According to a Wall Street Journal article by Richard Gibson, the number of SBA-backed loan defaults by franchisees increased 52% in the fiscal year ended Sept. 30, 2008, from fiscal 2007. Loan losses totaled $93.3 million, a 167% jump from $35 million just 12 months earlier.

Quiznos Sub had the highest number of loan defaults, with 108 franchisee failures.  Cold Stone Creamery franchises racked up 75 defaults, followed by the Subway franchise with 42 defaults and Curves for Women with 24.

By percentage of defaults to total loans, meal prep kitchen Dream Dinners had the highest, with 18% of franchisees having defaulted thus far.  Next worse were Taco del Mar and Carvel, with 15.49% and 15.38% defaults, and Cold Stone Creamery with 9.82%.

Fiscal 2008* Loan Defaults at Franchises with 50 or More SBA-backed Loans

Source: U.S. Small Business Administration *Year Ended Sept. 30

Who are franchising’s biggest losers in terms of loan default percentages from this list?

Curves International Inc. chief executive Gary Heavin,  added a bit of levity to the dismal news by claiming “These loan problems were a result of the overpriced resales of franchises between third parties.”  Franchise Pick has published many accounts of Curves resales offered for $1.00 with no takers.

FranchisePick.com and UnhappyFranchisee.com have reported candidly on many of these companies:

CURVES FOR WOMEN,  QUIZNOS,  COLD STONE CREAMERY

CURVES FOR WOMEN: Advice on Buying a Franchise Resale

CURVES FOR WOMEN: List Recent Club Closures Here

Quiznos Franchisee Blasts HQ’s Coupons and Discounts

Curves Franchisee Blames Economy for Closing

Quiznos Overview & Discussion

QUIZNOS SUB Rick Schaden Back as CEO. Reactions?

Cold Stone Creamery franchise on Unhappy Franchisee

What do you think?  Share a comment or insight below.

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  Will Cold Stone Creamery be adding Pepper Spray Swirl as a new flavor?  Or Tazerberry?  Will MACE be the newest mix-in?

Reader IllvilleMama jokingly suggested the Pepper Spray Swirl flavor in comments following the story of a fired Cold Stone Creamery employee so loyal that his hands had to be pried from the counter and he had to be pepper-sprayed by police to be removed from the premises.

According to The Daily Journal, the Aug. 9, 2005, incident happened at the Cold Stone Creamery in New Jersey’s Cumberland Mall.

According to court records, it started with Caldwell, an employee, engaging in a dispute with an assistant manager over her instructions. The original police report said foul language in front of customers was involved.

The assistant manager called the ice cream store’s owner, who told her to fire Caldwell. But Caldwell refused to leave, even when police arrived.

Officers used pepper spray to get Caldwell to let go of a counter he was using to resist being taken away.

The municipal court’s punishment amounted to $1,404 in fines and costs.

Caldwell argued on appeal there was not enough evidence to convict him, and he was denied his rights to an attorney, to confront witnesses and due process. He also claimed his right not to incriminate himself was violated.

The opinion from the two-judge appeals panel states the record “fully and firmly supports” the charges against Caldwell, calling his conduct “loud, boisterous and profane.”

“And despite defendant’s other blunderbuss contentions, we find no constitutional deprivation,” it states. “Indeed, we find defendant’s argument that he was deprived of the right to counsel to be particularly frivolous.”

The article states that Rahim Caldwell, 30, has just lost the third appeal of his conviction on three charges.  He represented himself in the last, and hopefully final, appeal.

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

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…this “golden child” of the ice cream industry continues to go undetected in their ruthless business practices, their flawed business model and their total disregard for the profitability of the franchisee.

If you are thinking about buying a [Cold Stone Creamery] franchise - DON’T DO IT!!!

J.B. Montgomery, ex-franchisee, from his Cold Stone Creamery complaint at Unhappy Franchisee

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Over at Unhappy Franchisee, a reader named J.B. Montgomery has left a scathing indictment against Cold Stone Creamery and Kahala Corp., alleging that he is an ex-franchisee victimized by franchisor “churning.”

In franchising, the term “churning” refers to the practice of reselling the same failed franchise or territory over and over for profit. It’s about as serious an allegation against a franchisor that can be made.

J.B. Montgomery alleges that he tried to sell his Cold Stone Creamery franchise, but each time he found a qualified buyer Cold Stone Creamery execs would find an excuse not to approve them. When Montgomery was finally forced to close his doors, it took Cold Stone less than two weeks to resell his failed store for a $42,000 profit.

