COLD STONE CREAMERY: Franchisee Alleges FR “Churning”


What follows is a comment left by ex-franchisee JB Montgomery who alleges he’s the victim of “Churning” at the hands of franchisor Cold Stone Creamery. In franchising, “Churning” is the practice of reselling the same location or territory over and over at a profit.
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I am a recovering Cold Stone Creamery Franchisee. It will be year next month that we closed the doors and regained our freedom.

In the past 12 months we were under contract to sell our Cold Stone Creamery to a second generation buyer. During that time I saw Cold Stone Creamery Corporate stoop to an all-time low – and have seen first hand the cruelty of “corporate churning” at the expense of those who were “supposed” business partners.

Our first buyer (yes, the first of three in a span of 6 months) put cash on the table in April and was ready to jet off to Chattanooga and Phoenix for 3 weeks of training. This buyer had small business experience in the Hotel franchise sector and had comparable communication skills as other local CS franchisees, one of which is 15 miles to the north and became an owner 12 months ago. This buyer was required to pass a “attitude profile” (FranchiZe Profile, by Dynamic Performance Systems) test before he could continue in the Cold Stone approval process. He failed the 132 question test filled with subjective, rambling and random questions. At first I was shocked! Until I realized that this was the typical Cold Stone MO – that is, what’s the latest new fangled gadget to spend money on. In reality this profile test is a slick way of discriminating against potential buyers from a cultural and racial point of view….and against franchisees eager to leave the system. And, in my opinion, a violation of Section 17, unreasonable denial clause.

Our second buyer, had cash on the table and was also ready to jet off to Cold Stone University for training. He had family Marble Slab ownership experience and had developed a close relationship with the regional Cold Stone training store in Chattanooga, who encouraged him to pursue our store. Again, he had better experience and better communication skills than existing CS franchisees … he also failed the “Attitude Profile”. We talked the area CS reps into giving him a second chance at the test. This time, with the help of my wife and our business broker, he passed by a single point. The CS Area Reps approved it and gave him the go ahead. He passed the in-store evaluation, language test, the food safety course. He was now ready for the 23-day training….we were THRILLED and thought that we would be out by the end of July. BUT…before he could registered for training he needed to have an over-the-phone interview with corporate and then receive corporate approval. In late June we were shocked to learn that he had been turned down by corporate. We appealed to the corporate Ombudsman for assistance on this situation. Her only comment was “that’s business…”. I was shocked.

Our third buyer was a local Cold Stone franchisee who owns a store 15 miles to the east of us. He did not have cash to put down and would need assistance from Corporate to get financing from one of the preferred lenders – and perhaps direct assistance from Corporate. Corporate told us that they were working with this franchisee and they should have things worked out by the end of August, which just happened to coincide with the last bit of credit to our name. In early August, a shot across the bow came from the Cold Stone director of transfers who said, “you are aware that just because he is an existing franchisee does not guarantee that he will be approved”. I knew right then and there that they would not approve him. In late August we received word that corporate would not assist the local franchisee and they would not approve him for purchasing our store. I did not understand the “about face” from their willingness to assist earlier in the month….until later.

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We closed the doors on Monday, August 27th.

By Friday August 31st, the Cold Stone area reps had the locks changed, inventory completed and the floors clean.

The week of Sept 14th, they had a buyer of their own up and running. They netted a cool $42,000 off a “new” franchisee rather than “allowing” us to sell to one of the qualified buyers.

****

I have been keenly interested in the past year in the Quiznos and UPS law suits. One could easily substituted “Cold Stone Creamery” in either of those law suits in revealing the product costs, labor percentages, kickbacks, franchisor horrors and the non-viable business models. Yet, 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 CS franchise – DON’T DO IT!!!

9 thoughts on “COLD STONE CREAMERY: Franchisee Alleges FR “Churning”

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  • August 1, 2008 at 3:19 pm
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    Good! Montgomery! For telling it like it is.

    Remember that under Federal Regulatory Policy, there apparently is no such animal as a “flawed business plan” or “flawed franchise” ——Only franchisees and locations are flawed because the matter of failure of a flawed busines plan or concept is why we have federal regulation of franchising in the first place.

    The government knew that always a certain percentage of even the best franchisors would have failures that would want to address the courts. The failures would want to address the courts because the franchisors would be selling the franchises without disclosing the risk as known to the franchisors and with great hype about the success of the franchise OUTSIDE of the contract and the government disclosure document. But, if failed franchisees could win in FRAUD cases in the courts, this would threaten entire franchise networks and be bad for the economy and the “greater good.”

    While it would be against the law to make an “earnings claim” out of contract, the government had to know that there was no way to enforce this prohibition. Franchisors have almost 100% protection against charges of fraud in our courts because most of them make no “earnings claims” in the government disclosure document or the actual boilerplate contract. The franchisee acknowledges that he has bought the franchise with no promise of success OR profits, etc.. in the franchise agreement.

    If a franchisor has any units standing in the economy, apparently, under Regulatory Policy, they can sell NEW units at any degree of risk of unprofitability to new buyers. This piggy-back scheme that is enabled by the ability of franchisors to churn and turn with immunity under the law is why franchising has grown in our economy. Franchisors can beat the failure rate statistics of new businesses because they can use franchisees as merely resources to reduce their risk of financing and operating units that may fail. —-IF the franchisor can perpetuate its presence and somehow acquire the assets of the failing franchisee to continue to serve the franchise system sales. Franchisors churn for survival, as in the case of Cold Stone, The UPS Store, and so many others.

