Thanks to BMM for letting me

Thanks to BMM for letting me use their forum space for my CS facts project.   I am moving the project to it's own web location where it can be better organized. 

You can find it at:

www.coldstonefacts.org

Note to all current and former Cold Stone Franchisees, please participate in the "Be Counted" program where we are accounting for all Cold Stone franchises sold and how they were churned or sold or closed, log your information here:

http://www.coldstonefacts.org/be-counted

Cold Stone Creamery is tired of being left out ...

http://www.bizjournals.com/orlando/blog/2011/01/missed-opportunities.html?comments=1#readercomments

Due Diligence: Cold Stone Creamery Fees, Fees and more Fees...

I have often pictured the franchise concept as a giant revenue hog trough with weekly sales being poured in at one end and at the other end the franchisee desperately waits for a financial draw.  In between all of the hogs lining up at the trough each month - the largest HOG of all is Cold Stone Corporate snorting and sloshing up as much of your weekly revenue it can possibly get.

There are 6 major Cold Stone fees that you should be aware of:

    1. Franchise Fee - one time payment - currently at $42000 per franchise and $35,000 for additional franchises.
    2. Equipment Fee - 4% fee charged by Cold Stone Corporate when purchasing any equipment from Cold Stone Corporate.  Incidentally, all equipment used in the your store is required to be purchased from Corporate.
    3. Transfer Fee - $10,000 fee to transfer your fee to another party.
    4. Royalty Fee - 6% this is a weekly fee drawn directly from you checking account - it is 6% of "adjusted income" which means that it does not apply to the sales tax that you collect, the coupons you redeem or the gift certificates you sell.
    5. Advertising Fees - 3% this is a weekly fee drawn directly from your checking account - it is 3% of the "adjusted income" also, as described above.
    6. Product Rebates Fees - the rest of the world call these "kickbacks" - the franchise world calls them rebates that are paid to the franchisor by the product suppliers.  These are tougher to measure as they are non-published and largely unregulated.  Basically, the product suppliers pay a percentage back to the franchisor based on the number of franchisees who order from them and amount that is ordered.
 
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Franchise Fee.  The Franchise fee is $42,000 (non-refundable).  The franchise fee is pretty well understood by those who have done any research into franchising.  It is basically the amount you pay for the privilege to own and operate the franchise.  This fee provides you a "proven system" that helps you to run your own business.  One would think that a "proven system" also includes a profitable one also - oh well.  It of course includes the permission to use the proprietary recipes, processes and ingredients of the franchise.

In July 2002, when we paid the franchise fee for the first location - the fee was $28,000 for the first store and $21,000 for additional stores.  In 2005, the fees were raised to $42,000 for the first and $35,000 for an additional store - a 66% increase.  Of course, corporate sold this as an increase of "value" to our investment telling us that this franchise was is such demand that we could easily get our investment and equity back out.

This fee is the primary motivator for the Franchisor to "churn" through new franchisees when possible.  In 2006, our last full year of operation, the royalties received by CSCorp from our franchise was $17,688.20.  You can see if CSCorp waits for me to close my doors, they 1) they get an immediate $42,000 (more than double what the annual royalties would have been) from the new franchisee, 2) they get continued royalty from the new franchisee, and, 3) they get a second generation owner in at a much lower entry cost point which increases the chances for future success.

Notice that it is the first generation owner that shoulders the largest financial burden in this churning process, eventually, .  More about start up costs in future posts.

Equipment Fee.  The equipment fee is a one-time 4% fee.  This fee is charged to you during the construction and financing phase and is often overlooked.  It is the fee that CSCorp charges for going out and finding the "right" equipment for the "proven system".  Whatever volume discounts the equipment manufacturer is given to CSC is not passed on and furthermore CSC is charging you another 4% for arranging the equipment.  This equipment fee is applied to any equipment sent to you by Cold Stone Creamery - from a $5 spatula to the $1900 Blenders to the $5500 Cake Freezer.

Transfer Fee.  The Transfer Fee is a one time $10,000 fee.  The transfer fee is basically an extension of the initial franchise fee.  If you ever plan on selling the store - there is a fee for transferring it to another owner.  Unless you plan on being a "terminal" franchisee - you will try and sell you store.  Count on $10,000 fee - add that to your initial franchise fee and you really looking at $52,000 for getting in and getting out fees.

Weekly Royalty Fee.   The Royalty Fee is 6% of your weekly adjusted sales.  It is automatically withdrawn from you checking account via an banking ACH wire agreement.  This is convenient and makes it less painful than writing a check each week.  I am sure that it is easier for CSCorp to get the fees also, many franchisees would think twice about paying it if they had to write a check each week.  Royalty fees are common in franchising and I knew the percentages before making the decision to buy.  So I have no problem with CSCorp or the non-disclosure of the fees or what they are used for.   

