Franchising Trends The Scoop on Premium Ice-Cream Franchises

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Rave reviews and long lines of customers may make you want to open a gourmet mix-in ice-cream franchise. But these popular businesses may not be all sweet cream and brownie bits. Here's the skinny.

This month, journalism is going straight to my hips. I've been checking out three premium ice-cream franchises-MaggieMoo's Ice Cream and Treatery of Columbia, Md.; Marble Slab Creamery of Houston; and Cold Stone Creamery of Scottsdale, Ariz.-that have been selling franchises as fast as they can serve up 500-calorie cones.

But it hasn't been all sweet cream and brownie bits, because these popular franchises pose sticky questions: How long will consumer tastes for premium treats last, and can you really make money with a gourmet ice-cream franchise?

"Join the herd and become a franchisee," urges MaggieMoo's Web site, and would-be operators are stampeding to all three brands. David Andow, Cold Stone's executive vice president, says his company receives an average of 2,000 franchise applications a month, has 400 stores open and will have 1,000 running by the end of 2004. Marble Slab president Ronald Hankamer says his company has 214 stores operating and 93 more under contract. And MaggieMoo's, which started with 16 units in 1997, just opened its 101^st store.

All three charge franchise fees of about $25,000 and require a total investment of between $240,000 and $300,000. Royalties are all 6% and ad fees are 2% (Marble Slab and MaggieMoo's) or 3% (Cold Stone) of gross sales. All three make their ice cream on the premises and even pour pouches of dairy product and flavorings into the same machine-a $12,000 stainless steel Carpigiani Cold Delite. All sell scoops of that fresh ice cream with one mix-in item, such as blueberries, Heath Bar bits or Gummy Bears, for about $3.50. And all three put on a show, with servers plopping ice cream onto a refrigerated stone and mashing in mix-ins with two stainless steel paddles, then scraping the concoction into a cup or, if you're feeling really decadent, a chocolate-dipped waffle cone.

Taste-Testing the Differences

Obviously, field trips were necessary to detect their differences. At a MaggieMoo's outlet in Lincolnshire, Ill., I ate cheesecake-flavored ice cream with strawberries and watched kids with blue mouths finish off cones of similarly colored cotton-candy-flavored ice cream. Jorge Jedwabnik, 45, manages the store for his brother Mario, who likes the brand so much he's agreed to build 29 more outlets in the Chicago area.

Cartoons of mascot Maggie and posters advertising various "moovalous" treats, like the Banana Moo, covered the pink and turquoise walls. To attract the franchiser's main customers-families with young children-each franchisee is required to buy a $3,000 Maggie costume to be worn in local parades and festivals, said John Gohde, MaggieMoo's vice president of operations. "Because we're in the ice-cream business, the costume's at the cleaners a lot," he says.

Mr. Jedwabnik has remained the "same portly guy" while working at MaggieMoo's, but Randy Shipley, 48, says he's lost 30 pounds since opening two Marble Slabs last year in Evanston and Skokie, Ill. "The normal person would be shocked at how much production work we do," he said during a break from restocking the back room of his sleek, white-tiled Evanston store. Mr. Shipley, who was a chef before spending 20 years as a telecommunications executive, says his biggest surprise was dealing with a teenage labor force. "I'm used to depending on people who show up for work, for instance," he explains.

Elizabeth Turner, 17, had shown up and was running a waffle-cone-assembly line. While their competitors charge extra for their cones, Marble Slab gives them away, and the one Ms. Turner filled with lemon custard and raspberries for me was still warm.

The walls are a warm, deep red in Ron Klipstein's Cold Stone franchise in Glenview, Ill. Mr. Klipstein, 29, is a commodities trader who turned to ice cream because he thought running a store would be "fun." Indeed, fun is how Cold Stone differentiates itself, with crew members often bursting into song, like Mr. Klipstein's rendition of "Cold Stone Creamery Is the Best" to the tune of "Yankee Doodle." Surprisingly, that chain's main customers are females aged 24 to 35, Mr. Andow says. Sure enough, while I devoured cake-batter ice cream with berries at one of Mr. Klipstein's outdoor tables, a van full of hearty young women arrived.

