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.

 Wall Street Journal Article