Due Diligence: Cold Stone Creamery Fees

Let's begin with the fees being paid by you to Cold Stone Corporate (CSCorp).

I have often pictured the franchise concept as a long revenue 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, I see, all of the money-starved hogs lining up at the trough each month - the largest of those hogs 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 CSCorp when purchasing any equipment from CSCorp.  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.
6. Product Rebates Fees - the rest of the world call these "kickbacks" - the franchise world calls them rebates that are paid to the franchisor.  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 purchasing the products.

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Franchise Fee.  The Franchise fee is $42,000.  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 - 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.

This fee is the primary motivator for the Franchisor to "churn" through franchisees.  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 build out, equipment costs and initial good-will with the community.  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 their "proven system".  Whatever volume discounts the equipment manufacturer is given to CSCorp is not passed on and furthermore CSCorp is charging you another 4% for arranging the equipment.  This equipment fee is applied to any equipment sent to you by CSCorp - 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 are 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.  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 (prime ice cream months) - 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 CSCorp 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 other store owners and corporate marketing specialist are not using the funds for product drops to food and homeless shelters (true story in Atlanta). 

In Feb 2007, CSCorp 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 public accounting for how the ad fees are used, how much has been collected or the current balance with corporate.

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.

Conclusion.  You need to do some serious research and proforma work - ask your self: is the cash flow from this franchise "good" enough and is the system "proven" enough to take 9% of my gross revenue right off the top and give it away.  And that's just the weekly fees, you will need to also consider the many hidden fees coming from equipment, product orders and in-store advertising.  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.  One last point, all fees are pulled by CSCorp no matter how far under you are each month.