The Rise and Fall of Carvel

Tom Carvel introduced the soft serve ice cream to the world. And he did so by accident. He built an empire out of this but he ran into many troubles with his franchisees. The chain started to decline when Tom sold his business. Let’s dive in to see what happened.

Before diving into the ice cream realm, Tom Carvel held multiple jobs, including being an auto mechanic and salesman for radios. In 1929, Tom borrowed money from his girlfriend to start selling ice cream from a vending truck. And it was a regular business until the summer of 1934. This is when his truck got a flat tire and he had to stop by a nearby pottery shop to save the melting ice cream. Funny enough, people loved the half-melted ice cream texture. That moment marked the beginning of the rise of Carvel’s. Tom immediately invested money in designing a freezer that would store ice cream to reach that soft texture. The product was a hit and Tom essentially opened America’s first retail ice cream company in 1934.

By 1936, he patented the no-air-pump, super-low temperature ice cream machine. Tom ended up buying the pottery shop to set up his operations. As demand was growing, he built more machines which he sold to other ice-cream stores. It’s interesting to note that Dairy Queen was also developing its soft ice cream at the same time. Tom began placing his machines in military post exchanges but operators were not respecting the royalty payment deadlines. Thus, he started Carvel Dari Freeze, which had the purpose of selecting and training franchisees. Then Carvel would sell them the freezers and flavorings. By the early 1950s, over 200 stores were opened.

Carvel’s stores were kind of unique. They were designed to incline forward and the roof would be slanted upward toward the street. All of this was done to catch customer’s attention. Business was good, with more than 500 Carvel stores in operation by mid 1950s. Despite that, Tom was not satisfied with the performance of the radio ads. He thus decided to star himself in tv ads, designing his own campaigns. Carvel was amongst the top three soft-serve ice cream companies, competing with Dairy Queen and Tastee Freez. To stay ahead of the curve, a dedicated ice-cream supermarket was opened in 1956, where Carvel sold ice cream novelties.

Now here comes the troubles. Franchisees were not satisfied with the terms of the contract. Carvel charged a higher initiation fee compared to others and restricted the list of authorized dairies from which franchisees could source the materials. In the late 1950s, some franchisees took Carvel to court but by mid 1960s, the US Supreme Court rejected the franchisees’ appeal. The FTC also dismissed a complaint regarding the restriction on the sources of supply. All of this resulted in Carvel losing most of their franchisees. But that did not stop Carvel from taking over them as company operated stores.

Here’s something I found interesting. Carvel bought a motel and converted it into the Carvel Inn. Tom used the site as the company’s headquarters and held franchisee conventions there. The company even bought Dugan’s bakery chain and All American Sports City, a development that housed a community center and a golf course. By 1969, they had filed for an IPO with revenues surpassing 15 million dollars. Then began expansion across the US, opening stores mostly in the Eastern states. The product line was expanded to include hard ice cream and take-home products such as ice cream cakes, sandwiches and desserts. It seems that the acquisitions weighed on net income at first, with Carvel posting losses in early 1970s.

But the main business continued to thrive, with more than 700 Carvel stores in operations and revenues surpassing the 40-million-dollar mark in mid 1970s. New products like the Cookie Puss, Fudgie the Whale and kosher ice cream enabled the franchise to grow even further. This was boosted by clever marketing tactics that Tom devised. A toll-free telephone ordering service was available for special occasions. Gifts like pens, pencils and hats were given to customers. Not to mention that Carvel kind of started the whole buy one get one free trend in the ice cream market. Stores were opened outside of the US as well, in countries like Canada, France, UK and Singapore. All of this enabled the company to bring in over 300 million dollars by mid 1980s.

Remember our good old friend, Investcorp, from our episode on Gucci (if not checkout our YouTube channel). Tom finally sold his empire to Investcorp in late 1980s for 80 million dollars. Unfortunately, Tom did not enjoy much of that money since he passed away a year later. Carvel started to decline from there, both in terms of revenues and stores. Franchisees did not agree to spend thousands of dollars in renovating the stores according to corporate’s plan. Carvel also stopped manufacturing its own machines. Of course, Investcorp tried to remedy the situation. New advertising campaigns were rolled out, a revamped direct-mail service was launched and even more products were introduced. The chain was also increasing its presence in supermarkets and stadiums.

But franchisees started dropping off again and the number of stores dropped below 500 by mid 1990s. The franchising terms were less attractive than other chains and the supermarket partnership seemed to cannibalize store sales for franchisees. By the start of the millennium, the number of stores dropped to below 400 but Carvel increased their presence to over 4,000 supermarkets. Revenues fell to around 200 million dollars and the chain was eventually sold to Roark Capital in 2001. The private equity firm vowed to turn around the failing franchise. The chain barely increased their store presence but greatly increased their footprint to over 8,000 supermarkets.

Here is something I dug up. According to data from the Small Business Administration, Carvel franchisees had a 41% failure rate on their loans for years 2000 through 2008. This is compared to Dairy Queen’s 5.8% and Foster Freeze’s 9% in the same time period. From that data, I gather that Carvel does not do a great job at selecting their franchisees. Or it might be that their strict franchise terms are such that the best franchisees flock to other chains. In my opinion, I believe that Carvel has a great product. But their poor franchisor and franchisee relationship is not something new. I am not saying that other chains do not face franchisee lawsuits but it seems to have taken a greater toll on Carvel.

Are you still a fan of Carvel’s ice cream? Or did you defect to Dairy Queen? What could they have done better? As always, let us know what you think.

Here is the link to the video: The Rise and Fall of Carvel

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