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Cold Stone Mixes It Up

Cold Stone Creamery may have the highest unit volume in the ice cream category, but its aggressive expansion plan has hit the skids over the past two years. In May, the Scottsdale-based chain, known for its marble-slab mixtures and crooning employees, was acquired by Kahala Corp, a quick-service-restaurant franchisor that holds Blimpie and Samurai Sam's. Taking a page from Starbucks, which has proved that cranking out new stores can be antithetical to brand building, Kahala-Cold Stone is shifting strategy and testing more-inventive approaches to growing their business.

"When a chain goes through explosive growth like Cold Stone did, you have to take a breath at a certain point and say, OK, we've got all the best spots out there," says Chris Prasifka, Kahala's newly appointed president. "We don't want to oversaturate and jeopardize our unit volume." Instead, Cold Stone plans to focus its efforts on growing same-store sales and making each franchise more profitable by diversifying the product offerings. This doesn't just mean adding new ice cream flavors, although Cold Stone will introduce a full batter line (Cinnamon Bun, Carrot Cake, etc.) this summer. It also means trying to hit different parts of the day through co-branding.

Ice cream is a difficult category. It's a fragmented market with many regional players, not to mention that "over the past 5 or 6 years, the introduction of frozen coffee drinks like Starbucks' are even more competition," Prasifka says. Because frozen desserts are bound to warm weather (many chains, including Dairy Queen, shut down during the winter months) and limited times of day (Cold Stone has two peak traffic times: after school and after dinner), ice cream franchises have had to get creative with co-branding. For example, Baskin-Robbins, which found a successful formula in sharing space with Dunkin' Donuts, is now making room for Togo's Great Sandwiches too. To expand its own lunch options, Cold Stone is doing experimental co-branding with SoupMan stores, the shops that inspired Seinfeld's Soup Nazi ("No Soup for you!"). SoupMan is not a Kahala-owned brand, and although it's testing well in some New England stores, Cold Stone is not convinced it's the perfect lunchtime fit. To hedge their bets, they are developing their own Cold Stone café with soups and sandwiches, which will go into testing in the next few months.

Obviously Cold Stone is not the first quick-service food chain to expand its base product offerings to improve sales volume at different times of day. Subway, number one in the sandwich category, added personal pizzas to the menu at 13,000 stores last year; McDonald's is installing espresso machines for upscale coffee drinks; and Dunkin' Donuts has just announced an "all-day, oven-toasted menu" with flatbread sandwiches. The challenge: While adding new products is a way to increase sales volume, you don't want to dilute the brand or alienate your core customers by, say, making them wait in line five minutes to order their Big Macs while you steam milk for a chai latte. Cold Stone recognizes this challenge. "There is definitely a concern to make sure it's a right fit. You won't see us put a Samurai Sam's in a Cold Stone. We're very protective of each brand," asserts Prasifka.

Another strategy for boosting sales earlier in the day is to add healthier options. Consider that a Cake Batter cone in the largest size, called "Gotta Have It," has almost 1,000 calories, and that's without any mix-ins; add brownie bits and rainbow sprinkles and you're well over half your daily recommended calorie intake. (In a nation with a childhood obesity problem, introducing an entire line of ice cream flavors that are essentially liquid baked goods is a move that could draw more criticism.) To balance out the glut, beginning in May, all 1,384 Cold Stone stores will offer low-cal NRgize smoothies, currently sold in health clubs. And jumping on the Pinkberry bandwagon, Cold Stone has created its own barely disguised imitation, a line of frozen yogurts called—wait for it—Tartberry, which is testing well in their crunchy California stores. Cold Stone gives Pinkberry its due credit, acknowledging that the popular chain has "done a great job of introducing the consumers in America to a tarter style of frozen yogurt."

Although fro-yo spilling over with fresh fruit may be a healthy alternative to ice cream, it's a stretch to call it breakfast. Enter another Kahala-owned mix-your-own-food franchise, Cereality, which is being piloted in the flagship Cold Stone in Phoenix. For between $3 and $4, Cereality allows you to mix two scoops of name-brand cereal (think sugary treats like Cocoa Puffs and Lucky Charms) with toppings ranging from dried apricots to malt balls to pop rocks. You can also order coffee drinks and hot cereal combos, such as oatmeal with caramel sauce. Prasifka explains, "Before our stores open at 10 or 11, there's someone in there getting them ready. And we've got this great brand that really seems to fit well. The whole concept is very similar—you go in and personalize your cereal." Not surprisingly, stand-alone Cereality shops are a big hit near college campuses. It's not uncommon to find students in their pajamas eating cereal out of the large Chinese-food-style cartons and taking advantage of the free WiFi. Within the next four months, Kahala is planning to integrate Cereality into 50 Cold Stone franchises, but it is still unclear how the operations will be folded into the ice cream shops and whether the concept will appeal to people of legal drinking age.

Cold Stone is experimenting with other ways to build the business, including merchandising, corporate catering, boosting cake sales, and international expansion (they will open 120 stores in 12 different countries in 2008). One thing Cold Stone doesn't plan to do is adjust their prices. The cost of commodities like milk and sugar is going up, but the increased purchasing power that comes with merging with a food-service giant like Kahala means Cold Stone can keep its price point stable. But is a $7 dollar ice cream cone really an affordable option for families during a recession? Cold Stone seems to think so: "Are people going down from a Gotta Have It size to a Love It? Maybe. But it's an affordable indulgence."