Cold Stone franchisees feel chill

Cold Stone was a stand-alone brand for 19 years before being acquired last year by multi-concept franchiser Kahala, whose brands include Blimpie sandwiches and TacoTime Mexican food. Kahala's plans call for slowing Cold Stone's expansion, reducing new-store construction costs and finding ways to grow average annual store sales to about $500,000 from about $360,000 now.

For many franchisees, the new ownership comes too late.

Formerly an independent real-estate agent, Gornall signed up for a Cold Stone franchise in June 2004. "The stores seemed busy all the time. You assume that 'busy' equates to profitability," he says.

Before buying, Gornall called half a dozen franchisees. "No one said, 'This is a bad deal,'" he remembers. But it soon became clear that something was amiss.

Gornall already faced high overhead such as a $3,700-a-month lease, he says. Then, he says, the company squeezed his margins further by mandating that he buy what he considered expensive ingredients, in larger quantities than he needed. Gornall adds that the company's promotional couponing shrank his profits.

Along the way, he says, he didn't get much help, either from Cold Stone or the area developer -- a company representative assigned to sell franchises in the area and monitor the franchisees. The area developer, Sean Brown, visited his store only once, Gornall recalls, and didn't have any good ideas for boosting sales.

Too many ice-cream outlets?

Gornall and his wife borrowed on their personal credit cards to pay the store's bills. But after their losses exceeded $100,000 last fall, they gave up and closed their store. They lost their house and are filing for bankruptcy.

"It's been pretty devastating," he says. Still, "I share some responsibilities" for failing, Gornall adds. "Maybe I should have closed sooner, but I kept on thinking things would be better."

The company wouldn't comment directly on the Gornalls' case. But Prasifka says, "When a franchisee asks for support, we make it a priority to get someone from our team to visit them, discuss their situation and get to the root cause."

He says if franchisees aren't satisfied with the support they receive from their area developer, there are "multiple resources," including an ombudsman, available. But he acknowledges that "during tough times, we will have some franchisees who will struggle."

The company didn't comment on Gornall's complaints about Brown, which were echoed by several other ex-franchisees.

Cold Stone terminated Brown in January 2007 after he "habitually failed to pay royalties, rent, advertising and other amounts" on Cold Stone stores he owned, according to a company document in a tax-levy dispute with the government in U.S. District Court in Houston.

The dispute arose over who should pay income and employment taxes owed on Brown's stores. The government looked to Cold Stone, but the company argued that Cold Stone didn't have an interest in Brown's properties at the time the lien arose. Brown declined to comment.

Citing surveys of franchisees, Prasifka says that overall "they're very satisfied with their area developers," whom he calls "world class." He says three of the two dozen or so have left the system in the past two years.

Continued: Cold Stone fights back

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