Weekly Advertising Fee.  The Advertising Fee is 3% of your weekly adjusted sales.  
Let me ask you - have you ever seen a Cold Stone Creamery ad during you local or national television programming?  Yea, I haven't either.  Compare that to the number of Dairy Queen commercials you saw last fall and winter.  At one point, DQ was on O'Rielly, TNT, CBS, ABC, NBC  multiple times a night.  In 2007, CSCorp announced it would start advertising on TV - much to the delight and excitement of the franchisee community - what did CSCorp do? They advertised from April to June - on Bravo, Lifetime and WE channels.  I did not see one of the commercials - and neither did it drive any new business into stores nationally.

Basically, the Ad Fee is broken into two parts - 2% to CSCCorp and 1% to local area Co-ops.  As an owner you are required to participate in your local co-op where the owners as a whole get to decide on how to use the 1% of ad money.  And being active co-op member is important to make sure that the co-op is not using the funds for product drops to food and homeless shelters.  In Feb 2007, CSCCorp announced that they would be retaining .75% of the local co-op funds to cover the costs of the national TV campaign - leaving .25% for local co-ops to used for local ads.  This meant that any local advertising or product drops expenses are shouldered the local franchisees.

By the way, there is no accounting for how the ad fees are used or how much is received.

Product Rebate Fees (Kickbacks):  If the Franchise industry ever had any regulatory oversight, the product kickbacks is where I would begin by requiring full and frequent disclosure of the percentage of franchisee costs vs. retail costs and the amount of rebates being paid to the franchisor.  Essentially, a "truth in franchising" full disclosure document.

Our first week of operation the first product shipment was missing the Cheesecake flavoring from Dippin' Flavors - we contacted Dippin Flavors directly and ordered a 50# pail for $43 (shipping included), once Dippin' Flavors found out that we were a CS franchisee - they cancelled the order and sent us a free one rather than charge us the retail amount.  The next order of Cheesecake flavoring ordered through Sysco cost me $65 for the same 50# pail.  The independent store owner down the street can buy the same products for much cheaper than an in-system franchisee can buy it.

In a December 15th CNBC special "Behind the Counter", CNBC exposed that in 2010 Cold Stone took in $18.5 million in product kickbacks, just so you are clear, that is $18.5 million above the WHOLESALE price that you and the other franchisees paid back to Cold Stone Corporate through your product purchases.  This special, of course, caused no shortage of discussion, so much so, that Cold Stone legal forced CNBC to pull the special off the air... to my knowledge aired just the once.  If you have not done so, check out the BMM article postings with a "CNBC" search string.

Question: Is this the kind of corporate partner you want to team up with? 

This so called partner wants to shut down any kind of disclosure of it's dealings, that says alot about the "transparency" and honesty of this Franchisor.

Non-published Fees.  You will need to also consider the many hidden fees coming from equipment, product orders and in-store advertising.  

Conclusion.  You need to do some serious research and calculations - ask your self: where is the cash flow from this franchise and is it "good" enough and is the system "proven" enough to take 9% of my gross revenue right off the top and give it away.  In search of your franchise "due diligence" - be damn sure to talk to the franchisees that have left the system and get a frank point of view.  So watch out for those HOGS gathered at the feeding TROUGH that you built snorting up every cent it can.
 

PRO-FORMA: Cold Stone Utility Costs

The Monthly utilities in this small (1600sf) ice cream franchise are extremely high.  
When you look at the equipment list you will begin to see why.

Electricity (monthly)  -  ($1300)

The electricity bill by far is the largest utility expense - this expense should easily deter any logically thinking wannabe franchisee.   A typical Cold Stone store following electricity requirements:

   Freezers:
     Walk-in Freezer  (24 hours @ 6 degrees F)
     Masterbuilt Upright Blast Freezer (15 hours @ -35 degrees F)
     Carpagianni Ice Cream Batch Freezer  (4 hours @ 10 degrees F)
     Ghea Scoop Freezer  -  (24 hours @ 8 degrees F)
     Backline smoothy freezer (24 hours @ 10 degrees F)
     Masterbuilt Upright Cake Freezer (24 hours @ -4 degrees F)
     Stone #1 freezer units (10 hours @ 15 degrees F, 7 days per week)
     Stone #2 freezer units (10 hours @ 15 degrees F, 3 days per weekend)

  Refrigerators:
     Walk-in Refrigerator  (24 hours @ 41 degrees F) (1 compressor)
     Back line refrigerator (24 hours @ 40 degrees F) (1 compressor)
     Pepsi upright refrigerator (24 hours @ 40 degrees F) (1 compressor)

