Cold Stone President Frigidly Responds to WSJ Article
SCOTTSDALE (Blue MauMau) - Cold Stone Creamery went into damage control today in an effort to reach out to franchisees and rally back their support for the franchise system. President Chris Prasifka stated in his letter, "Today, the Wall Street Journal published a critical article detailing a period of explosive growth in Cold Stone Creamery's history, as well as some of the current challenges and opportunities the brand is experiencing."
In his article, Richard Gibson, a special writer for Dow Jones Newswire, reported how franchisees are overwhelmed with soaring costs and shrinking profits in running their ice cream shops. Many contend that the Cold Stone's business model does not add up, and the cost of running a franchise is sending many into financial disaster and for some bankruptcy. They also feel that Cold Stone's rapid growth contributed to its problems.
But more than that, operators, past and present, stated that they were misled by Cold Stone when buying their franchise, by giving them unrealistic or inaccurate revenue numbers on existing stores. The company denies those accusations, saying that they do not give profit potential to prospective franchisees.
Cold Stone does admit in the WSJ article that more than 100 of its stores closed last year, which is up from 60 in 2006. One web site, according to the report, showed that 303 stores were for sale, but a spokesperson for Cold Stone excuses it as "par with industry expectations" given the economically challenging times.
But in Prasifka's letter to franchisees today he states, "First and foremost, I want you to know that our entire team here at Kahala recognizes the struggles some of you are facing." Kahala Corp., parent to Cold Stone, Blimpie and Taco Time, purchased the ice cream chain in 2007. Prasifka tells franchisees that the average unit volume is flat, labor and commodity costs are rising, and the U.S. economy is experiencing a downturn.
But in giving encouragement, he reflects back on the company's previous top priority, related to franchisees at Cold Stone's Annual Business Meeting in January. He reminds them that their priority is "growing same store sales and achieving system wide Average Unit Volume of $500,000."
Franchisee Feels Prasifka's "Feel-Good" Letter Falls Short
But in an interview today Cecil Rolle, a former three-store franchisee in Florida, said Prasifka's response is a feel good letter that falls far short in addressing the real concerns here. "He attempts to lay these issues at the feet of the economy." In making his point, he adds, "I owned three stores--two did $500,000 in sales and the other did $400,000. Therefore each of my stores were operating well above the average, yet we were unable to turn a profit." Rolle said that has nothing to do with the economy. He thinks the problems are due to a faulty business model and he says Cold Stone knows that.
But he also said that in spite of a large number of stores being unprofitable and failing, Cold Stone Creamery continue to sell to prospective franchisees on their own website based on statements such as "profit by making people happy" and " "Cold Stone’s franchise opportunities are about as solid as they come." Rolle said that strikes him as fraudulent, aside from the fact that they state in their UFOC that the company makes no statements as to a franchisee's profitability.
Another issue that Rolle feels Prasifka fails to address is Cold Stone's agreements to receive kickbacks from the companies that it requires franchisees to use. He said, "It would have gone a long way towards ameliorating the concerns for franchisees had he stated they would discontinue this practice. These fees are over and above the 9% that they charge franchisees based on gross sales." Rolle says these agreements drive up food costs for franchisees and forces them out of business.
As an example he says, "I recently purchased 24-24oz. Pepsi bottles from Sam's Club for $14.21. Yet as a franchisee, I was required to buy 20oz. bottles directly from the distributor. I believe I was paying $21.65 for 24-20oz bottles of the very same product. Therefore I was paying more than $7 more for product from the distributor and receiving 96 less ounces."
He then asks, "Shouldn't a franchisor negotiating on behalf of nearly 1,400 franchisees be able to negotiate a better price than I can get walking into my local wholesaler? " Rolle said Chris Prasifka never offered to return any of that money to the franchisees or to discontinue this practice.
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Cold Stone Another Quiznos
Cold Stone just uses the playbook devised by (p)Rick and Lil' Dick Schaden at Quiznos to run its operation. It's a short-term approach that relies on selling franchises to unsuspecting investors and siphoning off their money once the signature is on the dotted line. Selling food or ice cream to the public becomes secondary to finding new ways to rip-off franchisees. The result is a company that starts strong and grows until the word gets out. Once that happens the steady stream of suckers dries up and the system stagnates - or in Q's case, starts to wither. Eventually it will die.
