The brochure that Massachusetts businessman Paul Curry gave potential investors couldn't have been more positive about the prospects for his new Steve's Ice Cream franchise at 19th Street NW.
First, Curry wrote, there was the location -- "one of Washington's highest-traffic areas," with thriving restaurants, bars and shops nearby. Night and day, Curry observed, the sidewalks are filled with the kind of upscale business people and college students said to live for cold encounters of an ice cream kind.
Then there was Curry's business background. In the 1970s, Curry founded a string of photocopying shops that multiplied into 180 franchises. And, with a partner, he had opened more Steve's ice cream shops than any other franchisee.
But most important, there was Steve's itself. Homemade, rich and outrageously flavored, it is cult ice cream -- the kind that could entice college kids to a not-so-safe neighborhood in Somerville, Mass., near Cambridge and keep them lined up for hours.
But in November -- less than six months after opening -- the 19th Street shop closed. Curry's two other D.C. shops -- whose appearance in Georgetown and Dupont Circle in 1983 touched off Washington's ice cream wars -- were not doing well and all his franchises were for sale.
Steve's problems in Washington have sparked a four-way legal battle that has various parties alleging trademark infringement, contract violation and intermingling of the funds of separate franchise stores. Perhaps more significantly, they have raised a troubling question for the New York conglomerate that bought Steve's in December 1983 with plans to expand it 20-fold by the end of the decade: How do you clone a one-of-a-kind shop 600 times and keep it successful?
When Steve Herrell hung out his awning in Somerville in 1973, he thought he was opening an ice cream shop for addicts like himself. But what he had invented was a concept, which Steve's franchiser, Integrated Resources Inc., is now trying to sell.
The concept was the ice cream -- made in small batches in hand-cranked machines with plenty of thick cream, fresh fruit and candy. For customers not satisfied merely to slather on nuts and chocolate, Steve's invented the "mix-in" -- candy, cookies, nuts or fruit mooshed in with metal paddles. The ice cream was expensive, and the lines were long. To keep customers entertained, Steve lettered a blackboard in brightly colored chalks and hauled in a black piano for them to play.
Herb Goldberg, president of Integrated Food Resources, the IRI subsidiary that owns Steve's franchise rights, saw the "concept" -- piano, funky sign and all -- as a pot of gold at the end of a strawberry ripple-chocolate fudge-French vanilla rainbow. "It's fun ice cream," he said. Goldberg opened the first noncompany-owned Ha agen Dazs franchise on Long Island in the '70s before selling out for what he called bigger opportunities. "Ice cream has gotten too serious, too sophisticated," he said.
Herrell tired of the business in 1977, and sold out for a reported $40,000 to Joseph and Nino Crugnale, two Boston brothers who had an ice cream business of their own. They opened 34 franchises in Massachusetts, Pennsylvania, New Jersey and metropolitan Washington before selling out to Integrated for $4.3 million.
IRI, a financial services and real estate conglomerate whose only food businesses include some Wendy's fast-food franchises in New York and New Jersey, says it had big plans for Steve's from the very beginning -- particularly in markets like Washington, where college students are clustered. "We think it's a terrific vehicle for growth," Goldberg said, adding that plans to open 600 over the next five years would amount to "underdeveloping" of the concept.
He said about 100 new franchises are scheduled to open within the next year, at a cost of $25,000 a store plus 6 percent of gross sales. The company also has sold exclusive territorial agreements for some of the most lucrative areas in the country.
Steve's has influenced Washington ice cream lovers' eating habits indirectly for years. Bob Weiss, D.C.'s first ice cream guru, modeled Bob's Famous Homemade Ice Cream after the Steve's stuff he enjoyed as a law student in Boston.
But local ice cream lovers can date the battle for their hearts and dollars to July 1983. That month, Curry and his partner, Phillip Katz, declared war, opening a Steve's in Georgetown next door to Swensen's and just down the street from Ha agen Dazs. In August, the partners invaded Dupont Circle, staking out territory that had belonged exclusively to Ha agen Dazs.
Curry and Katz had controlling interest in the franchises, and managed them through their company, C & K Management Trusts. But other investors put up much of the money to get the franchises started.
One of these was William Riordan, a Salisbury, Md., businessman who used to manage tennis champion Jimmy Connors. He had visited the Somerville store once, while he and Connors were hosting a tennis clinic. "There was a line a block long," he recalled. "I was very anxious to get involved from an investment standpoint." Riordan's group of five partners invested $480,000 in the Washington and Boston franchises.
