When many of Cold Stone Creamery's franchisees decided to invest their life savings by purchasing one or more of the company's ice cream franchises, they say they did so under the promise of 20% profits and a belief in the company's doctrines to "profit by making people happy" and to "do the right thing." Now many of these same franchisees are closing their stores due to financial issues and crying foul. They say the swanky premium ice cream franchise company that is operated by Kahala Corp has not kept either promise. For these franchisees, the "Ultimate Ice Cream Experience" has been nothing short of an ultimate nightmare resulting in heavy financial losses and bankruptcy due to unprofitable stores.
Before newly enlisted franchisees ever get the opportunity to operate a Cold Stone Creamery, they are required to travel to the company's corporate headquarters in Scottsdale, AZ for a two-week training course. During that period, these future store operators are indoctrinated with Cold Stone Creamery's five core values that govern the Cold Stone Creamery family's treatment of one another and their customers. Among these core values are "profit by making people happy" and "do the right thing."
Cold Stone Creamery uses its "profit by making people happy" core value along with statements such as "Cold Stone's franchise opportunities are about as solid as they come" to ensnare new franchisees into its fold. The enticing statements appear on the company's own website as well as other websites designed to solicit franchisees.
However, in a federal lawsuit filed in August of last year, franchisees allege that the company is misleading potential investors. Cecil Rolle, who served as general manager for two stores in Tallahassee, FL and one store in Ocala, FL, each owned by his wife, said that in spite of operating three stores that consistently performed above Cold Stone Creamery's national average unit volume, they were unable to earn a profit.
"We had three stores and each of them were performing well above Cold Stone's national average" said Rolle. "Two of our stores did $500,000 each in annual sales, which is more than $100,000 above Cold Stone's national average. With more than $1.4 million in sales between the stores, Cold Stone repeatedly recognized us as outstanding performers among stores throughout their national franchise system and within our region. Even with such a large sales volume, we still could not earn a profit. This from a company that promised us 20% profits."
On its website, Cold Stone Creamery boasts its average store generates $381,985 in annual sales. "If our stores, which were together earning more than a quarter of a million dollars more than the average Cold Stone Creamery couldn't earn a profit, what does that say for those stores that are earning average or below average sales?--and we're in a warm weather state. I doubt this is what franchisees had in mind when they bought into Cold Stone Creamery's "profit by making people happy" lie.
Other franchisees agree. "They told us you could be running at around 15%" profitability, or if you run it efficiently, you could make 20% said Osama Albibi, who owns a Cold Stone Creamery store in Panama City, FL. "We're not realizing any of that. We're running negatively. We haven't had the outside support from (corporate) to kind of control some of the things (and) to work with us and guide us to make the store profitable." Albibi says his store loss $9,500 in November but he had a relatively good month in December. His losses only totaled $6,000 that month. "We just finished our numbers for 2007 and we loss nearly $132,000 on the year. It's crazy."
The lawsuit also alleges that Cold Stone Creamery negotiates and accepts kickbacks from its largest suppliers. Merriam-Webster's Dictionary of Law defines a kickback as a payment (as of money or property) made to one in a position to open up or control a source of income for the payor." In this case the lawsuit alleges that Cold Stone Creamery's quid pro quo deal was the receipt of cash payments from its largest suppliers in exchange for Cold Stone Creamery delivering big sales to those suppliers from its approximate 1,400 franchise operators. Rolle claims this drives up the food cost for franchisees--which lowers profits for the stores--all while lining Cold Stone's coffers with millions of dollars that were not agreed to in the franchise agreement.
"Hypothetically and as an example, if a bottler normally charges retailers 40 per bottle, and Cold Stone Creamery negotiates a 20 per bottle kickback, the bottler will likely charge franchisees 60 per bottle", Rolle says. "That would cut into the franchisees profits 20 per bottle and drives up food costs--which in turn drives franchisees out of business. Under this example, in doing so, Cold Stone Creamery would be able to generate an additional 20 per bottle revenue that was not agreed to in the franchise agreement. This is in addition to the 9% for royalties and advertising that franchisees agreed to pay to Cold Stone in the franchise agreement", says Rolle.
"Discovery is still on-going so we don't know the specifics of what was transpiring but I do know that my price for some products was significantly more than I would have paid for even a larger serving of the same brand, had I bought it at the local wholesale club. You mean to tell me that little ol' me has more buying power at the local wholesaler than Cold Stone, who operates 1,400 commercial outlets? But my store was required by Cold Stone to buy the smaller serving at a significantly higher price through the bottler", R*** said. "Where was the difference in price plus the buying power going?, into Cold Stone's pockets. When franchisees attempted to buy the lower priced products from wholesalers, they threatened to put any franchisee who purchased product from other sources out of compliance. That puts that franchisee in jeopardy of losing their store(s)."
R*** says there is something inherently wrong with a company that negotiates deals with vendors that increase the cost to the franchisees and therefore increase the royalties to Cold Stone--particularly when they know it puts hardworking franchisees out of business and puts their homes and other assets at risk. He says these kickbacks make their franchisees even less profitable when the company already knows their franchisees have profitability issues. "Cold Stone has known for years that a large number of their franchisees are unprofitable", R*** said. "Yet they go out and negotiate deals that make them even less profitable. That is completely contrary to their core value to supposedly "do the right thing" and inexplicably disingenuous in my view."
"Our store isn't as profitable as we anticipated from everything we were led to believe before we opened the franchise", said Albibi, noting the high cost of food and labor. "The sales have been pretty decent, but the expenses haven't been under control", he added. "The kickbacks drive the food costs associated with operating a Cold Stone Creamery franchise through the roof", R*** says.
Perhaps this explains the rash of Cold Stone Creamery stores that have closed in various parts of the country in recent months. In addition to other stores including both of R***'s Tallahassee, FL stores, Cold Stone stores have recently closed in Athens, GA, Scarsdale, NY, two stores in Loveland, CO, Dearborn, MI, two stores in Lexington, KY, four stores in Grand Rapids, MI, Chicago, Ridgecrest, CA, Richfield, MN, Ontario, OR, Roseburg, OR and even in the company's home and founding state of Arizona.
A recent review of the Cold Stone Creamery's website indicated that there were 392 of the company's approximate 1,400 stores listed for sale. That is approximately 28 percent of the company's entire national franchise system. According to R***, many stores have recently sold for only a fraction of what it costs to build a new store. "How would you like to invest $400,000 to build a new store and once you open it, it's worth less than half that? That would not be a very good investment in my opinion."
"Recently I have spoken with franchisees who have closed their stores, filed bankruptcy, loss their homes, and even lost marriages due to the financial debacle that resulted from failing or failed Cold Stone Creamery stores", said R***. "Juxtapose that with stories and pictures of Kevin Blackwell (Kahala's CEO) and his family frolicking in the beach. I think it's very unfair to negatively affect people's lives in that manner. We have been in contact with the proper authorities within the State of Florida and we are considering seeking an injunction to stave some of Cold Stone's tactics within the state."
"When I was considering buying an ice cream franchise, I looked at Marble Slab Creamery and Cold Stone Creamery. I wish I had bought the Marble Slab Creamery franchise because Cold Stone has been a disaster of an investment for me and so many others", R*** said.
"I look forward to confronting Cold Stone at trial and determining why they continue to sell stores on the basis of "profit by making people happy" and "Cold Stone's franchise opportunities are about as solid as they come", knowing that a large number of their franchisees are losing their shirts in these stores. I think they owe all of us an explanation."