Should You Buy a Carvel Franchise?

NEW YORK (TheStreet) -- Carvel Ice Cream, the 80-year-old ice cream chain known for its Fudgie the Whale and Cookie Puss ice cream cakes, has found itself, once again, in an industry that is full of frozen yogurt chains. But as oversaturation and perhaps fro-yo exhaustion starts to hit consumers, can the storied chain re-emerge?

Growing up, I lived in a town that had two options -- Carvel or the one frozen yogurt store (this, of course, was back when frozen yogurt had its first wave of popularity in the 1980s). It's hard to forget the thrill of the experience when visiting a Carvel store. I can remember loving its soft serve ice cream cones, especially with colored sprinkles, ice cream cakes for birthdays and even its "thinny thin" ice cream options. (Boy, did that marketing succeed!). Today, though, I rarely eat ice cream and when I do want a sweet treat it's likely going to be frozen yogurt. But maybe I don't eat Carvel anymore because the nearest location is about 10 minutes away -- too far when a fro-yo chain is just down the block. But after eating the brand's new Salted Caramel soft serve ice cream flavor while filming a video with Carvel, I might be looking closer for my nearest store.

WATCH: More feature videos on TheStreet TV | More videos from Laurie Kulikowski

The lack of locations is a problem that Carvel is planning to solve. With 400 stores (two-thirds of which are full-service locations, the rest are "express" shoppes), the company said it sees an opportunity to expand full-service locations in its home regions of the Northeast and Florida, and it sees an even bigger opportunity to open smaller "express" locations nationally. Carvel is actively recruiting new franchises into the system.

"We believe there is a strong opportunity to grow our [stores] especially in the core markets. We're seeing a very positive customer response" and believe Carvel can take market share in the ice cream market, said Carvel President Scott Colwell.

Carvel is competing in an industry that over the past few years has been dominated by the rapid growth of frozen yogurt chains. Carvel believes the new store design it debuted last month will breathe new life into it as it is up against hipper concepts like Menchie's Frozen Yogurt, Yogurtland and even Red Mango that are still growing at double-digit paces in terms of sales and store count, according to Technomic, as well as dominant ice cream store brands like Berkshire Hathaway's (BRK.B) (BRK.A) Dairy Queen, Dunkin Brands' (DNKN) Baskin Robbins and Braum's Ice Cream.

The new Carvel stores will "enhance guest experience and spur a new wave of growth for the iconic brand," Carvel said in a press release. The new shoppe design features "updates that showcase Carvel menu items, including new dipping cabinets and a topping bar, as well as a large display area for the brand's signature ice cream cakes. Carvel has also added digital menu boards to communicate the company's broad variety of treats."

Still, "the remodel is important in keeping Carvel competitive and keeping it current, especially when your brand has been around for 80 years," Colwell said. "With our full-service shops we think there is a big opportunity to still fill in the Northeast, the New York market [and] surrounding states ... and then with our express shops we believe we can grow nationally and we already have a number of shops out there. We're in 26 different states." The updated store design is specifically for new stores, but Colwell said that over the next several years existing stores will also be re-imaged.

Express shops, which serve most items except the expansive cake options, are smaller in size (about 100 to 300 square feet vs. 800 to 1,200 square feet) and lower in investment ($30,000 to $120,000 in initial investment compared to $250,000 to $380,000 for larger stores), Carvel said, but they are ideal for high-traffic locations such as busy urban streets, airports, universities, malls, stadiums and arenas, among other places. Carvel express stores are also developed as co-brands with established restaurants.

Carvel opened its first store under the new design in Royal Palm Beach, Fla., in March. The company plans to open 20 new locations this year, which will be a combination of full-service and express locations.

But is a Carvel franchise a smart investment?

Frozen-yogurt franchises had their first run at success in the 1980s. Popular names like I Can't Believe It's Yogurt and TCBY were born during this time. A decade later, frozen-yogurt stores lost their buzz as ice-cream shops and coffeehouses stepped up the competition.

Today, there are no lack of options available for consumers who want a sweet treat, between frozen yogurt, ice cream, gelato stores and ices, among others. Frozen yogurt has seen a resurgence, this time with more personalized offerings as many stores have implemented self-serve options which have hit the country over the past few years. This is the reality that today's Carvel is competing in, on top of the perceived threat that frozen yogurt is "healthier" than ice cream, which may or may not be true depending on which establishment customers visit.

The frozen yogurt/ice cream industry is a "very hyper-competitive segment right now," said Don Sniegowski, founder of BlueMauMau, a franchising blog. "Good luck to Carvel, but they've been flat or down for years. It's a tough world out there for ice cream franchisors."

