What We Can Learn from the Cold Stone Creamery Franchise

The Cold Stone Creamery franchise is replete with a history of problems that include franchisee lawsuits and an exposé in the Wall Street Journal. Learn why this franchise was destined to have problems.

I can recall when a Cold Stone Creamery opened less than 10 minutes from my house in a strip mall on Long island. It was about four years ago and being someone who enjoys a good dish of ice cream I paid a visit to what was then a highly publicized franchise concept. After my visit I can recall telling my wife that Cold Stone ice cream was not worth the high price. The franchise closed two years later. Before reading glowing reports about the phenomenal growth of the franchise, including its high rankings in the Entrepreneur 500,  I had known very little about Cold Stone.

I became more familiar with Cold Stone Creamery while consulting with a business brokerage group.  This firm represented several Cold Stone franchisees who listed their franchisees for sale. All but one was losing money. Since I had reason to view the Cold Stone franchise agreement, it became obvious to me why these franchisees were looking to sell.

In June 2008 the Wall Street Journal published an article reporting that a large number of franchise locations, approximately 16-20 percent, of Cold Stone Creamery franchises closed, or were being put up for sale by their owners. The article included claims by franchisees that the company had misrepresented the average revenues of Cold Stone stores and acted in ways that reduced stores' profit margins. Part of the problem, according to the Wall Street Journal, was Cold Stone’s rapid expansion in its earlier years, placing new stores too close to old ones, which hurt sales. Many times this led to inexperienced franchisees buying into bad situations.

I looked at the 2007 Cold Stone Creamery franchise disclosure documents and there were obvious signs that pointed to potential problems. The following are several that stood out:

  1. The site location and leasing requirements for a franchisee included the requirement that a real estate broker from the franchisor’s approved list be used. Failure to use a franchisor approved real estate broker would result in a $5,000 fee to be paid by the franchisee to the franchisor “in connection with training your real estate broker regarding our requirements and reviewing the letter of intent.”
  2. The franchisor disclosed that approximately 52% to 58% of franchisee purchases and leases of goods and services will be for items purchased or leased through Cold Stone “acting as a broker on your behalf” The franchisor reported that it earned over $6 million dollars in rebates from vendors and suppliers from franchisee purchases in 2006. The franchisor disclosed that these monies were used for general operating purposes, including but not limited to, salaries of personnel that assist franchisees increase their profitability and for other purposes. Remember this last sentence.
  3. The franchisor states that they will consult with the franchisee by telephone. If the franchisor, in its sole discretion, offers additional assistance to a franchisee then the franchisee will be charged an hourly fee, plus travel, lodging and meal expenditures. In other words we don’t make field visits to franchisees, but if we do then the franchisee pays.
  4. When it comes to a franchisee territory Cold Stone discloses that there is no exclusivity, moreover another Cold Stone franchise or corporate owned locations may be located across the street or even in the same building.
  5. Two Cold Stone Area Developers and one Cold Stone Senior VP had filed for Chapter 7 under the U.S. Bankruptcy Code. This is not intended to cast aspersions on individuals who seek relief under our bankruptcy laws. However, I don’t recall in my entire franchise career of seeing three individual Chapter 7 filings by franchisor staff in one disclosure document.

I could have included additional items on this list, but it really isn’t necessary to my point that this was a flawed franchise program. Here are some important things we can learn from the history of Cold Stone Creamery:

  1. When a franchisor earns a significant income from franchisee purchases, yet provides virtually no field support. Be wary.
  2. An arrangement that penalizes a prospective franchise for using a real estate broker that is not part of a so-called approved list is patently unfair. The term mandatory should be substituted for approved.
  3. A franchise agreement that provides a franchisee no protection whatsoever from competition from another franchise or a corporate unit and allows them to be in the same building. In terms of the amount of the franchisee investment, this lack of protection was unfair. There is no territory exclusivity whatsoever.
  4. Beware of the fast growing franchise programs that are on everyone’s Top 10 lists, but can’t produce many profitable franchisees.
  5. A bevy of area developers coupled with fast track franchise growth can be a warning sign.
  6. Franchisor staff that included individuals with prior business failures.

