Former Cold Stone franchisees, Cherny campaign slam Ducey

Doug Ducey

A group of former Cold Stone Creamery franchise owners accused Republican state treasurer candidate Doug Ducey, the company’s former CEO, of using a raft of dishonest business practices to perpetuate a revolving-door system that lured in franchisees, bankrupted them and then pushed them aside to make way for new ones.

At an Oct. 7 press conference, hosted by Andrei Cherny, Ducey’s Democratic opponent, four former Cold Stone franchise owners blasted the former CEO. They accused him of attracting franchisees with inflated profit projections, intentionally undermining owners and using Cold Stone’s store evaluation system to bully franchisees who challenged the company’s actions.

They said projected profits used to attract franchisees were inflated with numbers from successful, non-franchised locations that were operated by the company, such as a store at Times Square in New York, and owners were pushed out of business to make way for new ones after their profits never materialized.

“Cold Stone didn’t make a lot of money selling ice cream. They made money selling franchises,” said Harold ‘Hal’ Hickman, who owned Cold Stone stores in Las Vegas and St. George, Utah.

Hickman, Ken and Jennifer Gornall, Ed Normand and Randy Redd owned Cold Stone franchises during Ducey’s tenure as CEO, from 1995 to 2007, and all blamed the company and Ducey for financial hardships resulting from their investments in the ice cream company. Cold Stone Creamery declared bankruptcy in 2008.

Ducey accused Cherny of “grasping at straws” in his bid for the Treasurer’s Office, and said the former assistant attorney general and ex-White House aide was unfairly maligning Ducey’s former company. He would not, however, address the specific allegations made by the former franchise owners.

“(Cherny) won’t talk about his authorship of President Obama’s ‘Change We Can Believe In,’ so instead he spends his time tearing down Cold Stone Creamery,” Ducey said in a statement, referring to President Obama’s campaign policy book, which Cherny wrote. “Arizonans know what Cold Stone is: a well-run local business, which provides a product that consumers love. No amount of distortion by Andrei can change that, and Arizonans will see through his desperate efforts to smear a successful local company.”

According to the U.S. Small Business Administration, Cold Stone was second in the country in defaults on SBA loans in 2008 among franchises with 50 or more SBA-backed loans. Of 763 SBA-backed loans given to Cold Stone franchisees from 2001 to 2008, 75 defaulted in 2008.

Normand, who bought a store at 75th Avenue and Lower Buckeye Road in 2007, said he was forced to declare bankrupty when his store closed. The Gornalls, who owned a store at 53rd Avenue and Bell Road from 2005 to 2007, said they lost their home and their retirement savings after their franchise went under.

“They know they were selling a failed business model to franchisees, yet they continued to do it year after year to the profit of the creamery. Most of us, a number of us here, were just ruined financially,”
Ken Gornall said at the press conference, which was held at Arizona Democratic Party headquarters. “He was the CEO. He was responsible for whatever actions took place.”

Hickman alleged that when he attempted to sell his Cold Stone store in Utah, company representatives contacted the prospective buyer and urged him to wait until the store went out of business so he could buy it cheaper. He said after he closed his Las Vegas store, the company called the owners of the strip mall where it was located in an attempt to get the keys and security codes so they could reappropriate the store and the equipment inside. Hickman said he sued the company over the alleged interference, and as part of a settlement, Hickman parted ways with Cold Stone.

Redd, who owned four Cold Stone stores in Arizona, said the company tried to renege on a contractual agreement that allowed franchisees to pay reduced annual franchise fees after they had owned their stores for more than 10 years.

Redd said Cold Stone tried to prevent him from opening a new store at the discounted rate available to existing franchisees by opening another store less than three miles from the one he owned.

“They didn’t want to sell it to an existing franchisee. They wanted to get the $60,000. So they opened one that was within three miles of our existing store. And according to our contract, they weren’t allowed to do that,” Redd said.

The company marketed itself with two-for-one coupons that cut deeply into the stores’ profits, the former owners alleged. The coupons, often printed on movie tickets or given out at high schools, brought customers into the store but didn’t bring in much money for the owners because of the free ice cream they were forced to give away, Hickman said.

“We were giving away ice cream and they were getting branded,” Hickman said.

Redd and the other franchisees also said Cold Stone used its store evaluation system to punish recalcitrant owners who questioned Ducey or the company. He said the poor evaluations often consisted of arbitrary infractions, such as not having enough ice cream cakes on display in the store freezer. Redd’s store, he said, was cited for violating the company’s prohibition on having non-company food in its refrigerator because an employee had stored his lunch there.