    Air Conditioning:  2 - 10 ton Air Conditioners (2 compressors) - 1600sf

    Backline Counter Equipment:
        3 Waffle Makers (11 hours @ 350 degrees F)
        2 Hi-performance blenders (85 shakes or smoothies per day)

    Convection Oven  (discontinued in 2007 in profit increasing scheme)
        Brownie (3 hours @ 325 degrees F)

        2 Cash Registers, 1 POS computer system, 2 CC Gift Card machines, 1 Video Camera computer system  & 4 cameras, 1 Muzak system with tuner and speakers, General florescent lighting and store signage

     In case you lost count  - that was 14 (FOURTEEN!) compressors - 8 of which run 24/7/365.  Seven of the fourteen compressors are in the main lobby area and cause a very noisy environment - one of the complaints by some customers.

    One thing to consider - at least Subway, Blimpies and Quiznos can turn off their ovens at night.  Ice Cream requires 24 hour sub freezing temperatures.

Gas (Monthly) - ($50)

   Gas is negligible as in store heating is usually low because of ambient in store heat (all of those compressors   humming away hour after hour!)

Water (Monthly) - ($350 - $400)

   Water is high because it is used to flush the gutters around each of the two granite stones and to flush the dip wells used to clean the spades in between scooping.  These water taps run during all "business hours" - that is 11 hours per day.  In some areas the health department will require that the water runs during all business hours, most
   owners will get a few water bills and start mandating that water is on only when there is a line.  Water is also used to cool Carpagianni batch freezer, there is a single batch freezer per store and is used to make ALL the ice cream sold in the store - the batch freezer is often used for 4-6 hours per day and even more during summer months.

Also:

   1 - 3-compartment restaurant sink  (2 are re-filled every 4 hours)
    2 - employee hand sinks
    2 - customer restroom sinks and toilets

   The water usage calls into question the business model in a drought area where high water usage is charged a premium.

40 Gallon Grease Trap (monthly) - ($150)

   Many county health departments require that grease traps be used for waste water containing dairy products.  There are two issues with grease traps, first, it's a $150 per month to have it pumped and the health department will track how often you are cleaning your trap. Second, the residual ice cream waste is trapped in it - in the humid summer months this trap will give off a foul odor that your crew will continually remind you about.

Linen Service (towels and mats) (Monthly) - ($80)

   What choice to you have?  Wash them yourself?  Perhaps, the towels easier than the mats.  The mats will have a grease build up and become harder and harder to clean.  Eventually, you will sign up for a service.
   100 towels and 4 mats picked up weekly.

Bellsouth Phone Lines (2) (Monthly) and DSL Internet (monthly)  ($189)

   2 phone lines are required if you are going use credit cards and gift card processing.
   DSL is required only so CSCorp can pull your weekly sales information.  Years ago, before AlGore and the internet, CSCorp only required a fax from franchisees with the weekly sales generated by their POS system.

Lease expense - Common Area Maintenance (CAM)  ($425)

   The CAM expense comes with each lease and will be quoted to you above and beyond your lease square footage quote.  Including CAM in utilities since it includes trash pick up, building maintenance, landscaping,  and some property companies even throw their property taxes into the CAM.  Watch your CAM expenses - it raised on us each year of our lease - and there was very little the lease holders can do about it.

Totals

   Total Monthly Utility Expense:  $2594
   Total Monthly Regular-sized Creations:  639
   Total Daily Regular-sized Creations:  21

Conclusion:  one thing to consider is to go no larger than 900sf store - this will limit some of the expenses listed above, however, there are still the same number of freezers and refrigerators required by CSCorp.  A smaller store will cut back on AC and heating requirements.  Water and electricity will roughly stay the same - even if you have none or one public restroom.   In creating your monthly pro-forma make sure your utilities are properly accounted.  Even second and third generation owners cannot avoid this bloated business model which  sucks up a huge utility foot print.

Opinion:  I was always surprised that CSCorp never really took into account the huge utility burden placed on the franchisees.   As you can see, the list of energy-sucking equipment is staggering and is unsurpassed by any other franchise concept.  When the new smoothie program was introduced a backline freezer became a required item - it's sole purpose was to hold cups of premade frozen fruit - I would venture to guess that some stores don't sell enough smoothies to even cover the cost of the electricity of the smoothie freezer much less see any profit.  The new Pepsi drink program added a 5-foot upright refrigerator and at one point, in a "profitability improvement" program they introduced pre-made brownies so the convection oven could be removed and the 60 minutes of usage could be eliminated.