Cold Stone franchisees feel chill

By The Wall Street Journal

Earlier in this decade, Cold Stone Creamery was one of the hottest franchises around. The super-premium ice-cream stores attracted scores of franchisees hungry for a piece of the "Ultimate Ice Cream Experience."

Now many franchisees are selling their stores, overwhelmed by soaring bills and shrinking profits. Some have lost their homes, broken their retirement nest eggs or filed for bankruptcy.

What happened?

Even as they rave about the quality of the ice cream, numerous franchisees say the numbers in Cold Stone's business model didn't add up.

A pricey indulgence?

The cost of running one of the shops was so steep that making a profit was daunting, especially in an economy where a $4 scoop was a pricey indulgence, they argue. They also contend the company cut their margins even further by offering two-for-one coupons and making them buy costly ingredients from a single supplier.

Some argue that the company's rapid expansion crowded stores too close together -- and brought in too many inexperienced franchisees.

A number of franchisees also contend the company misled them, giving them promises of profit potential that proved unrealistic or inaccurate revenue numbers from existing stores.

And some say that they got little help from the company as their stores went under.

"They have a defective business model, there's no question about it," says Ken Gornall, a former franchisee who closed his Glendale, Ariz., store last October. He adds that the average revenue numbers he received before signing up "were quite misleading," exaggerating likely annual sales.

Cold Stone says more than 100 of its stores closed last year. That's up from 60 in 2006. One list on a Cold Stone Web site recently had 303 stores for sale -- more than 20% of the company's 1,384 as of December.

This "combination of numbers is very, very high," says franchise attorney Eric Karp of Boston law firm Witmer, Karp, Warner & Ryan. "I think it's a symptom of bad news and not good news." (Karp, who specializes in representing franchisee associations and individual franchisees, hasn't represented Cold Stone store owners.)

Cold Stone has been franchising only since 1995, and Karp concludes that 12 years or so would be an unusually short time for first-generation franchisees to be cashing out and retiring.

Chris Prasifka, Cold Stone's president, acknowledges that the "inventory of stores for sale now is higher than it has been." But a company spokeswoman terms the for-sale number "at par with industry expectations," given "the economically challenging times."

She adds that about 230 of those listed for sale are stores in operation; the rest are "awards" to develop future stores.

The company also contests the franchisees' charges. Cold Stone insists it doesn't provide profit potential to prospective franchisees. It also says the revenue figures it gave for existing stores were based on franchisee reports.

Costs, meanwhile, "will depend on how well a store is operated," Prasifka says.

Cold Stone says it uses a one-stop distributor to ensure efficiency, quality and economies of scale. It adds that franchisees can buy ingredients elsewhere at lower prices if the product is identical. Cold Stone says it won't distribute national two-for-one coupons this year, after franchisee complaints.

And the company says that it's selective about adding franchisees, typically approving about 2% of applicants.

As for their chances of succeeding, Prasifka asserts that "it's no different from any other business. You've got to work it." He adds, "It does take a year or two to understand the business."

Overall, Prasifka says, "We want all franchisees to succeed. However, minimal restaurant experience, a lack of desire to do local-store marketing or the inability to be operationally excellent can all contribute to a franchisee's inability to succeed."

Continued: 'You assume 'busy' equates to profitability'

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