Picante-sicles: entrepreneurs targeting mainstream with Mexican-flavored frosty fare.

MICHEL Algazi and Roni Goldberg are serious M.B.A. graduates who seem like the last guys who would quit their good jobs at Fortune 500 companies to make ice cream.

They did just that, but the budding Ben and Jerry are making desserts with a south-of-the-border twist. Their frozen concoctions include chili lime popsicles, hibiscus sorbet and sweet corn ice cream.

Who'd buy such flavors? Shoppers at Whole Foods Market Inc. and Wild Oats Markets Inc. have bought enough of the distinctively flavored desserts to enable L.A.-based Palapa Azul Inc. to claim that it posted revenue increases of more than 230 percent in its first two years. The company said it is expecting a 100 percent increase for 2006, although it would not reveal its exact sales figures.

The desserts also are sold in Target Corp.'s Super Target stores, Costco Wholesale Corp. stores in San Francisco and H.E. Butt Grocery Co. stores in Texas. In all, the products are on shelves in 25 states, and about 1,000 stores.

Now, Algazi and Goldberg are planning a rollout to mass-market retailers.

The duo is hoping to fulfill that Ben & Jerry's dream by reminding countrymen in the United Sates of flavors from their childhood and Anglos of their beach vacations. The Spanish word "palapa" means thatched umbrella or hut, and "azul" means blue. The name is designed to trigger a happy memory--and create loyal customers.

"These are the early adopters," Algazi said of organic food shoppers. "And they're the ones that become ambassadors of the brand."

Debbie Ban Gemert, national buyer for Wild Oats, said the Palapa Azul Inc. offerings seemed a great match for her chain.

"When it comes to things like sweet corn and hibiscus, when you start with the flowers, especially when it's not fruity, your Wal-Mart shopper won't appreciate this type of flavor," she said. "They're still into the chocolates and the moose tracks, your mainstream type of flavors. Our customers are curious, looking for a discovery, an experience with their food."

Like chili-lime popsicles?

"I go to Mexico all the time and love the food and the flesh fruit and vegetables they always have available. This was kind of a no-brainer. By the time you looked at all the bright packaging and all of the tropical, exotic flair that it has, it pops off the shelf."

Algazi and Goldberg concede that their Mexican desserts have found the most success on the coasts and regions with concentrated Mexican populations. Their popsicles are based on "paletas," frozen deserts on a stick made of fresh fruits sold throughout Mexico.

But Algazi and Goldberg believe that the mainstream Anglo market is ready for frozen cucumber-chile bars.

"Americans are consuming more Mexican food every day," Algazi said. "The ethnic market is growing, Mexican food in particular."

Growth area

Not everyone is ready to abandon their Rocky Road roots, however, according to Bob Goldin, executive vice president of Teehnomic Inc., a food industry research group.

"I don't know if the mainstream market is ready for sweet corn ice cream or hibiscus-flavored ice cream," he said, but suggested some of Palapa Azul's less unusual flavors could pave the way. "Mango is fine," he said. "It's become more mainstream. Pineapple, too. But it takes a while for this stuff."

The frozen dessert market is currently dominated by Unilever PLC, which owns Breyers and Magnum ice cream brands, and Nestle SA, which owns Dreyers, among other brands.

Still, Goldin said, it is a growth area and that provides an opportunity for Palapa Azul.

"There's tremendous growth in the population and there continues to be growing interest in authentic Mexican, as opposed to Americanized Mexican," he said. "You have a lot in California, but most of the country doesn't."

Most of the companies that have done well with "authentic Mexican" have been allied with major brands, and Goldberg and Algazi see themselves as in line with those companies, such as McDonald's Corp.'s Chipotle Mexican Grill or Wendy's International Inc.'s Baja Fresh.

"You see very different customers there that you would at a Taco Bell," Goldberg said.

Even Nestle has made inroads into the ethnic market, finding some success with its dulce de leche, an Argentine caramel it markets through its Haagen-Dazs brand. And Fruit a Freeze brand natural fruit popsicles manufactured by frozen confection giant CoolBrands International Inc. are similar to Mexican "paletas," or fruit popsicles, though they are sold in more traditional flavors such as lime and coconut.

Algazi and Goldherg admit they'd eventually like to be distributed by one of the major companies, and may entertain a buyout offer someday. After all, Ben Cohen and Jerry Greenfield of Ben & Jerry's ice cream fame sold their company to Unilever in 2000 for $324 million.

Goldin said having a unique product is essential to interesting buyers.

"Unilever liked Ben and Jerry's because it was an interesting, unique brand, not because they made good ice cream. They own good Breyers, they know good ice cream."

Another key is creating a distribution system. "ff you're selling in bodegas (small Mexican markets) it's attractive," he said. "They may never be able to reach there."

Getting started

Algazi and Goldberg met in 1992, while working in Mexico City for Diageo, the giant beverage company. Algazi had worked in marketing or launched products for the Walt Disney Co. and the Black & Decker Corp. in Latin America. Goldberg had served as a regional manager for Hewlett Packard and helped develop startups. They became fast friends and realized they shared entrepreneurial aspirations.

By 2001, they started thinking seriously about what to do. Their opinion of the Mexican food offerings that were popular in the United States provided their answer.

"It was very sad for us to see the low quality," Goldberg said. "Mexico has a strong tradition of quality food, but when we started looking, the products were not premium, not complex, not truly ethnic food."

It was the seemingly ubiquitous "mom and pop" ice creams shops that eventually caught their eye. From the operators of those shops they learned the recipes for the indigenous flavors. They also determined that fruits selected for their products had to be picked, pureed and frozen in the same day.

Armed with that knowledge, they came to L.A. and began making popsicles. They conducted market research at local farmers' markets, handing out more than 40,000 popsicles to learn about people's interests and concerns.

They got a big break at the Fancy Foods trade show in 2004, when a buyer for Whole Foods tried one of their frozen treats.

"She said, 'This is the best product at the show,'" Algazi said. "And she came right back with the West Coast distributor and said, 'I want you to start carrying these guys.'"

They landed $1 million for their first round of funding later that year. Algazi and Goldberg then took outsourcing to the extreme. Just about every phase of their operation: manufacturing, design and later, sales and distribution is done by another firm. The partners are the only full-time employees of the company, working out of an office in downtown L.A. They even found a team in Mexico to create an authentic design for the packaging.

The company now is hoping to complete a second round of funding, this time for around $3 million.

In the meantime, Algazi and Goldberg are reaping another kind of reward. "We get emails from people from Mexico all the time thanking us for bringing these products into the market," Goldberg said. "People talk about the flavors that remind them of their childhood in Mexico. And that comes with emotion."