SCOTTSDALE ARIZ. Kahala Corp. and ice cream chain franchisor Cold Stone Creamery have merged to form what they describe as a “world-class brand-building company” that aims to add more chains to its portfolio and possibly go public. —Multiconcept franchisor
The new entity created from the two Scottsdale-based companies is called Kahala-Cold Stone and includes 13 brands that the new firm estimates will generate $1.1 billion in annual systemwide sales from more than 4,600 retail locations owned by more than 3,000 franchisees in 15 countries. —Multiconcept franchisor
Although the merger would enable cost savings from economies of scale in purchasing and added clout with real estate brokers and developers, the company indicated that brand acquisitions would likely be done with funding from financial partners—despite initial media reports implying that Kahala-Cold Stone somehow was positioned to compete directly with deep-pocketed private-equity investors. —Multiconcept franchisor
Kahala Corp.’s brands, which collectively notched an estimated $650 million in systemwide sales in 2006, include the 1,600-unit Blimpie sandwich chain, 300-unit Taco Time, 200-unit Surf City Squeeze, 80-unit Frullati Cafe & Bakery, 80-unit Samurai Sam’s Teriyaki Grill, 50-unit Nrgize Lifestyle Cafe, 40-unit Great Steak & Potato Company, 35-unit Ranch 1, 11-unit Rollerz, 10-unit Johnnies N.Y. Pizzeria, and the co-brand ice cream concept WaffLo. —Multiconcept franchisor
Cold Stone Creamery’s franchisees own and operate all but two of the nearly 1,400 outlets in the chain, which is known for ice cream treats that are customized with mixed-in confections. Cold Stone has been one of the industry’s fastest-growing chains in recent years, rising from 100 branches in 2000 to 500 just three years later, when it awarded its 1,000th franchise. The 1,000th branch of the chain opened in 2005. —Multiconcept franchisor
Cold Stone this month entered into a pact with Soup Kitchen International—parent of the Original Soupman concept made famous in the “Soup Nazi” episode of “Seinfeld”—to franchise two co-branded formats that would include the ice cream component and either the Original Soupman’s soups or its full menu, including salads, sandwiches and smoothies. In April, Cold Stone did its first diversification by bringing under its corporate umbrella for franchising the upscale V’s Barbershop men’s haircutting chain of five shops, which reportedly counted Cold Stone chairman and chief executive Doug Ducey among its early patrons. —Multiconcept franchisor
Terms of the Kahala-Cold Stone merger were not disclosed, but the company indicated that the deal was financed in part by the late Robert Petersen, an early partner in Kahala and former publishing and real estate magnate who founded the Petersen Automotive Museum in Los Angeles. He died in March of complications from neuroendocrine cancer. —Multiconcept franchisor
“Through this merger, two great franchising powerhouses have joined forces to leverage the best each has to offer to the benefit of our brands, franchisees and consumers,” said Kahala founder and chief executive Kevin Blackwell, who now is chairman and chief strategist of Kahala-Cold Stone. Ducey is the new company’s chief executive. —Multiconcept franchisor
Blackwell said the holding company will be “well positioned to further develop its portfolio of high-performance brands organically, as well as through acquisitions of other desirable brands.” —Multiconcept franchisor
In opening up options for new funding, the merger could lead to a public stock offering, he said. —Multiconcept franchisor
For Cold Stone, whose chain had estimated systemwide sales of about $500 million in 2006, the merger offers an opportunity to create “a world-class brand-building company,” Ducey said. —Multiconcept franchisor
“Cold Stone did a pretty good job with ice cream, but did an equally good job with brand building and franchising,” he said. “Now we’re looking for ways to benefit our franchise community, our area developers and our organization as a whole.” —Multiconcept franchisor
Ducey said the merger would allow the new company to drive down costs with better purchasing power and increased leverage with real estate brokers and developers. —Multiconcept franchisor
The merger also would give Cold Stone franchisees and area developers more brands to expand their businesses, possibly through co-branding. Kahala already has units that combine as many as three brands and menus, such as Taco Time, Samurai Sam and Surf City Squeeze. —Multiconcept franchisor
For its part, Cold Stone had been experimenting with ways to add dayparts, such as at a handful of units in New York and Phoenix that are testing a co-branding with Original Soupman, a concept founded by chef Al Yeganeh. —Multiconcept franchisor
Ducey declined to say whether Original Soupman could be one of the brand acquisitions the new company might undertake. Though “we’re fans of Soupman,” it was too early to say what kinds of brands Kahala-Cold Stone might pursue, he said. —Multiconcept franchisor
Kahala has a reputation for acquiring smaller startup or troubled brands. Blimpie, for example, a once-3,000-unit chain that had shrunk to about 1,600 units, was acquired in January 2006 from previous owner Blimpie International, based in Atlanta, after that company was rocked by franchisee unrest and charges of malfeasance. —Multiconcept franchisor
Ducey said Kahala-Cold Stone would continue to look for entrepreneurial “embryonic” brands, as well as other “premium and superpremium” concepts that fit within the company’s franchise-focused portfolio. —Multiconcept franchisor
As an acquisitions company, however, Kahala-Cold Stone would be competing with cash-heavy private-equity buyers, who continue to prowl the restaurant industry for new investments. Despite Kahala-Cold Stone’s “healthy capital structure,” Ducey said, funding for new acquisitions would likely come through financial partnerships. —Multiconcept franchisor
Neither Kahala-Cold Stone’s available lines of credit nor any pledges of financing it may have obtained were divulged. —Multiconcept franchisor
According to Cold Stone Creamery franchise offering documents filed last year, the franchisor had annual corporate revenues in 2005 of $43.0 million, yielding net profit of $1.7 million, compared with 2004 revenues and profits of $31.3 million and $2.0 million, respectively. For 2003, Cold Stone’s revenues were $18.8 million, yielding a profit of $2.2 million. —Multiconcept franchisor
As a potential buyer of more brands, Kahala-Cold Stone would have an advantage, said Kevin Donnellan, spokesman for the newly formed company. —Multiconcept franchisor
Private-equity firms are essentially “bankers that haven’t managed foodservice entities,” he said. “Kahala-Cold Stone is a foodservice operator passionate about these brands.” —Multiconcept franchisor
Donnellan said management changes are possible as the companies consolidate, bringing together about 180 employees from Cold Stone’s headquarters and about 150 from Kahala. —Multiconcept franchisor
Both companies were founded in 1988 in Scottsdale, and have focused on franchising, owning only a small handful of outlets. —Multiconcept franchisor
The merger was greeted as good news by Cold Stone Creamery area developer Greg Ferrell, co-owner of Conehead Investments, which handles the territories of California and Nevada. —Multiconcept franchisor
“We’re very excited about the opportunity to be part of a larger organization,” he said. “We have a larger portfolio now that we can offer the people in our system. With Cold Stone, we could only expand so much.” —Multiconcept franchisor