Franchises and Ritter's Frozen Custard and Real Estate & Retail

Ritter's sets new game plan

November 26, 2007

The Indianapolis-based parent of the Ritter's Frozen Custard brand has been stuck in a cold streak lately, facing scores of new ice-cream competitors and a dwindling lineup of franchisees.

In September, Ritter's stores closed in Carmel and Mooresville. Locations in Fishers and Carmel are up for sale and could be shuttered. And in the last five years, stores have closed on East Washington Street, West 10th Street and at the airport.

The ice cream business is tough, particularly with the arrival of newcomers such as Culver's, Cold Stone Creamery, Marble Slab Creamery and Maggie Moo's. Sales figures for the Ritter's chain have been falling for years, and seasonal hours make it difficult to justify real estate costs.

But RFC Franchising LLC is planning big changes designed to firm up the home-grown chain, which now has 48 stores in nine states, down from more than 60 locations in 2005. It was founded in Franklin in 1990.

A first step: Ritter's is putting the cherry on top of a new modular building concept that would fit on half-acre sites and cost only $350,000 to build. The structures would be cheaper than the current design and take up a smaller footprint, allowing the chain to consider smaller towns and build on parcels too small for other restaurants. Strip centers are another possibility.

Ritter's also hopes to scoop up a co-branding deal with a dining concept such as Subway. Most ice-cream consumers buy their treats in the evenings, leaving an opening for a lunchtime-focused business.

Finally, the frozen custard chain plans to launch its first new products since 2001, including a Gelati blend that combines frozen custard with Italian ice.

"Everyone and their brother is now doing ice cream," said Bob Ritter, CEO of RFC Franchising and son of Ritter's founder John Ritter. "We've got to look at how we do business, and make sure we put franchisees in a positive position."

Soon after Ritter assumed the top post in 2004, he stopped selling franchises and instead focused on operations and supporting existing franchisees. Those efforts finally may be paying off. Sales at central Indiana stores are up about 1.5 percent for 2007, after four years of annual declines ranging from 4 percent to 8 percent.

Total revenue for RFC, which until recently was headquartered in Carmel, fell 31 percent in 2006, to $966,500. Still, the company managed to eke out a profit of about $26,000 in 2006 compared with a loss of about $14,000 in 2005. Ritter expects $17 million in system-wide sales for 2007.

"We've stopped the bleeding," said Ritter, 37. "We're a lot stronger than we were."

But the franchise pipeline also has run dry. Ritter now calls his decision to stop selling franchises a mistake, and he hopes to rebuild interest.

It won't be an easy pitch. The company's 2007 Uniform Franchise Offering Circular, a document filed with the Attorney General's Office, paints a grim picture.

The document breaks out financial information for stores in Franklin and Greenwood, both of which are owned by John Ritter. For the Franklin store, profit fell 44 percent in 2006 to roughly $27,000. Profit for the Greenwood location fell 57 percent during the same period.

And since 2003, the Greenwood store's profit is off 75 percent, from about $119,000 to less than $30,000.

Paul Jones is one franchisee who won't be coming back. The retired University of Louisville professor, who used to live in Indianapolis, opened a Ritter's in Bradenton, Fla., in 2003 and closed it in 2005.

"My idea was to hire a manager and sit back and count the profits," said Jones, who invested $1.3 million in the deal. "It didn't work."

Jones said the shop was too much work for too little money. His former Ritter's is now a Starbucks.

A big problem is brand recognition so far from the chain's home base, he said. He thinks the chain expanded too far from Indianapolis, too fast.

But that doesn't explain the loss of locations in Indianapolis. The store on Michigan Road in Carmel is under contract with a developer who plans to replace it with a strip center, said Craig Bracken, a real estate broker with locally based Weichert Realtors who is selling the store.

He also is listing the store on Allisonville Road in Fishers for $710,000, although that location likely will remain a Ritter's. Bracken said the stores are doing fine; the owner just wanted to focus on other business ventures.

At least one new store, in downtown's Buggs Temple, could open soon. The walk-up Ritter's should open in December and frozen custard also will be served in the Temple's restaurant, Ritter said.

It's next to impossible to make a pure ice-cream shop work, said Steve Delaney, a partner in Indianapolis-based Sitehawk Retail Real Estate who knows from experience: He owned several Delaney's Ice Cream and Sandwich shops and a Dairy Queen before he became a broker.

"I learned early on that food was a key to success," Delaney said. "Ritter's could form a strategic alliance with another food operation, perhaps a sandwich shop. When Culver's entered the market, the missing piece for Ritter's was they didn't have food to round out sales, year-round."

Another home-grown brand, Noble Roman's, faced similarly sluggish sales a few years ago. Upstart pizza brands were slicing away business, and many free-standing stores closed. Like Ritter's, the pizza chain opted for a strategy that includes co-branding and stores with less real estate and other overhead. For Noble Roman's, the plan is paying off handsomely.

Bob Ritter is hoping for a similar turnaround.

"I don't feel like the sky is falling," he said. "We're changing and refining the way we go to market."

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