The only way to avoid these types of modern day pirates is to invest in a system with franchisee run co-ops and a strong franchisee organization. Only a strong counter-weight will level the playing field and stop franchisors from ramming bad business decisions, like predatory coupons and over-pricing on needed items, down the franchisee's throat.
Re: Cold Stone President Frigidly Responds to WSJ Article
I have a good perspective on this as I used the be a Q zee and now I have my own chain... of one! lol BIBs were one of those things that Q zees could get cheaper than the independents. When I set up my Pepsi account I was originally quoted a higher price, but I got them to come down and now I'm paying $52.50. I know Q's price went up as I was getting out so I'm guessing that $49 price is probably their current one.
What you have to keep in mind is, that price also includes bypassing the local bottler and I can imagine for that level of volume, they should be able to negotiate a whole lot better price than I did. We could only guess what they are paying and how much they make off of it. The real question to me is, is it ethical at all for them to make any money when their UFOC says we *have* to buy from them, and they do it "for our benefit"?
BIB
$49.30
Quiznos' Price?
Is that $49.30 a Quiznos' price? If it's Quiznos', that's only $1.70 less than I pay along with only 60 other franchisees. I believe an independent food stand near me pays around 70 bucks for one.
-K-
Kickback costs
I own a smallish franchise in a major city and am with a relatively small franchisor (about 60 units). We feature Pepsi fountain drinks and we deal directly with Pepsi but at negotiated pricing by the franchisor for the "Bag-In-Box" (BIBs) syrups. I know that a nearby Quiznos cannot deal directly with Pepsi except for bottled drinks. They must buy their Pepsi BIBs through a distributor instead. I'm assuming that this is so Quiznos corporate can take a cut.
Knowing what they pay for a BIB would give a good insight as to whether they are getting screwed over or not, at least for fountain drinks. I pay $51 for a BIB. Does anyone know how that compares to what a Quiznos franchisee pays for one, or is there a Quiznos franchisee here that would be willing to divulge what they pay for a BIB?? I think it would be interesting to compare. With the number of Quiznos, I'd think that they would pay a lot less than I do.
-K-
hidden costs and fees
I am involved in another "fragile" frozen treats franchise. The reason franchisee's can't make profits as mentioned in this article is because the franchisors put in all these hidden upcharges on the products that are purchased from the distributors. They think we're stupid. Why can 1 store owner purchase items for the same or less than a large group of franchisees? The only answer is that the franchior is adding costs and fees to the base price. So to say all one pays is 7% or 9% R&A is a lie with all the big frozen treats players. The franchisee can not survive the hits and profits are small if any. Simply not worth the amount of effort required to run a QSR. So although sales are above industry average the profits stink. The franchisors are usually not interested in the long term investment of the franchise and jump jobs within the industry. Look at the resumes of all the players. Its sort of like- who's turn is it next? Definitely not Good to Great leadership, more of a let's build a resume.
Had you retained a competent due diligence
resource prior to buying the franchise, you wouldn't be in this predicament.
That goes for almost all buyers of franchises today - especially the newer franchises.
--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
"Treat" franchises usually not a treat for franchisees
When franchise problems are linked from the front page of a premier search engine, (http://articles.moneycentral.msn.com/Investing/Extra/ColdStoneFranchiseesFeelChill.aspx) then we know the issue has gained real public interest.
For years I've scratched my head in wonder over people paying $4-5 for an ice cream and having to make a special trip just to get it. Where do these types of businesses belong? They belong in select communities with deposable incomes sufficient to support the 'snob factor'.
Now, I have no issue with high brow businesses, but snob factors are a pretty good indication that franchising should not be a growth path. Franchising is generally for the masses - the antithesis of snobbery.
While I have wondered why people would frequent such businesses in ‘regular neighborhoods, I have never wondered why they eventually go south. Add in a struggling economy and the trip south is even faster. (It looks like coffee is boarding the train as well.)
