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The Road to Carvel Is Paved with Franchise Failure

The Carvel chain has melted over the years from its high of 850 franchises to a puddle of 367 franchises. The Street reports that only 275 are full-service shops. Carvel, bought by private equity firm Roark Capital Group in 2001, wants change. The 80-year-old brand has a plan to put lipstick on this franchise pig.

Laurie Kulikowski reports in The Street on Carvel's spin.

"We're seeing a very positive customer response" and believe Carvel can take market share in the ice cream market, said Carvel President Scott Colwell.

Number of Carvel ice cream shops. Chart: Blue MauMau, Data: FDD

How competitive and crowded is the ice cream landscape as Carvel makes its move? Consider this: Competitor Baskin-Robbins was positively giddy when after years of shop stagnation it finally had a net growth of four franchised shops (pdf) last year. That's ice cream. In the frozen yogurt space, the CEO of Famous Brands, the parent of frozen yogurt franchising firm TCBY, had this to say:

"At TCBY, same-store sales are down, but that's consistent with the industry. There's been so much growth in the frozen yogurt space. The size of the pie isn't getting bigger so we're stealing share from one another," Famous Brands International CEO Neal Courtney told Nation's Restaurant News in August 2013. The company announced last week that it plans to exclusively develop its TCBY and Mrs. Fields brands in co-developed stores going forward.

What is Carvel's new answer to the crowded ice cream and frozen desert marketplace? Carvel is introducing smaller "express shoppes."

Fudgie the Whale ice cream birthday cakes will still be there. That's the signature Carvel shaped ice cream cake from your youth that one can nowadays generically buy at the local supermarket. Speaking of which, Carvel was one of the first franchisors to move into alternate distribution channels (supermarkets), which infuriated its franchisees. The brand may have seen the supermarket as a necessity for survival but the brand never really recovered its footing.

Graphic by Blue MauMau from SBA data

How risky has an investment in a Carvel franchise been? Well, it could be said that the road to Carvel is paved with franchisee failure. Carvel is not just among the riskiest of ice cream franchises, according to its franchisees' inability to pay back Small Business Administration-backed loans (see adjacent graphic), but it is among the riskiest of ANY major franchise brand in any segment. In the ice cream shop segment, Carvel franchisees fail to pay back their SBA-backed loans even more than the imploding Cold Stone Creamery chain.

When asked about the SBA loan defaults, Colwell responded in an email that "It is difficult for us to comment on the 2001 - 2011 SBA data as we have limited visibility into how our franchisees finance their businesses." That said, "over the last few years, we've added new franchisees and existing franchisees have been opening up additional locations," Colwell said. "We encourage all potential franchisees to thoroughly read and review the Franchise Disclosure Document and speak with existing franchisees to thoroughly understand the business."

In other words, franchisees are on their own when it comes to understanding franchise financials and risk. There's another thing about Carvel's Franchise Disclosure Document. That is the document the franchisor fills out in order to provide basic information about the franchise system to a franchise buyer. According to researcher Robert Bond of World Franchising, 67 percent of franchisors now reveal some sort of franchise-level earnings in their Franchise Disclosure Document. But not Carvel's, which stays away from the pain of revealing restaurant-level earnings. Carvel's Item 19 in the FDD declares:

"We do not make any representations about a franchisee's future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations…"

That is franchisor legalese speak for: "Boc boc boc, are you nuts? Who'd want to buy one if we revealed shop-level earnings?"

Reporter Kulikowski of The Street interviews Carvel's President

Although it may not want to have been pinned down with revealing earnings in its disclosures to store buyers, Carvel did reveal to the media its systemwide sales. It told The Street the nice, rounded number of $100 million.*

Why is the market ready for a Carvel ice cream shop franchise investment? The franchisor hints why it is a good buy above other investments—because the ice cream market in America is really big.

"The good news for Carvel is over 90% of households still consume ice cream on a regular basis," [CEO] Colwell said.

Uh-huh. Wasn't Burger Chef in a market where just about everyone ate burgers? But it withered from its peak of a thousand plus units until the last one closed in 1996, despite the country's love affair with hamburgers. A big market is not a recipe for a good business.

Make sure you read the full fascinating story and details from The Street's Should You Buy a Carvel Franchise?

The answer to that question should be obvious. NO!

*Note: $100 million in systemwide sales for 367 Carvel franchises is an average unit volume of $272,480 per store per year before royalties, ad fees, food, payroll, property lease and other bills are paid. 

Disclosure: Neither franchising firm Carvel nor any of its ice cream or frozen desert competitors have advertising contracts directly with Blue MauMau.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email