What We Can Learn From the Cold Stone Creamery Franchise

by Ed Teixeira

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

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. That particular franchise closed two years later. Before reading glowing reports about the phenomenal growth of the franchise, including its high rankings in the Entrepreneur 500, personally 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 a 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%, 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 could include other negative articles and anecdotes about Cold Stone; however, suffice it to say that this had the makings of a flawed franchise program.

I looked at the 2007 Cold Stone Creamery franchise disclosure documents and there were obvious signs that pointed to potential problems. Following are several signs 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 dispersions 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 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.

© 2012 FranchiseKnowHow, LLC

Ed Teixeira is the President of FranchiseKnowHow, LLC. He can be reached at franchiseknowhow@gmail.com