The numerous failures of Cold Stone Creamery franchisees could be laid at the feet of the franchisor, franchisee counsel and yes, even those franchisees who were caught up in the hype of what was then a “hot” franchise opportunity. After all, there was enough disclosure in the franchise documents to set off numerous alarms.

I can’t comment on the current Cold Stone Creamery Franchise Disclosure Document and its franchise agreement. However, I do know that if I had reason to review the 2007 UFOC for a prospective franchisee I would have told them to walk away in double time.

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Comments

Cold Stone management seem like Mother Teresa...

compared to Quiznos corporate. Quiznos at one point was encouraging franchisees to close their stores, under the condition that they leave all fixtures and equipment intact so they could re-sell the store to another victim for a 100% profit. How is THAT for callousness and total disregard for the zees' financial well-being? At least Cold Stone pretended to care a bit.

Learning business skills from your mistake

Now that Mr. Teixeira told you about warning signs in the Cold Stone Creamery franchise disclosure document, how about sharing with us what were warning signs in your Quiznos disclosure document? What were the signs in the FDD of franchisor callousness?

"Take it or leave it" policy

When I told Quiznos franchise rep that I'd have my lawyer review the franchise agreement document, she basically told me to save my money, that the agreement is standard, and that everyone gets the same exact one, no exceptions, take it or leave it. To my defense, the timing had a lot to do with my signing it, as one-sided as the agreement seemed. Back then (2002), Quiznos was THE hot franchise, known for its creative recipes and high-quality, delicious food. The general idea was that it was a bit more expensive than Subway, but the superior quality and taste made the whole thing well worth it. I also did my due diligence by calling dozens of existing owners, and everyone seemed happy back then. I also did research on the Web as well, and no red flags popped up, something that couldn't be said today.

To tell you the truth, I was very happy (and making money, not crazy money, but at least profitable) until 2006, when a noticeable shift in strategy took place. Food costs rose, retail pricing was pushed downward and non-reimbursed coupons appeared en masse in an effort to compete against Subway on price. Yeah I know... CRAZY!! But it happened nevertheless.

Franchisees started complaining about being squeezed from both ends and many stores closed, and some hope returned when Greg Brenneman was hired as CEO. Relations with zees improved somewhat, but they went right back down after Subway launched the $5 large promotion in 2008, and the knee-jerk reaction by Q was to tell us to follow suit, just because Subway did it, without any changes to our food or operating costs. The hell with the image of superior quality, now Quiznos wanted to be viewed as just another Subway, but unprofitable.

And the rest is history. Quiznos never changed their tactics, thousands of stores closed, and now they're near extinction. To answer your question (finally!), I signed the one-sided agreement because zees back then seemed happy and making money. There was no way for me to predict what would happen with Q management later. Lesson learned.

FDD Rebate Disclosure

Guest says, "To tell you the truth, I was very happy (and making money, not crazy money, but at least profitable) until 2006, when a noticeable shift in strategy took place. Food costs rose, retail pricing was pushed downward and non-reimbursed coupons appeared en masse in an effort to compete against Subway on price. Yeah I know... CRAZY!! But it happened nevertheless."

Food cost were extremely high at Quiznos. For example, a store owner I knew in 2005 was purchasing the same bacon I was getting for $43/case. My cost was $22.

What was Quiznos FDD disclosure on rebates? As Mr. Teixeira notes, CSC 2007 rebate disclosure should have signaled anyone looking to invest in a CSC to run for the hills.

Then leave it

And the rep said: "....the agreement is standard, and that everyone gets the same exact one, no exceptions, take it or leave it.  "

And in that case, if the agreement s*cks, you leave it. Sometimes if the overall deal is good, yes indeed you do "take it" in order to get in. For example, there are "top tier" systems that don't have "protected territories". That doesn't mean you don't have expert advice reviewing the agreement, it just mean the advice is limited to take it or leave it rather than modifying terms.  Take it or leave it DOESN'T mean "so take it".  Maybe you leave it instead.