(BTW, on a related subject, I am NOT a fan of franchisor/supplier kick backs, and advise against that practice. Value added items are one thing, but straight up kick backs do not good franchise relationships make.)
Nick Bibby is a franchise consultant and principal of the Bibby Group.
Cold Stone's Troubles Well Known
In December, 2005 there was a large thread about CS and its obvious distress.
You can access the thread and summary here.
There was ample evidence the CS's business model was failing and getting worse.
Will it get better, I doubt it. Just update the financial analysis I did in 2005 and convince yourself.
Michael Webster PhD LLB
Franchise News
FranWhack never lies
Coldstone and all the other Kahala franchises have been on FranWhack for a long time.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
False Thinking on Costs
Answer: No.
Here are 2 reasons why.
Call the wholesaler and have their truck make a delivery to your store. If the price you pay them is not the exact same as what is at their central facility, listen to their explanation why there is a difference.
False Thinking on Costs
Mr. White,
I can assure you neither of your arguments carry.
1. Our standard purchases from my local wholesaler when I operated my stores was as follows:
24 boxes of Heath
10 boxes of Snickers
10 boxes of Reese's Peanut Butter Cup
6 boxes of Butterfinger
3 cases of Pineapple
2 boxes of Crunch
2 boxes of Kit Kat
8 bags of M&M
8 bags of Gummie Bears
10 bunches of bananas
1 case of peanut butter
10 cases of bottle drinks
We shopped every three weeks to a month. We had previously calculated our savings based on shopping at Sam's versus Sysco, the distributor that we were mandated to use by Cold Stone, was just over $400 per trip. That is well worth the drive and the "cost of gas for you driving to your local wholesaler, the cost of your time, etc." even if gas price reach $10/gal.
2. Sysco is a New York Stock Exchange company and one of the largest food distributors (if not the largest) in the country. Their vertical position in the distribution chain is equal to my local wholesaler. Frankly, I don't know who purchases more snickers bars between the two. In any case, the disparity is likely to be small.
When I walk into the wholesaler as one franchisee, I purchase at the published price of $14.21. However, if I walk into the same store as an owner of 1,400 franchises, I absolutely can negotiate a better price. (For the purposes of this evaluation, lets assume a 10% discount. Our discount for the $142.10 that we spent for the bottled drinks listed above would come to $14.21. This excludes all other products for the moment.) Because Sysco and my wholesaler enjoy the same vertical placement and their purchase power is the same or similar, I should be able to acquire the products around the same price. (I recognize that Sysco has extra costs in their performance, but this is likely more than compensated in the 10% discount that I give up on each of the products listed above by having supplies delivered to my door.)
I suspect that the overall problem here is Kahala-Cold Stone's kickbacks. If I am a bottler who targets a sale price of 40¢ per bottle and a franchisor negotiates a 40¢ kickback, it is logical to think the price to the franchisee will now become 80¢ per bottle. If the franchisor does that with nearly all of the franchisee's supplies and equipment, that drives the cost of those goods up considerably and drives franchisees out of business.
Costs
Focusing on Cold Stone's supplier arrangement seems beside the point to me. Here's why. Even if you are saving $400 per month by not using Cold Stone's supplier, that doesn't seem to be much more than a rounding error in a business that's supposed to be able to achieve revenue of $40,000 per month ($500,000/year). If you are reduced to taking the extra time to drive to Costco to save perhaps 1% of gross revenue, there is either a problem with the business model or with your specific franchise. And, of course, you are describing a pre-tax savings; the number drops by maybe 1/3 after-tax.
Costs
The issue is not how much were able to save buying $500-$600 worth of mostly candy each month from the local wholesaler. The issue is how much we were NOT able to save buying $3,000 worth of other goods EACH WEEK from Sysco at supracompetitive prices, all in the interest of financing Cold Stone's kickbacks.
Stated differently, but for Cold Stone's kickbacks, I could have bought candy and all other goods from Sysco at nearly half price, which is about what we saved by shopping at the local wholesaler for limited supplies. That's instant profitablility.