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(Franchise Pick Franchise Blog) Things have gotten chilly for Cold Stone Creamery. It started with Richard Gibson’s The Inside Scoop article in 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…

A number of franchisees… 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…

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 last December

Blue Mau Mau reported that the WSJ article left the franchise company president cold. President Chris Prasifka fired off a quick, reassuring letter Cold Stone Creamery franchisees. It didn’t seem to have worked.

Meanwhile, on the WSJ site and on franchise expose site Unhappy Franchisee, struggling and failed Cold Stone Creamery franchise owners took the opportunity to both vent and share their perspectives on the failings of the Cold Stone Creamery franchise, the franchise organization, and effects both have had on their lives.

ARE YOU FAMILIAR WITH KAHALA & THE COLD STONE CREAMERY FRANCHISE? WHAT DO YOU THINK? SHARE A COMMENT BELOW.

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Spring may be warming up for some, but 3 out of the 5 Cold Stone Creamery franchises have gone cold and stiff in the past year.

Melissa Cassutt of the Colorado Springs Gazette reports:

   The latest, at 2130 Southgate Road, was seized after owner Pittman Investments LLC, failed to pay $23,985 in state sales tax, according to a sign posted on the door. The assets of the store - including a industrial-size ice cream machine and three waffle cone makers - will be sold in a public auction Tuesday.
   The city also has a tax lien against Pittman Investments. Company owner Ralph S. Pittman Jr. could not be reached for comment.

Cold Stone Creamery franchises at 218 N. Tejon St. and 765 N. Academy, Colorado Springs, also closed within the last year.  In May 2007 Michelle Chocolatiers & Ice Cream closed, and a Maggie Moo’s Ice Cream and Treatery franchise closed in November 2006.

According to Cassutt, approximately 16 percent of all Cold Stone franchises are for sale.  So you can have your pick of 228 out of 1,400 franchises open.

Why are Cold Stone Creamery franchises failing?

Food and beverage industry publication The Ice Cream Reporter, blames the high cost of operating a Cold Stone Creamery franchise.

According to the article, former CSC franchisee Bruce Hodgkins is quoted as saying that “location and corporate policy played into his decision to relinquish the franchise back to corporate in 2005, after three years of business.”
According to Hodgkins, Cold Stone allowed the Tejon franchisee to open too close to his store, and they forced him to remodel shortly after opening. He also complained that Cold Stone didn’t let him to do his own advertising, and forced him to honor $40,000 worth of corporate coupons in his last year of business.

According to Cold Stone franchisee Hodgkins,  “You just don’t make any money the way it’s set up.”

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

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(FranchisePick.Com)  See also: 

Cold Stone Creamery Co-Brands With Soup Nazi,

How ‘Bout a Stone Cold Bowl of Reality?

In his comment left last night on my post Cold Stone Creamery Franchise: Hell Hath no Fury Like a Franchisee Scorned, unhappy Cold Stone Creamery franchise owner Cecil Rolle states:

a recent review of Cold Stone’s website indicated that the company had 392 of its approximate 1,400 stores for sale (that’s a whopping 28% of its total franchises)…

…a recent review of bizbuysell.com and other sites revealed several Cold Stone stores with asking prices of less than $100,000 and one as low as $29,000. There is even a listing for a location that was opened in 2006 where Cold Stone corporate is attempting to sell a store that was apparently closed by the local taxing authority just last Thursday when the owner was unable to pay his taxes…

It cost me nearly $400,000 to start my campus location. If you invest $400,000 to develop a new Cold Stone and within a relatively short period, you are offering to sell it for $100,000, I doubt you will consider “Cold Stone’s franchise opportunities are about as solid as they come” as they claim on their website.

Rolle includes a link to this story (Cold Stone franchise gets served cold facts, by Ben Moger-Williams) of a Colorado Cold Stone Creamery franchise owner who is caught between a cold stone and a hard place:

The franchisee of Brighton’s Cold Stone Creamery must appear in Brighton Municipal Court to face charges
Timothy J. Dailey, 42, of Thornton, was served a summons by the Brighton Police Department on March 13, according to BPD spokesman John Bradley. Bradley said Dailey was not arrested but he was charged with failure to pay taxes and failure to renew a sales tax license.
City Manager John Bramble said Dailey had not paid his Federal Insurance Contributions Act taxes, which cover Social Security and Medicare taxes for employees.

Moger-Williams reports that Dailey’s shop will be closed for a “few weeks” while “Cold Stone Creamery’s corporate offices look for someone to take over the franchise.”  He notes that the franchise was listed for sale on broker site Bizquest.com as having gross revenue was $281,000 and an asking price of $99,000. “The reason for selling was listed as ‘Corp location looking for a franchisee.’”

