Entrepreneurship & Innovation Class
Case Study 8.1
Heartache and Financial Failure: What
Happens When Financial Challenges Become
Overwhelming
TEAM CS: Michal MA1N0219
Emil MA1N0211
Anja MA1N0206
Lubica MA1N0212
13/11/2013

About Cold Stone Creamery:
– Selling ice cream (with nuts, Oreo biscuits etc.)
– In 1988, first shop opened by Susan and Donald
Sutherland in Arizona, U.S.A.
– In 1995, first franchise store opened
– From late 1990s to mid. 2000s fast growth
– At its peak had 1,400 franchise stores
– From 2003- 2005 number of stores doubled

• In 2008 many franchise stores were put on sale or closed due to financial losses and emotional distress that franchisees had
• Claims from franchisees:
– Costs are too high comparing to revenues
– Selling a premium priced product in tough economy
– Difficult to cover overheads as the stores are located in expensive locations (one scoop of ice cream is $4.00, rent alone around $7000 monthly)

– Rapid expansion of the brand as well as their competitors (Haagen-Dazs, Ben & Jerry’s)
– Stores are located close together
– Franchisees are required to buy products from approved distributor even if there is a discount in a supermarket for the same product
– Franchisees are not allowed to do their own advertising
– Forced to honour $40,000 in two-for-one coupons mailed by the corporate office

• Franchisees complain it is extremely difficult to make money owing and operating Cold Stone Creamery
• They also say that company’s model is “broken”
• Internet full of franchisees talk about their financial and emotional toll because of losing their Cold Stone franchise.

• Cold Stone’s president stated that: ”inventory of stores for sales now is higher that it has been”
• The company’s spokeswoman characterised the forsale number as “at par with industry expectations”
• In 2008, still more that 1,000 stores opened and the company continues to sell franchises
• The company argues that the ultimate success of an individual store depends on how well it’s operated.

• If you were thinking about buying a franchise, like a Cold Stone Creamery store, what
financial information would you look at and analyze before you compete the purchase?

• Market share
• Potential market growth
• Costs and revenues of franchisees
• Forecasted costs and revenues of the franchisee I would open (based on the information of other franchisees with similar features to the one that I would open)
• Potential market threats
• Consumers and suppliers bargaining power

• After reading the case, do you sympathize or do you believe the company’s explanations?

• We do not believe the company’s explanations. Despite of the company’s obvious decline in market share and threat of bankrupt, the company spokeswoman characterized the for-sale number as “at par with industry expectations”
• Why?
– If a company would confess their decline, they would have to decrease a price for the potential buyers (because the firm face a bankrupt).

• Do you think that some businesses that have financial trouble might never have had a chance to begin with?
– If so, what can a business owner (including a franchisor of a Cold Store Creamery) do ahead of time to make sure the business is financially feasible? Use the concepts conveyed in this chapter and Chapter 3 to formulate your answer.

• There is a chance for firm with a financial trouble to get investment. However no investor wants to invest to the company that does not appear to have a potential growth and / or has a poor management
• According the feasibility analysis theory if the company is not financially feasible, the main idea of the business should be recreated

• The business owner (or franchisee) should make a feasibility analysis to make sure that the business idea is (financially) feasible.
• Buying intention survey should be administered in order to predict revenue of the business and subsequently analyze costs and assess a financial feasibility
– It is especially important for franchisees who plan to open a franchisee because every location of the business has different factors influencing the feasibility

• At some point in your career, could you see yourself buying a franchise?
– If so, what type of franchise do you think you’d enjoy owning?

• In order to make a right decision whether and what type of franchisee to buy, there should be done a detailed research about markets’
and franchisers’ potential growth as well as a
feasibility analysis of a franchisee in the proposed environment and factors influencing business.
• List of top 10 franchisees in 2013: http://www.entrepreneur.com/franchise500/i ndex.html

• What lessons, regardless of the type of business involved, can a prospective business owner learn by reading this case?

• It is important that business practice prudent financial management.
• Otherwise not only owner but everybody else involved in the business (and / or franchisees) might hard but it does not improve a quality of their life (because of the bad management).

• Do some Internet research to see what the status of Cold Stone Creamery and its franchisees are today.
– Has the business environment for Cold Stone
Creamery franchisees improved or are a number of them still going out of business?
– Make a list of the business and environmental factors working for and factors working against
Cold Stone Creamery franchisees.

• According analysis of Cold Stone Creamery from 2010:
– “Cold Stone has closed approximately 160 stores in two years, and more than 20% of its current stores are up for sale. Many franchisees are overwhelmed with debt, and some store owners are even claiming personal bankruptcy.” http://www.lewrockwell.com/decoster/decoster132.html

High Prices of products
Franchisees’ stores are too close to one another
Factors working for franchisee
Factors working against franchisee