Growth | September 2009 | By Jamie Hartford

Simply Successful

Rita’s built a business around the humble Italian ice, and after 25 years, it’s still going strong.

In an industry of ever-more-ostentatious offerings, the Italian ice is about as humble as it gets: water, fruit, and sugar. Yet, Rita’s has parlayed that simple formula into a successful franchise business with an enviously loyal customer base. For the country’s largest Italian ice concept, which turns 25 this year, simple is anything but stupid.

Rita’s origins are every bit as modest as the recipe for its signature product. Founder Bob Tumolo opened the first location, named for his wife, on a front porch in Bensalem, Pennsylvania, in 1984. By 1987, Tumolo and his brother John had opened three more stores in the Philadelphia area. They started selling franchises two years later. Today Jim Rudolph is CEO and the brand is expected to reach 600 units later this year.

In the early days, “water ice,” as it was called locally, was as popular among Philadelphians as cheesesteak, and stands selling the frosty fare were common throughout the city and all over the East Coast. Even today there are a number of regional Italian ice concepts, but with more than 550 locations in 18 states, Rita’s is by far the largest. What set the concept apart and ultimately allowed it to expand beyond the City of Brotherly Love were two things, says Rudolph, the company’s chairman and CEO since 2005.

“Their product was different than anyone else’s,” he says. Tumolo and his mother perfected the recipe, making their product fresh daily with chunks of fruit and tossing out unused product after 36 hours—a practice still followed by the chain. “Nobody else was doing that,” Rudolph says.

The second thing that elevated Rita’s above the competition was a bit of business savvy. Early on, Tumolo formed an advisory committee that included an attorney, an accountant, and a supplier.

“These guys gave him a tremendous amount of insight,” Rudolph says.

By 1996 the company reached the 100-unit mark with a presence in nine states, and by 2005 it had more than tripled in size, to more than 300 units. That year Tumolo sold the business to Rudolph’s private equity firm, McKnight Capital Partners, where growth continues and revenues have more than doubled to nearly $32 million.

Along with increased size and sales, Rudolph’s team brought other changes to the Rita’s system. The company no longer builds walk-up locations where guests order at an outdoor window. That model led many locations to close for as long as five months during the fall and winter. Though Rudolph, himself a former Wendy’s franchisee, says he won’t force existing operators to retrofit their stores and extend their seasons, all new franchisees must build walk-in stores that stay open year-round. This year the company also debuted mobile and stationary-cart prototypes designed to bring the concept to sports stadiums, fairs, and nontraditional venues.

In the first year under Rudolph’s leadership, franchise agreements doubled. Rita’s has also made Entrepreneur’s Franchise 500 list for the past five years, most recently ranking No. 76, and been listed among its Fastest-Growing Franchises since 2007. In addition, the company earned nods from The Wall Street Journal’s “Startup Journal” and the National Minority Franchising Initiative. Those honors, coupled with the fact that the initial investment required to open a Rita’s store is about 13 percent less than the competition, according to FranData, have the chain poised to continue its strong growth, even during the recession.

“The cost to open up a Rita’s is significantly lower than to open up most other quick-service restaurants,” says Darren Tristano, executive vice president of food-industry research and consulting firm Technomic. “With the cost of capital as high as it is today, that works in their favor.”

This year the chain entered the New York City and Texas markets and anticipates 75 new store openings by 2010. Going forward the company has its sights set on Arizona, Nevada, and California.

“We call it a freight-train strategy,” says Rita’s president Lenny Valentino Jr. “We’re not just going in and making a couple of stops; we’re going right through and building a critical mass one territory at a time.”

So how has Rita’s managed to build a business around ice without it melting? Through a solid core offering, product innovation, and an unparalleled customer experience.

Innovation

As Rita’s grew, so did the market for quick-service snacks. The industry now sees 7.1 million snack visits a year, according to market researcher NPD Group, and snack-related occasions continued to trend upward last year despite the dismal economic climate. But with more consumer demand for quick-service snacks, competition also increased. According to global consumer, product, and market-research firm Mintel, use of the word “snack” in offerings on menus tripled between 2005 and 2007, with almost two-thirds of those mentions coming in quick-service. Competitors such as tart yogurt concepts Pinkberry and Red Mango continue to pop up, while established players have introduced a slew of new products in recent years, including Taco Bell’s Frutista Freeze and Wendy’s expanded Frosty lineup.

“Within frozen desserts, competition is definitely heating up,” Tristano says. “You’ve got big players in a very mature segment of the industry.”

Rita’s keeps up with the competition by putting its research and development team to work.

“I think product innovation played a pretty big role in the last several years since Jim Rudolph purchased the company,” says Lynn Hoban, Rita’s vice president of marketing.

Under Tumolo’s leadership, the chain added frozen custard to the lineup, paving the way for line extensions like the Misto, a blend of Italian ice and custard, and the Gelati, a layering of Italian ice and custard. On Rudolph’s watch the menu expanded even more. Since 2005, the company has added more than 10 flavors and created three more line extensions mirroring larger trends in the frozen-treats category.

In 2007, when competitors like Cold Stone Creamery and Marble Slab were making customization all the rage, Rita’s debuted its Blendini, a blended treat combining the customer’s choice of Italian ice, frozen custard, and Oreos, Nilla wafers, pretzels, or M&M’s Minis. Its answer to the specialty frozen coffee craze was the Ritaccino, a mixture of custard and ice available in café or mocha flavors. In line with customers’ growing health concerns, Rita’s introduced the fat-free Slenderita soft serve and made sugar-free Italian ice available systemwide in 2008.

“We are students of the industry,” Hoban says. “We’re doing our research, looking at what’s going on around us, and watching the trends.”

Next in the pipeline is a series of cobranded Italian ice flavors—the first of which, Swedish Fish, debuted last month—and a line of frozen custard cakes, which are being tested at select locations and should roll out to more stores sometime in the fourth quarter.

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