Fight for Sweets Sours : Lawsuits Demand Demotion of Head of Heidi’s Frogen Yozurt

A dispute is heating up between franchisees of Heidi’s Frogen Yozurt Shoppes and the chain’s founder and chief executive, Heidi Miller, with some angry store owners calling for Miller’s demotion.

If the franchisees have their way, Miller--a 33-year-old body builder who emphasizes the nutritional benefits of yogurt--is going to need a lot more than muscle to maintain her grip on the frozen-dessert empire.

So far, at least four Superior Court lawsuits have been filed against the Laguna Hills parent company in recent months by franchisees who allege mismanagement by the chain’s executives. Heidi’s officials denied the allegations.

In separate actions, five franchisees who own 10 stores have filed claims against Heidi’s with the American Arbitration Assn. Encino attorney Gerald T. Grenert, who filed the 10 claims, said he plans to file about 15 more arbitration claims within the next three weeks. He estimated that the arbitration claims will total about $1.2 million for alleged misrepresentations.

“They have to bring in a person who understands the business,� said Skip Villerot, owner of three Heidi’s stores and president of the Assn. of Heidi’s Franchisees, a group that represents most franchise owners. He estimates that roughly half the franchisees favor a management change.

“This is a good, strong franchise with one of the best products on the market,� said Villerot, who noted that his stores are doing well. “But we want to be one of the big boys in the yogurt market and it just isn’t happening.�

Company attorney James L. Morris declined to comment specifically on the legal claims, but said Heidi’s believes that the cases are “without merit and will be vigorously defended.�

Novelty Market

Miller could not be reached for comment Tuesday. But Executive Vice President Brian Pallas, who together with Miller owns about 86% of the company’s outstanding stock--defended Heidi’s Frogen Yozurt and denied allegations contained in the lawsuits.

“The majority of franchisees are pleased and very successful,� Pallas said. “Our intention has always been to see them succeed and . . . the company has every intention to work through these differences of opinion and philosophy in a very competitive market.�

At issue in the dispute is Heidi’s slice of the frozen novelty market, valued at up to $1.6 billion annually. Frozen yogurt has become one of the hottest new products around--particularly in Southern California--because it contains less cholesterol and fewer calories than ice cream.

Of Heidi’s 72 franchise operations, Villerot estimated, owners of all but the newest stores are “disappointed� over the company’s scant advertising efforts and what some characterize as poor management.

But other franchisees said the unhappy owners represent less than half of all franchisees. And the company said only a handful of franchisees are participating in the efforts to oust Miller.

‘Most franchisees are very happy,� said one store owner who asked not to named. “There are things to be worked out; the company is just going through growing pains.�

The lawsuits and arbitration claims contend that Heidi’s management made deliberate misstatements about how well its stores were doing and how well they should perform, as well as misrepresentations about Heidi’s yogurt being original, secret recipes. Some also allege fraud, claiming that Heidi’s executives misrepresented their ability to oversee franchise operations.

Toppings in Question

Furthermore, according to the legal claims, the company has provided franchisees with poor store layout designs and required them to buy freezers and machines that could not be operated legally in California.

Franchisees also complain that Miller will not allow them to sell some popular toppings--such as crumbled Oreo cookies and Gummy Bears candy--because they are not “natural� products.

According to several franchisees, the differences have been simmering for at least 18 months. “We’ve tried to negotiate changes since January, 1987,� said one owner who asked not to be named. “It’s just stall, stall, stall.�

One store in Santa Ana closed within the past two weeks, and the owner said she plans to file for bankruptcy.

Disgruntled franchise owners also point to the company’s financial results as an indication that potential sales are melting away.

Heidi’s Frogen Yozurt reported net income of $167,979 for the quarter ended March 31 on revenue of $1.6 million. But that included an $800,000 initial franchise fee for planned stores in Tokyo. None of the Japanese stores has opened yet.

For the fiscal year ended Sept. 30, 1987, Heidi’s lost $848,000 on sales of $4 million, compared to a loss of $383,000 on sales of $4.2 million the previous year.

Pallas, the company’s executive vice president, blames Heidi’s poor showing on the company’s break-neck expansion. Heidi’s has grown from two stores in 1984 to 79 today--seven of those company-owned--in six states.

Competition Gains

The franchisees “are independent businessmen,� added Pallas. “Anybody in a key position is going to have people who are unhappy with the focus of the company. But it’s two or three individuals that really shouldn’t be franchisees.�

For most of the franchisees, Pallas said, the company will work “in a positive way for a mutually acceptable solution. But it can’t be done overnight.�

But as the soft, frozen product’s popularity has grown, so has the competition. Where Heidi’s once reigned as the undisputed frozen yogurt queen in Orange County, direct competitors such as Penguin and Golden Spoon have been giving the chain a run for its money. What’s more, frozen yogurt is now being dished out by everyone from Haagen-Dazs and Baskin Robbins to all-night convenience stores.

The competition wouldn’t hurt so much, some franchisees say, if the company’s promotional efforts were more effective. Franchisees contribute 2% to 3% of revenue to a company advertising fund, in addition to 4% paid to the parent company as royalty fees.

Villerot and others contend that franchisees aren’t getting their money’s worth. “We don’t think advertising is being spent in the right spot,� Villerot said.

Several franchisees also claim that the company said it would sell them goods at its cost, but instead marked up prices to make a profit.

“Once they had my fee, I felt they were against me,� said Julie Davis, whose Santa Ana store closed its doors Aug. 12. She said the company, for example, required her to buy two window decals for $500 as well as such items as a ticket counter. “And I never even broke even in the store,� she said.

A suit filed Tuesday in Los Angeles Superior Court in Lancaster by store owner Randal Anderson alleges that the company overstated how much money franchisees could expect to make, both verbally and in its written documents.

Damages Sought

In the suit, Anderson stated that “magazine articles and newspaper clippings were prominently displayed on Miller’s office walls at corporate headquarters . . . They included a representation by Heidi’s that the average yogurt store franchise was enjoying yearly sales of $300,000 to $350,000.�

In fact, according to the lawsuit, at least one shop was in severe financial difficulty and “other franchisees were experiencing sales that were $200,000 or less.�

The lawsuit also alleges that Anderson was sold a display freezer and yogurt culture machine that could not be operated legally in the state and that his store has faulty architectural design with inadequate electrical and air conditioning systems.

In the suit, Anderson asks for rescission of his franchise agreement and $2 million in punitive damages.

Another lawsuit, filed in Orange County by Wayne and Mary Jane Moore, alleges that Miller and Pallas used unlawful business practices and defrauded them.

The Moores claim they were coerced into paying an extra $11,600 to secure the rights to the franchise when Heidi’s management told them other people were interested. This was false, according to the lawsuit, which seeks damages of $3.75 million.

Times Staff Writer Ray Perez contributed to this report.