Frozen-out franchisees regroup with KaleidoScoops

Nation's Restaurant News, July 7, 2003 by Carolyn Walkup

WHEATON, ILL. -- Three years after being disfranchised by parent company Baskin-Robbins, a group of former franchisees have scooped out a new place in the snack segment with a cooperative of ice-cream shops called KaleidoScoops Ice Cream & More.

While the co-op today has 80 ice-cream shops operating in 19 states, its future back in 1999 was anything but bright. At the time Glendale, Calif.-based BaskinRobbins was in the midst of a company reorganization and had decided to eliminate several "nonstrategic" Southern markets.

As part of the termination that included about 200 franchise agreements, 40 Baskin-Robbins operators in Texas and Louisiana were told that their franchises were being eliminated. But rather than leave the ice-cream business, a number of those franchisees made the decision to reorganize as a cooperative doing business under the KaleidoScoops brand.

They also filed a $40 million breach-of-contract lawsuit against Baskin, a division of the British conglomerate Allied Domecq QSR, that would prevent the company from re-entering their region as a future competitor. A spokesman from Glendale, Calif.-based BaskinRobbins could not be reached for comment.

Over the past three years, KaleidoScoops has doubled in size, and roughly half of its members have no previous ice-cream-shop ownership background, according to co-op president Tom Fletcher. Fletcher, formerly chief operating officer for Big Apple Bagels, previously held executive positions with Dean Foods and Baskin-Robbins.

Initial sales at most of the first KaleidoScoops stores to be converted from Baskin-Robbins units dropped an average of 20 percent, said co-founder Jerry Merrill of Amarillo, Texas. Since the co-op has become more organized and stepped up marketing and other programs, though, sales have improved, he added.

"We've gone from a group that had one of the darkest days with Baskin-Robbins to a fairly coherent, rapidly growing business," Merrill added.

Billy Dan Rolling, a KaleidoScoops owner in Shreveport, La., operates his shop in his former Baskin-Robbins store. "We're not franchise people; we're co-op people," he said. "There's no franchise fee. We like this arrangement better. It gives you more freedom."

The KaleidoScoops co-op offers several of the services that most franchisors provide for a $2,500 entry fee and $600 annual membership dues. However, use of those services -- including help with site selection and construction and an advertising program -- is voluntary.

Except for the identical exterior signage, ice-cream products that must be purchased through the co-op's supplier, standard staff uniforms and ice-cream cups, each store reflects the personal taste of its operator. Current co-op members own from one to three shops. A committee decides when to add or subtract ice-cream flavors. An optional Weight Watchers-endorsed soft-serve co-branding program has proved popular in some stores.

Operators choose any additional products they want to sell, whether the items are coffee, bagels, sandwiches, candy or giftware. They also determine their own operating hours and decor.

For instance, a shop in Crystal Lake, Ill., which is an outlying suburb of Chicago that strives to maintain a small-town ambience, sells Beanie Babies and many other gift items and posts community events notices in its window.

Average-unit sales vary widely, since hours, location and store size can differ considerably. Sales average roughly $235,000, although they range from $100,000 to $500,000, Fletcher estimated. He further projected that KaleidoScoops will have 100 units open by the end of this year and another 75 to 100 shops open by the end of 2004. He described a new owner's opening costs of about $100,000 as "affordable."

Members split a portion of any profits generated by the coop in the form of patronage dividends. No dividends have been paid so far, Merrill said, but he forecasts that some would be paid within a year or two.

He also expects that remaining debt of about $27,000 will be paid off later this summer. The debt came from funds lent to the co-op by the original former franchisees for startup costs.

Meanwhile, the former Baskin-Robbins franchisees still are hoping for a swift end to the lawsuit against the franchisor. Merrill predicted that the suit would be settled soon because he and the other former franchisees want to get that experience behind them.

"As a co-op, we don't have to answer to anyone," Merrill said. "No one can ever take our businesses away from us again."

"I think the cooperative method of ownership is a vehicle that can work very, very well," said Bob Purvin, chairman of the American Association of Franchisees and Dealers, based in San Diego. However, he added, "it also can be abused if it's not properly managed."

But, Purvin added, "if you do it right, all of the issues that we see in franchising in terms of 'them versus us' melt away."