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Turning a Gelato Shop Into a 16 Store Franchise, With Frost Gelato

Is it possible to build a successful business with your best friend? Stephen and Jeffrey of the Frost Gelato Shoppe franchise seem to think so. They’ve been friends since second grade and credit the deep trust that they’ve built up over their entire lives to helping them survive over 13 years of being in business together. But how do you go from never starting a business, to opening a Gelato shop in an underdeveloped part of Tucson Arizona and franchising the business within just three years?

In this episode we learn about the early days of building their first location, and the set of correct decisions that lead the friends to enjoy consistently rapid year over year growth. The two founders explain how their ongoing success comes down to the advice they take from their family of entrepreneurs – their ultimate mentors. From learning about real-estate and location scouting from Stephen’s mom, to understanding where they had the most opportunity to be competitive from Jeffrey’s dad, these early lessons allowed them to focus on the other part of the business that was paramount to their success – obsession with the quality of their product.

We hear about how they were able to get daily inquiries to franchise their business, and how they quickly learned about franchising to take advantage of the growing opportunity. To date, not a single franchise location has failed, and the Frost Gelato brand is now being enjoyed internationally. We got to try their gelato during the recording of this episode, given to us directly by their master gelato chef, Nazario, who was in the studio with us. Molto delizioso – and that’s not just the sweet tooth talkin’.

Show Notes

0:20 Today with us we have the founders of Frost Gelato

0:46 The two of you are almost brothers, have known each other since the 2nd grade. Have you guys had any other business together before this one?

1:00 Went to the University of Arizona together.

1:15 How did you guys get the idea to start a company together?

1:30 Junior Senior year they were thinking about what they were going to with their lives, and started thinking of random ideas to pursue.

1:51 Jeffrey’s dad had the idea of having them open a Gelato Shop. It sounded good compared to the other ideas they had.

2:00 With the Climate in Tucson, and growing demand for ice cream, Gelato seemed like a good idea.

2:30 Started the idea shortly after graduating in 2005.

2:43 Did you think you were going to get a job after college?

2:50 Stephen went to go for a family business in Chicago, Jeffrey got a job in advertising, but after 4 days he already hated it.

3:20 Jeffrey called his parents after that week and said he needed to do his own thing. That’s when they came up with the idea of a gelato stand, and he called Stephen who was in Chicago.

3:38 He quit his job after 9 months.

3:52 That job was a good lesson as to what not to do.

3:55 What did you learn about what not to do in the ad sales job?

4:32 One time he secured a large vendor, but because it was outside of his department, they took half of his commission and gave it to someone else.

5:10 Jeffrey learned that you have to take care of the people who work for you because they’re the face of your business

5:25 This was Jeffrey and Stephen’s first business, but they both grew up around entrepreneurs.

5:35 Stephen’s family was in the sausage business.

5:45 The sausage business was started by his great grandfather and passed down to his aunt.

6:37 Stephen knew he might not have the opportunity to take the business over because the family might want to sell it at some point, so he decided to go off on his own.

6:53 So your dad gave you this idea. What was the first thing you did?

7:11 First they decided to look into where they would get the product.

7:23 Found a wholesaler and ordered some samples. They tried it and thought it was horrible.

7:53 Then they found a food show in LA and met some guys making gelato and it turned out that they were suppliers and the quality was high.

8:18 They then spent 2 days at the supplier’s “Gelato University” making gelato

9:00 Stephen’s grandfather gave some good advice when he asked him for investment. He asked, “is this something you want to do every single day? If I’m going to give you money I need to know you’re all in.”

9:23 Both their families always taught them that if there’s a problem you can always find a solution, even if behind their backs they talked about the risks.

9:40 It was hard to ask family for money because they had never done it before.

9:50 They weren’t afraid to lose the family’s investment because they had a “we’re not going to fail” mentality

10:22 They had good guidance from their family, and they both listened to their advice, which paid off. Such as the decision to have 3 cases instead of 2, to have more options. They didn’t pretend like they know everything.

10:45 Right before they opened they were given the advice to try and get some help from someone experienced, and their supplier recommended this chef Nazzario in Italy who knew how to make gelato.

11:08 They originally asked him to help for 2 weeks, and he ended up staying with them for 14 years.

11:35 They were too naive to know what they were getting into, but then if they knew all the problems going into it they probably would never get started.

12:12 Most entrepreneurs don’t think about the day to day and it’s important to think about the type of business you would actually want to run. So Stephen’s grandfather’s advice was spot on.

12:58 We did a live tasting

13:15 Unlike many ice cream flavors, it tastes exactly like the flavor that it says on the container

13:21 Is Gelato healthier for you than regular ice cream?

13:25 It’s half the calories and 80% less fat.

14:55 How did you scout the location once you had all of this lined up? Our previous guests from The Coffee Project said it was one of the hardest things for them in the beginning.

