will.

The one hit wonder concept isn’t just in food retailing.  Think of Crocs (you know - the horribly ugly shoe things) or American Apparel (remember CEO, Dov Charney, who called his CFO an idiot). Lots of hype, great stock prices for a while and then plop!  You can make money if you get out at the right time, but if you ever find yourself saying “They could be the next McDonalds”, it’s apparent you’re drinking the Kool-Aid and probably a good sign that it may be time to exit.

Consumer tastes are fickle.  Red Mango and PinkBerry still have lots of runway to grow so this is not to say they’ll flame out tomorrow, but it will happen.  Plus not being a frozen yogurt afficionado, is there really room for 2 similar players in the premium markets they’ll target?

Here’s a look at the 5 year chart for some of the publicly traded one-hit wonders (Starbucks, American Apparel, Cheesecake Factory, Crocs) I referenced above.  (note:  not all have been public for 5 years)

Perhaps there is a shorting strategy here?

Tags: American Apparel, cheesecake factory, cold sotne creamery, crocs, jamba juice, pinkberry, red mango, smoothie king, starbucks, tcby

This entry was posted on Thursday, August 14th, 2008 at 4:53 am and is filed under Business Strategy, Current Affairs. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.