Charity’s Ice-Cream Franchise Hits a Rocky Road During Its First Year

Nonprofit leaders say many factors can help make a poor urban neighborhood stronger. For Lisa E. Johanon,

a key ingredient is ice cream.

As head of the Central Detroit Christian Development Corporation, Ms. Johanon had long been frustrated that the nearest place where inner-city residents, including her own family, could buy frozen treats was 10 miles away. So when the opportunity arose for her charity to open a small business, as a way to provide job training to local youths, she knew just which kind of venture she wanted.

“Some people have big dreams of social justice and equality,” says Ms. Johanon, laughing. “I just wanted to be able to walk to buy ice cream.”

In August 2002, Central Detroit Christian opened the doors of its own Tastee-Freez franchise.

But as the business’s first year of operation has shown, getting a franchise off the ground can prove far more complicated than initially envisioned.

Central Detroit Christian started the soft-serve ice-cream parlor with three goals in mind: providing job training to young people, spurring the neighborhood’s economic development, and generating revenue for itself. Ms. Johanon says that the organization made the decision to go with a franchise so it could focus on those goals, rather than on the mechanics of creating a business from scratch.

What’s more, the organization benefited from Tastee-Freez’s expertise on the layout and design of the store, pricing, and food preparation, Ms. Johanson says. “You don’t have enough time and energy to invent all these systems and standard operating procedures and to develop recipes,” she says. “That’s not what we are in the business to do.”

Research Challenge

She says the group tried to do market research as it was writing its business plan, but it was difficult to get information about stores that were located in similar neighborhoods. “There isn’t another urban Tastee-Freez in the nation,” explains Ms. Johanon. “And nobody who was already in Detroit was going to share anything, because we’d be viewed as competition.”

The organization chose Tastee-Freez because of its relatively modest franchise fee of $10,000. For its part, the company treats Central Detroit Christian just as it does its more than 220 other franchise owners. In addition to the full franchise fee, the charity also pays the company a 4-percent royalty on its net revenue.

The total cost of getting the store started totaled $166,000 — including the franchise fee, equipment, store construction, and the first three months of payroll. Equipment alone accounted for $84,000. Grants from the state of Michigan and the Thompson Foundation, in Plymouth, Mich., covered $104,500, and Central Detroit Christian took out a loan and opened a line of credit to pay for the rest.

Headaches at Start

Although preparations to open the store were relatively smooth, the charity was not immune to the hassles that accompany starting a new business. For five months, the power company charged Central Detroit Christian for the electricity used by the business next door, which is four times as large as the Tastee-Freez. And a backlog of orders for freezer equipment pushed back the grand opening to August 30, which meant that Central Detroit Christian missed out on the lucrative summer ice-cream months.

Ms. Johanon is quick to point out that the expenses don’t stop after the grand opening. “The reality is that it’s not a cash cow right now,” she says. “It’s a big cash drain.”

During the first fall and winter, Central Detroit Christian subsidized the business to the tune of $3,000 to $5,000 a month. After a particularly rough Detroit winter that included an ice storm at the beginning of April, the store was able to cover its expenses during the spring and summer months. Sales were not strong enough, however, for the charity to put aside cash reserves as a cushion for the coming winter, as Ms. Johanon had hoped.

The organization now will have to cover some of the business’s operating expenses again. But it expects that the bill won’t be as high as last year, perhaps $2,000 per month. Central Detroit Christian plans to rely on its line of credit to cover the shortfalls. While the organization may run up some short-term debt doing that, says Ms. Johanon, the second installment of the Thompson Foundation’s three-year grant has helped the organization stay on track to retire the long-term debt it incurred starting the business by the spring of 2004.

Breakfast and Coffee

Meanwhile, the organization is working hard to find new ways to increase sales at the store.

Tastee-Freez gives its franchises more latitude in what they can serve than most fast-food companies, which tend to have set menus, says Ms. Johanon. Taking advantage of that flexibility, the organization introduced breakfast food and high-end coffee in April as part of an effort to become less dependent on ice-cream sales. The experiment seems to be working. The new offerings now account for 20 percent of the store’s sales. The store has also added hard ice cream to its menu.

“We needed to develop additional channels of revenue in this business in order to be able to survive long-term,” says Larry Johnson, one of two businesspeople who have been serving as volunteer advisers on the venture to Central Detroit Christian, and the driving force behind the new menu items.

In 1990, Mr. Johnson sold the computer-leasing company that he had founded in the 1970s, and since then he has devoted his time to church-ministry projects, combined with some business consulting. For the last year, he has been volunteering at Central Detroit Christian full-time.

Money Versus Mission

Mr. Johnson says that the biggest difference between working with a charity on a business and working on a traditional for-profit venture is that nonprofit businesses try to balance social goals with financial ones.

“There’s always that tension between pushing a little harder to make a little money so the organization can thrive, versus maybe having a little more compassion and patience, because your mission is so much larger than the immediate results of a strong quarter,” says Mr. Johnson.

At the Tastee-Freez, he says, that might mean taking aside an employee who comes to work upset, and asking him or her what’s wrong, rather than pressing the person to get started on the shift. But at the same time, says Mr. Johnson, employees need to recognize that not every employer is as understanding.

One other way Central Detroit Christian differs from other owners of Tastee-Freez franchises, says the charity’s executive director, Ms. Johanon, is that it employs more workers because it wants to provide job training to as many young people as possible.

When the charity started the venture, it hoped that after a few years it would generate enough income, $30,000 to $40,000 per year, to pay for the organization’s job-training director and the other employment services it provides to employees. But Ms. Johanon is starting to think that the charity may have to continue to seek grants to cover those costs.

“The goal and the hope was that the business would not only sustain itself, but sustain the job-training component, but maybe that’s unrealistic on our part,” says Ms. Johanon.

Job-Training Woes

In addition to its financial struggles, the franchise has encountered obstacles on the job-training front as well.

Each year, Central Detroit Christian has two groups of employees who work at the store for six months. Five of the 19 in this spring’s group, all young men over 18, were arrested during their terms of employment. One is accused of being involved in an attempted murder, two of stealing cars, and two of counterfeiting checks.

To have such a large number of program participants in jail was a serious blow to the charity, especially to the staff members who worked with them, says Ms. Johanon. Even though she strongly believes there is nothing a single, six-month program could have done differently to have prevented the criminal activity, Ms. Johanon says, “it doesn’t lead toward your feeling very successful. So it’s a very challenging time.”

One change the charity made when it recruited its next round of Tastee-Freez employees in September was to draw from the pool of young people who had some previous connection to the group, as a participant in its tutoring, sports, or other youth programs.

Despite the difficult lessons of the past months, the organization remains convinced that business can be a powerful tool to further its social mission. By the end of the year, the charity plans to start another franchise, a Merry Maid cleaning service, to increase the amount of job training it can offer to local young people.

Even so, Ms. Johanon urges charities to think carefully before they launch a business venture. “It’s tough work,” she says. “It’s a lot more work than I thought, and it’s not something that you should step into lightly.”

At the same time, Ms. Johanon says that if she had it to do over again, she would still make the call to start the business, in part because she believes that Tastee-Freez is more than just a place to teach work skills to young people.

“It’s not a grocery store, and we haven’t saved the world,” she says. “But it’s a small step that says, Here’s an amenity that helps make a community whole.”