Cold Stone did the same thing

Not only did they encourage franchisees to leave the system, they sued some franchisees to force them out without paying them a dime for their $400k stores. Then they came in and resold the stores for whatever they could get.

Yes, Cold Stone pretended to care but don't give them any credit for that. Pretending to care is far worse than being open about your motives. If you identify yourself as my enemy, at least I know where we stand. If you convince me that your my friend when you are really a money grabber, I am more vulnerable. This is how Cold Stone was able to get so many franchisees.

Cold Stone had every reason to negotiate high leases.

Knowing what we know now, many of us would have gladly paid the $5k to have our own real estate broker negotiate the lease. When you’re struggling to pay your lease every month and then you find out that the Marble Slab across the street is paying a couple thousand less per month on their lease, you regret not paying the $5k to use your own broker.

We franchisees had to pay Cold Stone up to 5% of our monthly lease payment so Cold Stone had an incentive to negotiate high lease payments and they did. We franchisees made Cold Stone’s day every month when we paid those high payments and the 5%. They were laughing all the way to the bank. We were had by our own franchisor.

it is amazing to me people are dumb enough

To have a franchiser negotiate a lease when the franchiser is making a commission off the lease value.

Franchisor handling of lease

Franchisor handling of lease negotiations, and there are a hell of a lot that see this as just another profit centre, is just another 'take it or leave it' clause and sold to franchisees suggesting the franchisor's real estate team are real estate professonals and therefore better positioned to negotiate a better deal.

On entry to franchising most know nothing of any of the abusive practices to possibly come and at renewal they are given no choice. They are not dumb because they allow franchisors' to negotiate leases; they are dumb when they do little if any research into the dark side of franchising.

Cold Stone's core values were deceptive.

Cold Stone had these core values that they used to parade around and the one they would use the most was Do the Right Thing. Yes, we were all suckers to believe that they had our best interest in mind but I think we all believed they would Do the Right Thing.

You Should Have Just Said No to Cold Stone

“You regret not paying the $5k”? How about you regret not walking away. That would have been the smart move and it would have saved you a lot more than the difference between your rent and the Marble Slab rent.

Seems like Cold Stone franchisees are all bankrupt.

Cold Stone Creamery

How about an update since this was so long ago? Huge changes have taken place with Cold Stone Creamery as they are part of Kahala now. It would be interesting to know how things are five years later. How about the rest of the story?

Kahala Made Things Go from Bad to Worse.

We all hoped Kahala would improve things but they didn't. When Kahala and Cold Stone merged in late 2006 or 2007, Kevin Blackwell emailed the franchisees and told us about the talent they had in Kahala and promising to fix things. He didn’t. As bad of a manager as Doug Ducey was, Kevin Blackwell was unimaginably worse. With Kevin Blackwell running the company, prices for products went up (probably because of the kickbacks), we started losing even more money, more and more stores started closing. Kahala started slashing its staff and things got even worse because you could call the headquarters and never hear back from anyone. Every year got worse and worse and then we never heard from Kevin Blackwell. That was a sure sign of weak leadership for me. Several months ago we just ran out of money and filed bankruptcy. Kahala is probably the worse franchising company ever.

Cold Stone Real Estate and Leasing

The Cold Stone real estate team in 2005 was a joke. Story much too complicated for comment section here. Their leasing agent and the area developer both outright lied about rents. Area developer just wanted the franchise fee for two locations. The leasing person in Arizona couldn't be bothered submitting an offer on a space we found ourselves, in the area we really wanted to operate. The local broker who showed it to us was lambasted by the Cold Stone agent for stepping on his toes, even though he sat on his thumbs and let a great site with a huge volume of pedestrian traffic get away. Instead, we got the site (2nd of multi-unit) they had already leased and blacklined...double the size needed, which greatly increased our buildout and operating expenses for HVAC and cleaning; pretty red leather furniture, expensive tables, wool rugs...looked great, but set us up for failure BIG time. Needed significantly more than "average sales" to support even though rent was "low". Bait and switch. If I could redo one day in my life, the day I signed franchised agreement with Cold Stone is the one. I will pay for and be haunted by the consequences of that action for the rest of my life!