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(FranchisePick.Com)  In franchising, the Internet has changed everything.  It used to be that angry franchise owners just went away quietly.  Even those who sued the franchisor did not get the added leverage of press coverage. 

But franchisors beware;  these days vengeful franchisees spread the word across the Internet… which also happens to be where franchise buyers are doing their research.

The Dissed ‘n Franchised don’t need much of an opening to blast out their message.  NJ Star Ledger’s sports writer Dan Graziano casually mentioned in his blog that while visiting the Yankees Spring Training Camp, there was a Cold Stone Creamery next to his hotel.  That was all that was needed for frosted ex-Cold Stone Creamery franchise owner Cecil Rolle to leave this icy comment:

Cold Stone does have very good ice cream. However, in my opinion, from an investment standpoint, Cold Stone is a DISASTER!!! If I had a penny to invest in a franchise, Cold Stone would be very last on my list.

I am an Ex-Cold Stone Creamery franchisee. I am currently suing the company in federal court for among other things: (1) fraud in the inducement (i.e. for selling to potential franchisees based on statements such as “profit by making people happy” and “Cold Stone’s franchise opportunities are about as solid as they come”); and (2) Cold Stone effectively charges more than the 9% enumerated in their franchise agreement because they negotiate and receive “kickbacks” from the very vendors that they require franchisees to use. Those “kickbacks” drive up food cost for its franchisees and makes many of them unprofitable. This is apparent by the large number of stores that are closing down throughout the nation.

Cold Stone has known for years that its franchisees have had serious profitability issues, yet they go out and negotiate deals that make their franchisees even more unprofitable. In my view, there is something inherently wrong with a company that negotiates deals with vendors that increase the cost to their franchisees. Those deals effectively pad the company’s own profits at the expense of its franchisees who suffer life altering financial failures and many are filing bankruptcy at an alarming rate. In my opinion, that is completely contrary to their core value to supposedly “do the right thing”. Cold Stone’s lack of care and concern for their franchisee’s well being is inexplicably disingenuous in my view.

On its website, Cold Stone Creamery boasts its average store generates $381,985 in annual sales. We had three stores and they were performing well above the national average. Two of our stores did $500,000 each in annual sales, which is more than $100,000 above the company’s national average. We operated a store near a large college campus that was among the top Cold Stones in the entire nation. With $1.4 million in sales between the three stores–Cold Stone Creamery repeatedly recognized us as outstanding performers among stores throughout the nation 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.

There are Cold Stone Creamery franchisees who are pumping several thousands into their stores each month just to cover their losses. One franchisee told me, after investing $300,000 to open his store, he is losing $4,000 to $7,000 per month. A franchisee in Florida recently told me that he lost nearly $132,000 in just one store during 2007. That’s alarming…

…Cold Stone has been an absolute nightmare of an investment for many of its franchisees–myself included.

Cecil Rolle
cecilrolle@aol.com

Cold Stone, I know how you feel.  Tonight over on BlueMauMau.org an anonymous “Guest” claimed I am a drunk and a liar (as if those were bad things) and was helping them choose a franchise and somehow tricked them into giving me their money.  Unfortunately for “Guest” I don’t sell franchises.  Even worse for guest, I’m an Irish marketing guy.  Calling me a drunk and liar’s a bit redundant, wouldn’t you say?

WHAT DO YOU THINK?  (ABOUT COLD STONE, NOT MY IRISH T’IRST)  LEAVE A COMMENT BELOW.

Photo credit:  yanec  Licensed under Creative Commons

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(FranchisePick.Com) Is the Cold Stone Creamery’s franchise bowl half-empty or half-full? Amidst rumors of internal problems and a third round of layoffs at franchise amalgam Kahala Cold Stone, here’s the latest attempt at making their concepts work: sticking a couple of them together. Who knows? They can always add a Cereality franchise to the mix.

