MTY/Cold Stone's Kickback Scheme

Updated June 6, 2021

MTY Food Group, Cold Stone Creamery’s parent company, disclosed an average increase of $1.4 million each year in kickbacks totaling $87.5 million from 2017–2020 (PDF pgs. 62, 66, 59 and 54) on a declining number of U.S. franchisees. MTY reported kickbacks in other brands as well. For example, MTY more than doubled Papa Murphy’s 2019 kickbacks from $781,545 (PDF pg. 48) to more than $1.6 million in 2020 (PDF pg. 44). The company also increased Taco Time’s 2019 kickbacks from $23 million (PDF pg. 59) to more than $24 million in 2020 (PDF pg. 52).

Kickbacks are “commercial bribes” that are harmful to franchisees—causing operators to pay “artificially high” prices. Franchisors use them to increase revenues. The U.S. Legislature has acknowledge that kickbacks create a “windfall to the franchisor at the franchisees’ expense”. The U.S. Inspector General’s Office also acknowledged the financial devastation suffered by Cold Stone and Quiznos franchisees—two franchise companies that perhaps rank as the most criticized companies for excessive kickbacks linked to store closures.

The threat that franchisor kickbacks pose to franchise owners due their propensity to substantially raise the cost of goods and services that franchisees must purchase has been well documented. Cold Stone’s history includes repeated franchisee complaints of a failed business model due to the company’s kickback scheme, which in turn caused stores to become unprofitable (here and here). Owners suffered severe financial consequences including loss of their business and savings, bankruptcy, home foreclosure, etc. Quiznos’s franchisees made similar kickback complaints and perhaps it’s no coincidence that Cold Stone and Quiznos suffered among the highest SBA loan failure rates in franchising.

Recently, Cold Stone has successfully avoided media coverage of its kickback scheme and held negative press to smaller publications, announcements of store closures and other issues of local interest. The company is therefore poised to sell new franchises claiming low food cost, profitable franchisees and claim that its franchise network is growing fast. This may lead some potential franchise investors to believe that Cold Stone’s troubles and kickback scheme are in the past.

However, Cold Stone’s 2020 Franchise Disclosure Document (FDD) and other documents reveals that Cold Stone has not grown positively in the U.S. since at least 2007, has closed 500+ U.S. locations in the same period and 271 franchisees left the company in just the past three years. This exodus predates COVID-19. Cold Stone also disclosed that MTY USA and its subsidiaries received kickbacks totaling “$23,028,389, which was approximately 12.8% of MTY USA and its affiliates total recognized revenue in the amount of $179,562,467” (PDF pg. 59). Wow! Nearly 13%!

Below are statements that, based on the information above, some potential investors may find false or misleading as to the effects of Cold Stone’s kickback scheme.

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