15:00 Jeffrey’s mother was in real estate and took on the job of finding a location. Even though the guys wanted to move to LA, Jeff’s father convinced him that there would be too much competition there and they’d be lost.

16:00 She showed one location that they originally didn’t like, but it had a pizza place next door that always had a line out the door, but the area wasn’t great so they scrapped it.

16:25 They found a new shopping center but the rent was way too high, $100/sq ft.

16:50 So they decided to go back and take a look at the original location and their mom gave them the advice of visualizing their store with the patrons there. And they saw that people eating pizza would definitely want gelato after, so it made sense to open near a pizza shop.

17:11 Jeff’s mom said, look at the foot traffic, strollers, and restaurants.

17:33 They ended up deciding on this location when they went back to scout it out and overheard 4 people leaving the pizza place saying that they want ice cream.

18:20 From idea to opening their first shop it took a full year

18:41 How much did it cost to open the first location and how much capital did you raise?

18:50 Cost $450,000, and the original investors were Stephen’s grandfather and Jeff’s parents. The landlord also kicked in some.

19:09 They learned about tenant improvement allowance, which is money a landlord gives you to improve the space. They got close to $80,000 in improvements.

19:40 It took 3-4 months to do the build out.

19:42 One of the things they think really helped in their success is having a 3rd display case, which almost no one has. Even though they cost $30,000 a piece. They wanted the wow factor when someone walked into their store.

20:09 The third case makes it look like the gelato is endless

21:37 How did you decide how much equity you would give your family for the investment. How did you negotiate that?

21:54 It wasn’t the first time Stephen’s grandfather invested in a family business, which made it easier to ask.

22:53 They did the investment with a promissory note that Stephen’s grandfather insisted on being interest free. But also had some side promise agreements with the family members not on paper too.

23:10 Did you guys do any promotion ahead of time to make sure you’d make back the money?

23:22 It was mostly based on the foot traffic. The construction also built excitement.

24:07 It took them 24 hours to make the first days batch, and they barely slept those first several months.

24:20 They were easily serving 500-2,000 people per day. They still do about that in business on a daily basis in any location, depending on the time of the year.

25:06 You ended up starting to franchise just 3 years later. Why did you decide to do this?

25:30 Once it was clear that the business was doing well people were asking them if they would expand or franchise via email, phone etc.

25:46 They had 5-7 requests per day.

25:52 Started to look into how to franchise about a year into it and learned that you need to prove yourself and have a few locations before you franchise.

26:28 They met with a franchise attorney who gave them the franchise book for McDonalds, which was a huge operations manual.

26:56 They decided it would be faster to grow by franchising and started working on the operations manual which went into every detail of how to run the shop.

27:09 It took them 2 years to write the manual and they opened up 2 more stores in the process.

27:13 Their goal was to sell 1 franchise in the first year and they ended up selling 3 in the first 6 months

27:40 How did your day to day change once you started expanding?

27:55 They started by creating an advisory board where they’d have yearly meetings. They had to learn how to manage people too.

29:00 Their franchisees are also entrepreneurial and always have new ideas, and they always tell them to try their system first and show how theirs might work better and if it does they approve it.

31:20 Is there a standard percentage that you keep from the franchisees?

31:27 Frost works off of a 5% royalty.

31:47 Unlike most franchisers, the only thing they require their franchisees to purchase directly from them is the ingredients from Italy and anything logo’d that they can get bulk discounts on. Everything else they can buy themselves locally, such as produce, dairy, cleaning supplies etc.

32:10 A lot of franchises try to charge for every little thing, but they are very transparent about what they make, which is basically just their 5% royalty

32:50 For $550K you get 8 weeks of training, get 2-3 weeks of training of their staff at your location and everything else you need to open the store.

33:10 Cost depends a bit on the location. For example in Austin the energy efficiency requirements forced them to spend $100K on the storefront glass alone.

33:55 How did your working relationship as friends evolve and how did you decide who owns what decision?

34:10 They get along very well and fight like brothers, and the business has made them grow closer together.

34:42 They fell naturally into their roles. Stephen is the numbers guy, Jeffrey is the sales and people guy.

35:19 What’s one big decision where there was disagreement?

35:33 They have an unwritten rule where if they disagree on something they get the opinion of their family and advisors and go with the majority.

36:37 Early on they had a potential deal to have a 5 state, 50 location franchise buy out and they were super excited. But then they asked who is going to run it on a daily basis and they didn’t have an answer. So they didn’t go with the deal.

36:44 Now they do discovery day with every franchisee and show them the whole business and if they see that people are overwhelmed and not interested in doing the work, they don’t go with them.

37:25 If one of them doesn’t agree they don’t move forward with a big decision like a new franchisee.

38:00 Now that you guys have figured out your model, what’s next?

38:05 They want to get to 25-30 locations and go from there.

39:04 Now there are people traveling in Italy saying that Frost gelato is better.

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