Mergers & Acquisitions and Franchises and Ritter's Frozen Custard and Strategic Planning and Retail and Real Estate & Retail

Ritter's buyer retools custard chain

May 4, 2009
This St. Patrick's Day, TruFoods LLC executive Gary Occhiogrosso got an object lesson in why his company's acquisition of Ritter's Frozen Custard either could be a great opportunity or a royal pain—or both.

He visited the chain's ill-starred 10450 Allisonville Road location on a blustery March day. The shop, which sits in the middle of an empty field and offers only picnic table seating, closed in 2008 when its previous owner threw in the towel. Now it was being readied to reopen under new management.

Apparently the store's potential customers just couldn't wait.

"It was obvious that they weren't open, yet people were pulling into the parking lot," said Occhiogrosso, TruFoods' chief development officer. "I hadn't tasted the product at that point, but when I tasted it I knew immediately why everyone was passionate about it and addicted to the stuff."

Indianapolis residents have been passionate about the company's handmade frozen custard ever since it debuted almost two decades ago. But while the ice cream is sweet, the story of the former mom-and-pop company's attempts to morph into something grander is decidedly bitter.

Now, New York-based TruFoods, which bought the company in May 2008 for an undisclosed price, is trying to get the formula right.

TruFoods plan includes finding more and better-financed franchisees; rationalizing the systems needed to run a successful location; making the point of entry a bit less pricey; and creating more reasons for people to visit stores.

The company also wants to drive lunchtime traffic by serving food. Some locations have begun selling Nathan's Famous hot dogs, and TruFoods is working on an expanded relationship with Westbury, N.Y.-based Nathan's that would roll out hot dogs, chicken fingers and French fries chainwide.

TruFoods specializes in buying and turning around underperforming brands. The company's other holdings include Arthur Treacher's Fish & Chips, Pudgie's Famous Chicken and Wall Street Deli.

Even while making changes, TruFoods wants to stay true to the original concept, which Chicago expatriate John Ritter and his wife, Bonny, launched in Franklin in 1989. At the time it was a novelty—frozen custard made fresh each day inside a retro-looking circular building with outdoor (and only outdoor) seating.

Customers lined up, and soon the company was off to the franchising races. By 2000, when Saul Lemke became CEO, the chain boasted 18 locations. By 2005—its peak—there were 60.

But along with growth came problems. Lemke, who acquired control in 2003 (with the Ritter family retaining a major stake), was at the time roundly criticized by some franchisees for expanding too quickly while neglecting day-to-day operations.

By the time the Ritter family reacquired control in 2004, installing John's son Bob as CEO, there were 53 units—a number that by November of 2007 had dwindled to 48 in nine states.

Steve Delaney, a partner in SiteHawk Retail Real Estate and former owner of several ice cream shops, said many factors may have contributed to the chain's troubles, including a lack of well-heeled franchisees, a comparatively high cost of entry, and competition.

"They were on the cutting edge of the boom in fresh, gourmet, handmade ice cream when they first came out," Delaney said. "But then there were several imitators," such as Culver's Frozen Custard and Maggie Moo's. "So the competition increased dramatically."

It didn't help that opening a traditional Ritter's location could be quite expensive. Once an operator acquired the land, then built and fitted out the distinctive structure, startup costs could soar past $500,000. This for a building that had few alternative uses and no interior seating—meaning that locations in colder climes must close during winter.

Reviving expansion

Under TruFoods, the number of locations has slipped to 33. The new owners are determined to revive expansion, but not by franchising to operators unlikely to succeed.

"Number one, it's about selecting proper franchisees," said TruFoods' Occhiogrosso. "Proper franchisees are people who have the mindset that agrees with our mission statement, of putting the best product out there and creating an enjoyable and memorable experience. Not just selling franchises for the sake of selling a franchise."

A trickier question is addressing the store's often idiosyncratic locations and store designs. In its pre-TruFoods days, the company experimented with strip mall locations that offer all the amenities missing from traditional stores—chief among them indoor, all-weather seating. But there's a problem.

"Oddly enough, they don't perform as well financially as the freestanding units," Occhiogrosso said. "Because this isn't just about selling ice cream. It's about summertime and making memories and creating moments with your neighbors. You're selling the entire experience.

"The minute you move the concept indoors—not in all cases but in some cases—you become like any one of the hundred competitors that are out there."

The company will try to capture the best of both worlds by offering franchisees a new, modular building that looks pretty much like a traditional Ritter's, but costs less to build and features a drive-through.

It's also exploring growth on a new front. TruFoods said it might offer Ritter's frozen custard in some form to convenience stores—a thorny proposition, since the product is made in small batches several times a day.

The last component of the TruFoods approach is to further infiltrate the markets where the chain already has a presence: Indianapolis, Houston and Dayton, Ohio, as well as Tampa, Orlando, Fort Lauderdale, and West Boca, Fla.

The bottom line is that while there's definitely demand for the product, it can't perform up to par until the franchising system is ironed out.

"When you're in the franchising business, that's very different from being in the frozen custard business," Occhiogrosso said. "And sometimes franchisers, or founders of concepts, are challenged crossing that bridge between being in the ice cream business and being in the franchising business. We are in the business of putting people into a cash flow vehicle whereby they operate the system and the system runs the business."

Franchisee closes

That effort comes too late for longtime franchisee Bill Osler. A couple of months ago, he shuttered his Hilton Head, S.C., Ritter's after five years of operation—a period, he said, that was punctuated by (among a great many other problems) relentless difficulties with getting supplies in a timely manner. That and overly optimistic estimations of what the sales of his business would be.

"They said it would be in the $300,000 to $350,000 range," Osler said. "I assumed they knew what they were talking about. But it never came close to that. The sales were never what they represented."

Bob Ritter, the former CEO, now is Ritter's director of franchise development. In Indianapolis, he's concentrating on getting several dormant locations running again. Resurrection of the Allisonville Road store was this year's biggest achievement.

"Nationally, I would have to say we'd like to do 20 (new locations) in the next couple of years," Ritter said. "In Indianapolis I think we could do another four or five—reopening some and adding a couple."

Though TruFoods has helped drum up leads, finding franchisees for anything these days is tough. Ritter says the biggest challenge, not surprisingly, is securing financing. He sees a lot of people who already own businesses and want to diversify, and others who have been downsized and are looking for a new line of work.

Career change

One recent franchisee is 30-year-old Josh Austad, who was formerly based in Minneapolis as an operations manager for Northwest Airlines. He took a buyout package when the company merged with Delta and used it to purchase an up-and-running Ritter's in Palm Harbor, near Clearwater, Fla.

"I got lucky because I was buying an existing location," Austad said. "A lot of the up-front costs that you would have if you actually had to construct a building or renovate a space, I didn't have to do."

Austad hadn't even heard of Ritter's until he started investigating business opportunities. He wasn't put off by the chain's small size or limited (five stores, including his) Florida presence. Quite the opposite, in fact.

"I liked the fact that it was small," Austad said. "I didn't want to be store No. 1,000. I didn't feel like I'd get the personal attention I need, because I've never owned a business before."

Austad hopes to open a second location within five years.

Bob Ritter is optimistic there will be many more opportunities for expansion. The distinctive custard that caused customers to flock to his parents' Franklin store still is the company's biggest selling point.

"The brand following is so strong," Ritter added. "In most markets that we've gone into, we get voted best ice cream in those markets. We got voted best ice cream in Detroit by the Detroit Free Press, and we only have one location there, in the suburb of Brighton. That says a lot for the brand and the marketing, and without a doubt about the product." 
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