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  • August 26, 2008 at 1:05 am
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    Hi,

    I am actually looking at a 2 years old location (I’ll be 2nd gen). I been reading a lot of articles regarding CS and seems like 9 out of 10 is negative regarding this zor.

    One big question i have regarding the store I am looking at is..CS hold the master lease and is subletting to zee. I have reason to believe zor is making profits on the sublet also. Is this legal? Will this be disclose in agreement?

  • August 26, 2008 at 11:38 am
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    CS hold the master lease and is subletting to zee. I have reason to believe zor is making profits on the sublet also. Is this legal? Will this be disclose in agreement?

    Yes It is legal and Yes it should be disclosed.

    Holding the lease gives the franchisor extra leverage and can probably be used to cover up failures. Let’s say you are failing but owe future royalties and lease payments. They accept your equipment, fixtures, ownership to let you off the hook and make you sign a gag order. They can then resell to some other unsuspecting person without it being characterized as a “failure,” just a “transfer.”

    That’s a cycle that could go on and on. That’s basically the concept of “churning.”

  • August 28, 2008 at 4:44 pm
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    You fail to mention “third party churning” that is faciltated by the franchisors who don’t want to take over the lease or the assets and prefer to send in a buyer (usually another franchisee) to bargain with the Landlord and the failing franchisee.

    The Franchisor helps this third party by putting pressure on the Landlord through not assuming the Lease, as in their option, and by putting pressure on the failing franchisee who needs to get out from under the personal guarantee on the long-term Lease to avoid bankruptcy and the threat of liquidated damages for the franchisor if the failing franchisee doesn’t cooperate with the third party.

    The failures are obscured in the Transfer Columns of Item 20 when this transaction is listed as a sale-transfer in the new FDD (formerly UFOC).

    When the “transfer-sale” of the assets to the third party is accomplished, the franchisor can carry this transaction just as a transfer-sale in his FDD (formerly UFOC) that looks like a sale-transfer that the franchisor merely approved under the terms of the contract. They can hide their involvement in the acquisition of the franchise for pennies on the dollar and in the squeeze on both the Landlord and the failing franchisee.

    If this is not right —Sean! Please correct me.

  • August 28, 2008 at 7:44 pm
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    I’m crazy to say this but here it goes.

    Have any zees that is failing ever thought of re-negotiating the lease to a reduced rent amount?

    I mention this to someone and they say that re-negotiating lease is like running into a brick wall. I think one of the main reason why Cs zees are failing because of the sluggish economy. Higher prices on COGS, fuel, job loss, home value declining etc. People are not going to spend 7 dollars for ice cream in this economy so this accounts to decline in sales volume. CS calls their zee partners, so why don’t they step in to help these partners and cut their .60 cents that they are making on the subleasing and save these poor zee souls?

    I guess that’s why it’s call the American Dream. Because the scenario abovve will only happen in your dreams. :)

  • August 29, 2008 at 1:55 pm
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    Jason!

    You are right! Because of the recession, many more franchisees will fail but their franchisors have a better chance of surviving the recession because they have no investment in the physical unit that fails. The franchisor often can hang on in a recession if enough units stand to keep his operation viable. Remember, the franchisor is not your “partner” and does not share in your losses and takes his profits from your gross sales and NOT from your profits all of the time you are operating under their brand name —until death do you part. They even get to pick the “bones” of the failed franchisees with threats of liquidated damages and owed royalties that often are upheld by the courts.

    But! This is why government regulation supports franchising and franchisors. Franchising was said to have taken the economy out of recession in the 70’s and in the 80’s and 90’s when black clouds were on the horizon. Franchisors have an opportunity to beat the brutal statistics concerning small business startup failure and this, obviously, is why they are allowed to sell franchises at any degree of unviability and risk of failure to the public with immunity under our laws. The government apparently views franchisees as “soldiers” who can be sacrificed in the war to save the economy! The SBA subsidizes both the big and the little franchisors.

    The SBA Patriot Express Loan Pilot program came into being in June of 2007 to help VETS and their families to invest in themselves but will the VETS and their families be advised of the real risk of the investment, as known to the franchisor, before they put their signature to a franchise agreement. I wouldn’t mind at all if the government just wanted to subsidize the VETS and their families but the SBA does take the collateral of franchisees that has been posted for the “guaranteed” loan after the SBA pays the guarantee to the bank and the lender. The SBA, in reality, subsidizes the franchisors and the banks and the lenders.

    When times are hard and people are losing their jobs, the predator franchisors are out there selling the “American Dream.” Those who have some money saved and equity in their homes and/or 401’s are encouraged to invest in themselves and the NEED for a job and income is used to sell franchises to the public.—-both new and used franchises.

    I have no objection to selling franchises to those who are fully informed of the risk before they put their money out on the table and sign their due process rights away in a boilerplate adhesory franchise agreement. The evil in franchising is that the “risk” is obscured under the current status quo of franchising and the regulatory policy under the FTC Rule.

    The American Dream is sold to the public and The American Nightmare is hidden in the rhetoric of the free press that knowingly and unknowingly protects the special interests and public polikcy of the status quo for the “greater good.”

    Any ideas on how this could be fixed, Jason?

    Carol

  • October 17, 2008 at 8:25 pm
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    I would be interested in any information you have on the UPS Capital lawsuits as we are currently pursuing that ourselves. I have looked on line, but I haven’t found anything that relates to our situation with UPS and Cold Stone. If you could post some links, that would be great. Thank you!

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