Franchisees Sing the Blues

But around the country, a group of Marble Slab franchisees are singing a different tune, and it's as blue as those cotton-candy mouths. Roger Golladay, 51, a superintendent with the Army Corps of Engineers, who opened a Marble Slab three years ago in Kennewick, Wash., with his wife and sister-in-law, says, "We were all excited about getting the 19% to 25% net return the franchiser told us about. But no matter what we did, we could never get our labor and food costs close to what the franchiser said they should be. Last year we did $360,000 in gross sales and could only pay my wife $500 a month. My sister-in-law and I took out nothing."

When he called other franchisees, Mr. Golladay says he found several more who were struggling. He also found Dan Collins, of Baton Rouge, La., who opened four Marble Slabs in the mid-1990s with a group of partners and closed them four years later after losing, he said, more than $1 million, despite good sales and "lines out the door." When Mr. Collins discovered that the corporate store Marble Slab used as a financial model had unrealistically low labor costs because franchisees-in-training did most of the work, he filed a lawsuit.

Mr. Collins and his partners lost that suit last year, but they've since filed an appeal, plus actions against the company's original accountants and law firm. Their attorney, Thomas Schmidt, a partner with Schmidt & Hoffer in Houston, says he also represents former franchisees from 17 other failed stores and that more want to join the litigation.

"They all failed because their operations were terrible, and the jury agreed with us," Mr. Hankamer says. He also blamed Mr. Collins for "stirring things up" with Mr. Golladay and other disgruntled franchisees.

Are They Financially Viable?

The question isn't just who's right or wrong in the Marble Slab lawsuits. It's whether operating premium-ice-cream franchises can be financially viable. Margins on ice cream should be about 30% before royalties and ad fees, says Lynda Utterback, executive director of the National Ice Cream Retailers Association, a trade group in Rolling Meadows, Ill. But adding the mix-ins requires more labor than a straight dip, so labor costs are likely to be higher than at regular ice-cream stores, says Dennis Lombardi, executive vice president of Technomic Inc., a Chicago-based food-service-consulting firm. Plus, premium ingredients come with premium price tags. Marble Slab is an older system, and it's possible that the problems at some franchisees' outlets will surface at other companies as well.

Mr. Andow says yearly sales average $358,000 at Cold Stone Creamery franchises, and the fact that 51% of franchisees open more than one store means they're doing well financially. Ms. Utterback isn't so sure. "Mixing things into ice cream isn't new," she says. "We had similar concepts in the 1980s that disappeared. The process is very time-consuming, and ice cream is an impulse item. I fear customers will look at these places' long lines and go somewhere else."

Then there's the competition. Chicago isn't the only market sweetening up. Indianapolis has almost 100 ice-cream stores, and a recent article in the Athens, Ga., Banner-Herald claims that city is being "deluged" with gourmet ice-cream shops. Mr. Lombardi says, "It's too early to tell if these stores are just a fad or a trend, if consumers will continue to prefer the show versus faster, less expensive ice cream."

A Trap for the Health-Conscious

Then there are the calories. The Center for Science in the Public Interest's report, "Living Large; The Scoop on Ice Cream Shops," listed Cold Stone Creamery's products among the "belly traps," including the chain's regular sized "Mud Pie Mojo" sundae, weighing in at a whopping 1,180 calories and 26 grams of saturated fat, the equivalent of two personal pepperoni pizzas.

Back in Evanston, Mr. Shipley says he isn't concerned about any of this. "If you choose the right location and market it right, there's no reason you can't make money," he says. Sales at his Evanston store, near movie theaters, a commuter rail station and Northwestern University, should run $425,000 this year and $325,000 at his second store, he says. "The people who don't do well take on too much debt service and try to run their stores remotely," Mr. Shipley says. "My wife and I didn't take a day off from August to November last year."

Anyone thinking about buying a gourmet ice-cream franchise should "do a ton of due diligence, talking to existing franchisees. Then expect to get heavily involved," he adds. At that point, he had to stop talking and unload more boxes.

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