The 19th Street store, Riordan believed, had the potential to be the most profitable in Washington.
Curry believed so, too. He spent $194,000 plus regular monthly rental payments to buy the lease rights to the store from Andrew Shapiro and Jerrold Klein, two part-time lawyers who ran their own small ice cream store there called Inside Scoop. The two men used the money to open a manufacturing facility and a new store on Connecticut Avenue in Cleveland Park.
But, Riordan said, the problems began almost as soon as the store opened last April. "There was no business there. The figures I got were very low."
At the same time, Riordan says, the Dupont Circle and Georgetown franchises were not performing up to expectations. Profits were well below the 20 percent that had been promised, Riordan said.
The partners finally sued Curry in Massachusetts Superior Court in October, claiming he never complied with repeated requests to see the franchises' books. They also accused C & K of intermingling the funds of stores in violation of the trust agreements, and Curry of selling investment shares that amounted to unregistered securities. Curry denied the charges in an affidavit.
Curry did admit that the Washington stores encountered difficulties, but he attributed them to location, labor problems, excessive optimism and raw inexperience. "I'm a franchise consultant. I find the successful concept that can be cloned. . . . I'm not an operating person. I've never scooped any ice cream. I wouldn't know how to make it if I had to."
He also conceded that "we were a little optimistic about our sales projections" -- particularly on 19th Street, where it quickly became apparent that the after-dark crowd was more interested in alcohol than ice cream.
The situation is quite different at the Steve's franchise in College Park, near the University of Maryland, Curry said. That store has no labor problems, the rent is much lower and the profits consequently higher.
"The thought was that, in many ways, the name would be magic," Curry said. His investors were "greedy," and disappointed when they "didn't make a quick killing," he said.
Even before the 19th Street store opened, problems in Washington and elsewhere had caused a fair amount of legal discord. In April, that unhappiness bubbled over when C & K sued Integrated and Steve's former owners, the Crugnales, for allegedly fixing prices by refusing to let Curry raise his prices in Boston. Last month a federal judge in Boston threw out the part of the suit in which Curry alleged that the Crugnales and IRI violated franchise agreements by failing to provide adequate training and management procedures and by failing to meet the promised profit of 20 percent of sales.
Now IRI is suing Shapiro and Klein, the two Inside Scoop owners, for patent and trademark infringement. The two lawyers took over the Steve's store in November when C & K defaulted on its sublease and buyout agreement and are operating both stores. The 19th Street store was closed for about a week and has now reopened under the Steve's name. IRI argues that it alone can assign franchise rights, and is asking a Washington federal court to prohibit Shapiro and Klein from using the Steve's name.
The problems, not surprisingly, have prompted some reassessment on the part of both Integrated and Curry. Curry -- whom the Crugnales chose to act as their franchise consultant in 1981 and who opened Steve's first franchise -- said his stores in the Washington area are for sale "to Integrated or whoever will buy them." He said he has no intention of opening any more Steve's shops, and may even close his most profitable stores -- in Cambridge and Boston, where Steve's name still "is magic."
Goldberg would not comment on speculation by investors that Curry is negotiating a sale with Integrated Resources. Goldberg also refused to talk directly about IRI's relationship with Curry and Katz.
Goldberg noted, however, that the 19th Street store was the second C & K franchise to close. The first, in Atlantic City, shut down last year after less than a year in business. Goldberg said he asked for the store to be closed. He blamed the failure partly on location, and partly on C & K management.
Goldberg denies that problems in Washington are the result of the concept or of the rapid expansion of the company.
"Another company would build maybe 2,000 or 3,000 franchises," Goldberg asserted. But a lot depends upon the individual franchises, he said. He said his company is looking for franchise operators who are "so in love with this thing that they make up for in hunger what they lack in experience."
It is an attitude with which Curry himself agrees. Management firms that run franchises as investments are too far removed, he said.
All of this sounds very familiar to Steve himself. In the decade since he founded the chain that bears his first name, and now a competing ice cream chain that bears his surname, he has watched with dismay as it moves further and further from the spirit he intended. "The store in Somerville was such a phenomenon because it had character," he said.
The problems with Steve's, he said, show the problems of large-scale franchising. "Right now I'm thinking in 'small is beautiful' terms," he said. Expansion to 600 "is easier said than done."