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The incredible shrinking ice cream company Add to ...

Things had been up and down. But after Smith's death, they were only down: Just about every external development hurt CoolBrands, and the reversals made its fundamental weaknesses nakedly apparent. First, nothing took up the slack after the loss of Weight Watchers. The Atkins diet craze fizzled almost as quickly as it had caught fire. Stein boasted that the No Pudge! line would sell more its first year than the Weight Watchers Smart Ones. It didn't. And lower sales of just about everything else meant less product flowing through the company's plants, which squeezed profits. "They just couldn't come up with a couple more dynamite brands to feed the system," says Bob Gibson, an analyst with Toronto-based Octagon Capital Corp.

CoolBrands was now reporting in U.S. dollars, and for the fiscal year ended Aug. 31, 2005, revenues declined sharply to $385 million (U.S.) from the peak of $450 million (U.S.) in fiscal 2004. The company lost $74 million (U.S.), compared with a profit of $23.5 million (U.S.) the year before. The share price slid to around $3.

And it was becoming clear that Stein wasn't the leader that Smith was. A company insider says that Smith had the ability to "look at the landscape, locate the players and set out the road map from A to B." Stein, by contrast, was good at following a road map, but "he's not a vision guy."

That industry landscape was shifting dramatically in 2005 and early 2006. Size and brand strength were becoming more critical, and the gap between No. 3-ranked CoolBrands and leaders Nestlé and Unilever was widening. Both multinationals had several so-called pull brands that supermarkets wanted on their shelves, such as Häagen-Dazs and Drumstick for Nestlé, and Ben & Jerry's and Klondike for Unilever. To get them, stores were willing to take new or less popular brands as well.

CoolBrands, however, had lost its pull-Weight Watchers-and that made it tougher to win shelf space for any of its brands. Competition was heating up in the grocery business, too-most chains had begun to rely more on so-called slotting fees to boost their revenues. Getting a new SKU on an American chain's shelves these days can cost $750,000 (U.S.) for the first year, after which the chain may drop the product if it doesn't sell. A company insider says CoolBrands spent more than $20 million (U.S.) over two years on slotting fees.

Nestlé and Unilever created even more grief for the company. After years of being what one source close to CoolBrands calls "good little oligopolists"-that is, being content to co-exist-the two multinationals started taking the gloves off in price wars. That forced CoolBrands to cut prices as well.

The Serruyas now had little to do with running the business. Over the years, they had invested in many other ventures, including the Fairweather women's clothing chain and the short-lived Toronto Phantoms indoor football team. In the fall of 2005, Stein and the board decided to spin off the franchise operations on which the company had been founded. Aaron Serruya bought them in December for $8 million (U.S.) through a company he controlled, International Franchise Corp. He stepped down as CoolBrands' executive vice-president, but remained as a director. The company also said it would eliminate the multiple voting shares in May, 2007.

Michael Serruya was still co-chairman, but Stein was now running what was essentially a wholly American company. (In early 2006, CoolBrands had about 2,500 employees in the U.S., but only two in Canada.) And Serruya was apparently getting frustrated. To appease the critics on the Street, he'd given them the independent directors they wanted. But only one of those directors, Joshua Sosland, owned CoolBrands stock-just 4,030 shares. "Are their interests aligned with the rest of the shareholders?" asks one company insider, thinking back to that period. "When the stock goes down, do they feel the same pain as the shareholders?" The answer was no. And there was plenty of pain on the way.

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