The First Co-Branded Store Makes NYC Debut on Astor Place

‘Soup and Ice Cream for Life’ Raffle Drawing During Ceremony

NEW YORK, Oct. 8 /PRNewswire/ — Soup Kitchen International, the creators of the Zagat-rated soups of Al Yeganeh, the legendary soup man who inspired the “Soup Episode” on Seinfeld, and Cold Stone Creamery, the fastest-growing ice cream concept in the United States, today announced the grand opening of the first The Original SoupMan/Cold Stone Creamery at 2 Astor Place in New York, NY in early November. Recent Penn State graduate Daniel Petryszyn is opening the first hybrid, co-branded franchise that will feature both The Original SoupMan’s world-renowned soups and Cold Stone Creamery’s super-premium ice cream. Petryszyn’s Original SoupMan/Cold Stone Creamery, in addition to ice cream, will showcase Yeganeh’s 50 varieties of soup as the “centerpiece of the meal.” Each meal will be presented with a piece of fresh, crusty baguette, fresh fruit and a piece of imported chocolate — just like Al Yeganeh served it at his original shop. As Yeganeh explains it, this is simply “the way to eat.” Alongside Yeganeh’s 50 varieties of soup there will also be an extensive line of gourmet salads and sandwiches.
“Customers demand choice and innovation,” said Dan Beem, Cold Stone Creamery President. “We’re pleased and excited to explore these opportunities with the Original SoupMan to introduce both the highest quality, most creative ice cream experience alongside premium, gourmet soups, all under one roof.”
During Petryszyn’s grand opening ceremony, one customer will win a free cup of soup every day for the rest of his life while another customer will win a free cup of ice cream as part of the “Soup/Ice Cream for Life” drawing. In addition, the first 100 customers will receive a gift bag stuffed with free merchandise.
The Original SoupMan will also donate $1,500 on behalf of Yeganeh’s charity, “Al’s Feed the Hungry Foundation,” to “City Harvest,” the world’s first and New York City’s only food rescue program. Feed the Hungry Foundation donates funds to local hunger charities every time a new Original SoupMan location opens. The charity is headed up by Baseball Hall
of Fame legend, Reggie Jackson.
About The Original SoupMan
Founded in 1984, legendary soup man, Al Yeganeh, set the standard for
delicious, world-renowned soups at his New York City location, Soup Kitchen
International. Now, with the international growth of his franchise, The Original Soup Man, Al and his team will give the whole world the opportunity to experience soup as it was meant to be. The company also sells the Original SoupMan soups in Grab-n-Go packages in grocery stores nationwide. To learn more, visit http://www.ORIGINALSOUPMAN.com.
About Cold Stone Creamery
Cold Stone Creamery delivers the Ultimate Ice Cream Experience(R)
through a community of franchisees who are passionate about ice cream. The secret recipe for smooth and creamy ice cream is handcrafted fresh daily in each store, and then customized by combining a variety of mix-ins on a frozen granite stone. Headquartered in Scottsdale, Ariz., Cold Stone Creamery is part of the Kahala-Cold Stone holding company, a leading brand-building franchisor with a portfolio of 14 diversified brands. Cold
Stone Creamery alone operates more than 1,400 locations in the U.S., Puerto Rico, Guam, Japan, Korea, China, Taiwan and United Arab Emirates. For more information about Cold Stone Creamery, visit the company’s Web site at http://www.coldstonecreamery.com.

Related Stories:

Cereality Franchise Closes in 3 Months; Breaks Previous Record

Soup Nazi Under Fire in Franchising (No Success for YOU!)

How ‘Bout a Stone Cold Bowl of Reality?

Reality, Surreality & Cereality

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Last week, in response to Kahala Cold Stone’s acquisition of the fledgling Cereality Cereal Cafe chain, I asked Can Kahala Cold Stone Put Some Reality in Cereality? The answer was swift and clear.

In “Cereality Growth Begins By Shutting Two of Seven Stores,” Restaurants & Institutions magazine’s Derek Gayle writes that:

On acquiring the seven-unit Cereality Cereal Bar & Café chain, one of the first moves franchising powerhouse Kahala-Cold Stone made was to close two stores, one in Chicago, the other in Evanston, Ill, a suburb north of the city.

The stated purpose is to transition from company-owned to franchise units but the two that have gone dark may not re-open in the same locations.

In the surreal land of Cereality, restaurant chains grow by closing units. (Imagine… they only have five more units to close to achieve 100% growth!)

In the land of Cereality, companies transition to becoming franchise chains by immediately closing their franchise training store (Evanston, IL), and their flagship store in a market they called “one of the best in the entire world” (Chicago).

In Cereality, new owners boldly announce their strategic decision to close stores that have already been closed for months, and take the reins from management who already departed the company.

In the surreal world of Cereality, trade magazines state the chain has “…proved the viability of a cereal-based restaurant concept” despite the fact that about half of the walk-in stores, 28% of the total units, failed.

When will reality set in?

Kahala Cold Stone CEO Doug Ducey states that they won’t be expanding by investing their money in corporate stores, but will instead allow franchisees to finance the growth of the concept. Why not build and operate company stores? As Ducey states in the article:

“As you reach the 30 to 50 mark in terms of stores, you get a good handle on what works and what needs to be fixed,” Ducey adds. “That’s when you can build dozens of stores and have a high probability of success with both the brand and franchisees.”