"At TCBY, same-store sales are down, but that's consistent with the industry. There's been so much growth in the frozen yogurt space. The size of the pie isn't getting bigger so we're stealing share from one another," Famous Brands International CEO Neal Courtney told Nation's Restaurant News in August 2013. The company announced last week that it plans to exclusively develop its TCBY and Mrs. Fields brands in co-developed stores going forward.

Carvel has just 275 full-service shops, down from 466 full retail stores in 2006, according to its Franchise Disclosure Document, as reviewed by Blue MauMau. And that's less than half of the number of stores Carvel had at its height. The brand, founded all the way back in 1934 by Tom Carvel, was sold to Investcorp in 1989. Carvel was bought by private-equity firm Roark Capital Group in 2001. Roark owns several popular food brands including Cinnabon, Auntie Anne's and Moe's Southwest Grill under its Focus Brands unit.

Colwell told TheStreet that retail sales were about $100 million but declined to comment further on sales. According to Technomic, systemwide sales were about $95 million in 2013, down 2.7% from the prior year.

"We're a brand that's been around for 80 years. We have some older long-term franchise partners that have essentially dropped out of system and what we're doing is replacing them with new growth," Colwell said. But Colwell doesn't seem deterred by the resurgence of frozen yogurt nor does he back away from the idea that consumers want perceived healthier eating options.

"The good news for Carvel is over 90% of households still consume ice cream on a regular basis," Colwell said. "We've always dealt with a very competitive marketplace. Fast food sells soft serve, frozen yogurt came out many years ago and is making a resurgence and what we found is the more we stay focused on what Carvel does best, which is serving America's freshest ice cream, the better we do and the better our franchise partners do."

Still, Carvel franchisees had a high percentage of Small Business Administration loan defaults during the period of October 2001 through Sept. 30, 2011. During that time, Carvel SBA loans had a failure rate of approximately 56.41%, according to the data on Blue MauMau's Web site.

When asked about the SBA loan defaults, Colwell responded in an email that "It is difficult for us to comment on the 2001 - 2011 SBA data as we have limited visibility into how our franchisees finance their businesses."

That said, "over the last few years, we've added new franchisees and existing franchisees have been opening up additional locations," Colwell said. "We encourage all potential franchisees to thoroughly read and review the Franchise Disclosure Document and speak with existing franchisees to thoroughly understand the business."

Harry Balzer, chief industry analyst for the food market at NPD Group consumer market research firms, believes Carvel can be successful. The trick, he said, is to create novelty in a category that consumers are already demanding.

Colwell said that franchisees, while required to sell a core product line, are also encouraged to go beyond that, particularly when it comes to creating original cakes which are a big seller for the brand. The company is also gradually introducing online cake ordering throughout the system, which is driving incremental sales, Colwell said. About 25% of system franchisees can accept online ordering and the company is in the process of expanding out to the rest of the system. Colwell said once that's completed, there's also plans for a mobile app. (Baskin Robbins just implemented online cake ordering last quarter.)

Social media is also helping. "Consumers who use social media, they like to get involved with the brands that they love and are invested in," Colwell said. "If we just take a picture of our product and shoot it out on Instagram or out on Facebook (FB) our customers love to respond and like it and comment on it."

Richard Stakofsky has been a Carvel franchisee in Brooklyn since 1978. He's prepping for a strong selling season, kicking off with Mother's Day.

"To me I think [frozen yogurt is] a fad. You have a lot of these frozen yogurt stores that pop up, they don't last long. We do what we do best. We focus on ice cream, we focus on freshness [and] designing cakes. We're stronger than ever," Stakofsky said.

-- Written by Laurie Kulikowski in New York.

>>Read More:

Does Target's CEO Departure Signal 1Q Earnings Pain?

Why T-Mobile Is Beating AT&T and Verizon

Why Millennial Aren't 'Cutting the Cord' Yet

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

More from Personal Finance

All 2018 Graduates Must Watch Jim Cramer's Bucknell Commencement Speech

All 2018 Graduates Must Watch Jim Cramer's Bucknell Commencement Speech

The Best Investment Advice? Stay Diversified

The Best Investment Advice? Stay Diversified

Use This Simple Investing Strategy to Stay Ahead in a Rollercoaster Stock Market

Use This Simple Investing Strategy to Stay Ahead in a Rollercoaster Stock Market

5 Most Ridiculous Royal Wedding Memorabilia Items

5 Most Ridiculous Royal Wedding Memorabilia Items

7 Ways Your Financial Adviser Should Help You Survive Rising Interest Rates

7 Ways Your Financial Adviser Should Help You Survive Rising Interest Rates