Supplier Kickbacks
Would supplier kickbacks to the franchisor be illegal?
Supplier Rebates
Steven B. Feirman wrote two very useful articles about the legality of rebates in the US Franchise system.
If you cannot find them on the internet, drop me an email and I will find them for you.
Feirman concludes:
"Thus, a franchisor has many arrows in its quiver in defending financial arrangements with vendors to its franchise system.
These arrangements are made in a competitive marketplace, where the law of supply and demand governs.
Franchisees, rather than being victims of that marketplace, are beneficiaries, with the ability to select the franchise system that best serves their interests.
That Franchisor A elects to charge franchisees a 5 percent royalty and to obtain a 2 percent vendor rebate, and Franchisor B elects to charge franchisees an 8 percent
royalty and to obtain no vendor rebate, should not be a concern of federal antitrust law."
Note that to reach this conclusion Feirman assumes that not only the basis for the rebate is disclosed but that the amount is disclosed in the FDD.
Generally, this is not the case.
Michael Webster PhD LLB
Franchise News
Understanding vs. Disclosure
Michael, I agree, but both your point and Mr. Feirman's require a level playing field as it regards an understanding of the proposed relationship. Real world franchising rarely shows the level's bubble in either the horizontal or vertical middle.
The franchise house is normally built on a slope because the builder is experienced and the buyer is not. 'Competent' due diligence is (once again) not normally part of the buyer's agenda.
Nick Bibby is a franchise consultant and principal of the Bibby Group.
They are perfectly legal
as long as they are disclosed. The franchisor doesn't have to say how much the kickbacks are. Unless the franchisor represents so large a market force that restricting supply has atttributes cognizable under the antittrust laws (which none do), disclosure is now an open road to what Quiznos is doing. Talk about a license to kill!--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Kickbacks
Mr. Solomon,
We realize that the Kickbacks are legal if they are properly disclosed in Item 8 of the UFOC. We allege that Cold Stone did not comply with the disclosure requirements enumerated in Part 436.
In our amended complaint, we also allege that Cold Stone restricted our purchases of supplies to certain vendors. As I indicated above (as a guest), those prices were supracompetitive when compared to prices for the very same supplies with unauthorized vendors. We strongly suspect that Cold Stone's own vendor contracts will reveal that their intent was to make our relationship with these vendors exclusive. Cold Stone has fought us tooth and nail since (I believe) February on our RFP of those and other documents. This despite the fact they are clearly relevant to our case.
Finally, I attempted to call you earlier today to see if you might be of any assistance to us in our effort against Cold Stone. I will try you again later this afternoon. I very much appreciate your commentary as well as the other professionals' commentary regarding our issue.
Cecil Rolle
cecilrolle@aol.com
Yes, Kick Backs 'are' a license to kill.
Although, as I said earlier, I advise against a kick back decision for franchisors, that advice is sometimes ignored simply because the tactic 'is' perfectly legal ((when disclosed in the offering circular/FDD).
Inexperienced buyers rarely catch the point until it's too late.
The presence of kick backs triggers my BS detector and sends me into excavation overdrive when examining an offering.
Nick Bibby is a franchise consultant and principal of the Bibby Group.
re: Supplier Kickbacks
There is no perfect or complete answer to that question. Undisclosed kickbacks are always going to raise issues. Differences in state laws will be part of the equation too. Washington's Franchise Act specifically addresses the issue, but may leave franchisors with a misimpression about what they can permissibly do, at least according the Washington Supreme Court.
Costs
As a former franchisee, our costs were way out of proportion to our sales. If this was due to the kickbacks, then that is why we could not make money. As an owner of other restaurants for 18 years prior to operating a Coldstone, we never had the problem of losing money. We sometimes did not show any take home profit, but we didn't have to take money out of our pockets to operate.
Re: Costs
As a current Franchisee, we are faced with this same issue. We've been paying out of pocket since we've opened, barely showing any profit, and have been open over a year.
MSNBC Story on CS
Don't know if this was posted before as to CS, but I just noticed it on today's MSN Home Page.
Cold Stone franchisees feel chill
-K-