Red Mango USA dishes up healthier frozen yogurt

The frozen yogurt business puts a sour taste in Daniel Kim's mouth. And that's good.

Kim is on a mission to bring a more tart and better-for-you version of frozen yogurt to the USA. Already a hit in South Korea, it is fermented in a way that he says makes it less sweet and more healthy than desserts that are often called frozen yogurt.

Winning over U.S. consumers, though, won't be easy. Red Mango USA, headed up by former investment banker Kim, 31, has only 10 stores open. It is facing stiff competition from West Coast upstarts that are attempting to get consumers to try this new type of frozen yogurt, often called fro-yo, that's served in a cafelike environment.

Complicating things further: Red Mango's chief rival, Pinkberry, has a big head start in the key Los Angeles market and has deep pockets behind it from the investment arm of Starbucks sbuxfounder Howard Schultz. Pinkberry has about 40 locations.

Meanwhile, frozen yogurt hasn't exactly been one of consumers' top choices. Production of frozen yogurt has fallen 43% to 303.5 million pounds in 2006 from 1990, says Don Blayney of the USDA Economic Research Service, which means the average person ate just a pound of frozen yogurt that year.

But despite the major hurdles, Kim thinks consumers are ready for premium yogurt much as they were ready for deluxe coffee when Starbucks first started. "Yogurt is healthy, natural and tastes good," he says. "People love this concept."

The fact frozen yogurt isn't yet mainstream means it's possible to grab a bigger slice of the market for frozen dessert, Kim says, which the International Dairy Foods Association sized at $23 billion in 2006.

Made like beer and cheese

But what is the concept? The first key ingredient is the product itself, the yogurt. It's real yogurt, meaning it's fermented in much the same way that beer or cheese is made. Most desserts called frozen yogurt are made by mixing powder, milk and sugar.

Red Mango's process leaves behind living organisms called live and active cultures. These cultures give the yogurt probiotics, or organisms believed by some to have health benefits that continue to be studied, says Jeff Blumberg, professor of public health at Tufts University.

Probiotics are thought to assist digestion and the immune system. "It's better for you than ice cream," he says.

Unlike most products served by its competitors, the yogurt at Red Mango meets the National Yogurt Association's criteria for live and active culture yogurt.

Red Mango yogurt also has less sugar than many other frozen yogurt desserts. A half-cup serving of Red Mango contains 90 calories, about 18% fewer than a similar serving of TCBY's yogurt.

The next thing that sets Red Mango apart is the setting of the stores. Red Mango stores are designed to encourage lingering and feature comfortable stuffed chairs and hip music, much like a Starbucks.

Blending healthier yogurt with a place to hang out is what made Red Mango popular in South Korea, where it was founded in 2002 by a former colleague of Kim's from investment banking firm Donaldson Lufkin & Jenrette. Kim still recalls being bewildered when he first heard the idea. "Frozen yogurt in Korea? OK …," he says. But in just a few years, the chain was booming.

It was Pinkberry, Red Mango's rival, that seized on the idea and brought it to the USA in 2004. The company was founded by two Korean-Americans, Shelly Hwang and Young Lee, and Kim thinks they modeled their stores after Red Mango.

"The concept of Red Mango pioneered in Korea years before Pinkberry was started," he says. "We can't do anything about it, but we're here to compete." Pinkberry spokeswoman Lauren Lundy declined to comment beyond an e-mail saying that none of Pinkberry's management ever worked for Red Mango.

Pinkberry's rapid U.S. expansion, mainly in California and New York, was not missed by Red Mango's executives in South Korea. Not wanting to be another example of an innovator that gets left behind by an imitator with better execution, Red Mango tapped Kim to bring it to the USA.

Acknowledging that Pinkberry's lead in Southern California will be hard to overcome, Kim says the rest of the country is up for grabs. He's planning on opening almost one new store every week and recently established a beachhead in the next-biggest battleground: New York City. In early December, Red Mango launched a store directly across from Pinkberry's location in Greenwich Village. The front doors of all Red Mango stores read: "You're gonna love the original."

Anna Park, 18, a student at New York University, says she has tried Red Mango when traveling in South Korea and prefers it because it's real yogurt. She was enjoying a bowl outside with friends in the freezing New York December weather at the Red Mango store opening. "It's so good," she says.

A selling point

For a product where wholesomeness is part of its attraction, the fact Red Mango is real yogurt is a selling point, Kim says. Rival Pinkberry has been sued twice by consumers alleging the company shouldn't call its product yogurt because it doesn't have an adequate level of active cultures. Spokeswoman Lundy says, "Pinkberry has a policy not to discuss its formulation. It is a proprietary formula that is being aggressively sought by many competitors." As for the lawsuits, one has been settled and the terms are confidential, Lundy says. The other is pending.

Kim knows that even if the controversy is a distraction for Pinkberry, it won't last long. So Red Mango is expanding as fast as it can. It has opened company-owned locations in California, Nevada, New York, Utah and Washington and is working with franchisees in several cities.

The stores are profitable shortly after they open and generate cash that can be used to expand, Kim says. Red Mango is a private company, so its financials cannot be independently validated. But Kim says stores attract up to 750 customers a day who spend $5 to $6 each. That translates into revenue at each store of $750,000 to $1.2 million a year.

Red Mango has also lined up an investment from Wetzel's Pretzels founder Rick Wetzel and private investment firm Stone Canyon Venture Partners.

Certainly, high-end yogurt could be a fad. Boba, a sweet drink with tapioca balls at the bottom, was another Asian import that fizzled in the USA. And Blayney points out that ice cream is a tough rival to yogurt, because producers are constantly finding ways to lower fat and calories.

Even so, the race is on. Kim is shooting for 50 stores by the end of 2008 and 100 over the next three to five years.

"Red Mango follows the trend of healthier desserts," says Michael Seibert, managing director of Stone Canyon. "Red Mango won't be as big as Starbucks, since it's not an addictive substance, but it can get really big."