And what of the franchisees who will build the 25 to 45 Cereality Cereal Cafes before they “get a good handle on what works and what needs to be fixed”? They may have a big, cold bowl of Cold Stone Reality waiting for them…

Cereality Blogliography
July 23, 2007 Cereality Growth Begins By Shutting Two of Seven Stores (R&I)
July 17th, 2007 Can Kahala Cold Stone Put Some Reality in Cereality? (FranchisePick.Com)
July 13th, 2007 Reality, Surreality & Cereality (FranchisePick.Com)
July 12, 2007 The Cereality Acquisition: Big Ideas Live (R&I)
June 27th, 2007 Trendy Franchise Concept Gets Cereality Check, Closes Store(s) (FP)
Source articles:

May 23, 2007 Specialty Cereal Eatery Boxes Up Bowls, Spoons (Daily Northwestern)

March 28, 2006 New cereal-serving restaurant expects to bowl over Evanston (Daily Northwestern)

Company website: Cereality.Com

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Can you tell the difference between REALITY, SURREALITY and CEREALITY?

Cereality: Cereality is what you see in this screenshot from the Cereality Cereal Cafe franchise website: a fun and wildly successful restaurant concept that is, as USA Today stated, so absurdly simple it can’t fail. The homepage photo above showcases the concept: the happy, laughing people of Evanston, IL, lined to the door, eager to pay a pajama-clad “Cerealogist” $4 for a bowl of cereal while cartoons play on the flat screen overhead.

Reality:  Reality is what I found earlier this week when I visited the Evanston, Il Cereality: just a bracket and hanging wires where the flat screen monitor used to be, the tables, chairs and menuboards all gone off to breakfast-nook heaven, the custom cupboards open and bare, and the brushed aluminum door is locked tight. In Evanston, as in downtown Chicago, the Cereality Cereal Cafe has closed, and Saturday morning has returned to being a once-a-week event.

Surreality:   I guess Surreality is trying to envision a world without a single $4 per bowl cereal-only restaurant - and imagining how the residents will survive… having to relearn the primitive practices of cereal pouring and milk-dousing all over again, learning to eat from a bowl, not a disposable cardboard chinese food container. Eating cereal with a plain old spoon, not a hollow one you can suck milk through.

Perhaps Surreality is imagining the highly trained Cerealogists wandering the mean streets of suburban Evanston, the older ones in tattered PJs, slumped in despair, muttering about the time they met King Vitaman, the younger ones mustering the energy to start over, to be retrained and recertified as Sandwich Artists, Starbuck’s baristas or even Popologists at Humdinger Kettle Korn.

The Evanston location was a beauty, highly visible in about as perfect a location as you could find: Hip. Progressive. Upscale.  Sidewalks bustle with young affluent professionals with kids, and Northwestern college students with $30K+ tuition and no cooking skills.  As I stood before the empty location, the voice of Frank -N-Berry Sinatra crooned:  If you can’t make it here, how’ll you make it anywhere…? (like, say, State College, PA or Newark Airport where they also have locations?)

To me, there’s something infinitely sad about a closed business, especially one with  energy and cleverness.  The problem is that Cereality is a concept in love with its own cleverness.  Even in recent interviews and television appearances, the founders recounted the cleverness of their two-year-old press release .  They giddily quoted their cute, pithy slogans.  They didn’t speak the language of restaurant operators;  no talk of  average unit volumes, visit frequency or food and labor costs.  They did not obsess over cereal quality, or speak passionately about creating innovative, fresh cereals that could introduce an entirely new culinary category for Americans to enjoy on the run.  They were enthralled with the pop-culture appeal of the mass-produced, mass-marketed brands.    If the countless “eatertainment” concepts that floundered and failed in recent decades taught us anything, it’s that cleverness can get people to try your concept, but it’s your product that will determine your success.  If you’re in the foodservice business, your product is food.

Cereality Check Lesson #1:  Know what business you are in;  its the only way to make success a reality.  If you’re in the cleverness business, you better be able to find people who will pay you for being clever.  If you’re in the food business, you better provide a great product that will bring people back again and again.  Our brave forefathers in the Eatertainment wars fought and died to teach us that lesson.  Don’t make their sacrifices be for naught.

WHAT DO YOU THINK OF THE CEREALITY CONCEPT?  WOULD YOU CONSIDER A CEREAL CAFE FRANCHISE?  YOUR COMMENTS ARE APPRECIATED.

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