International Law

Cold Stone Case Study

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I am in San Diego for the meeting of the AAFD Standards Committee, saw a Cold Stone franchisee.

Gwendolyn Bounds, writing at the WSJ has an article on Cold Stone, with three warnings for franchise buyers.

"1. Is there too much expansion? Cold Stone's rapid pace of store openings was enticing. Everyone wants to be on board with a winner.

But you may not want to be invested in a brand if locations are too close together, or brand saturation among consumers sets in. Cold Stone says it closed more than 100 stores last year.

One list on its Web site showed 303 stores for sale, more than 20% of the company's total as of last December.

2. What's the company's policy with national coupons? While franchisees often love national advertising, they don't always love national coupons or discounts because not every market's economics are the same.

In the case of Cold Stone, franchisees contend that a two-for-one coupon cut into profits. Cold Stone has agreed to stop distributing them.

3. Will the product survive a downturn? A $4 scoop of ice cream is fabulous business when most folks are feeling flush.

It isn't such an easy sell when people are cutting back discretionary spending. Ask yourself how you'd market any franchise during tough times as well as good times.

And prod the company about how much leeway you'll have to shop around for better deals on supplies."

Are these good tips? Well, yes and no. The first observation should have supplemented with information from Cold Stone's item 20 which shows how much churning is going on. Item 20 in the FDD, when read conservatively, can produce a failure rate - the chances that you will lose your entire investment.

Focussing on store sales is not conservative enough because you should assume that the item 20 sales are forced transfers involving a complete loss of investment. (If the franchisor doesn't want explain the item 20 in greater detail, then assume the worst about transfers.)

The second tip about coupons is simply hindsight. And the third tip is pure speculation. But one out of three is pretty good.

Full post as published by Misleading Advertising Law on September 22, 2008 (boomark / email).