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

Introduction

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

Franchisees’ Challenges (1/3)

• 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)

Franchisees’ Challenges (2/3)– 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’ Challenges (3/3)

• 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.

Word of the Company

• Cold Stone’s president stated that: ”inventory of stores for sales now is higher that it has been”

• The company’s spokeswoman characterised the for-sale 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.

Case Questions

Question 1

• 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?

Answer to Question 1

• 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

Question 2

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

Answer to Question 2

• 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).

Question 3

• 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.

Answer to Question 3 (1/2)

• 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

Answer to Question 3 (2/2)

• 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

Question 4

• 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?

Answer to Question 4

• 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/index.html

Application Question 1

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

Answer to Application Question 1

• 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).

Application Question 2

• 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.

Answer to Application Question 2 (1/2)

• 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

Answer to Application Question 2 (2/2)

Franchisees’ stores are too close to one

another

High Prices of products

Poor management

Economic recession

Tough competition

Franchisee training

Store locations

Recognized Brand

Factors working for franchisee

Factors working against franchisee

Thank You for Your Attention