Anatomy of a Start-Up
Gerald Ritthaler had no idea that it would take 10 years to bring his tiny snack food company to life
| Executive Summary
The Company: Ritz Foods International, based in Delray Beach, Fla.
Founder and President
Name: Gerald Ritthaler
Dressed in a safari jacket, the better to evoke the rainforest origins of his product, Gerald Ritthaler stood near his 10-by-10-foot booth in trade-show Siberia: a distant corner at the National Automatic Merchandising Association's gathering last October at Chicago's McCormick Place. He watched as vending-machine operators, snack food brokers and distributors, and plenty of competitors sampled his new chips.
If the scene is altogether common--a first-time entrepreneur glimpsing and gauging the early arc of his new business--there's also much here that's out of the ordinary. Call Ritthaler's company, Ritz Foods International Inc., with its five-person office in a bank building in Delray Beach, Fla., the un-start-up: slow, not nimble, to market; based on an unknown product and having an unusual (for these times, anyway) high-overhead corporate structure; guided not by youthful entrepreneurial energy but by a rather uncustomary, second-wind gust from a retirement-aged founder. Not to mention that it's a business bent on cracking an increasingly unfriendly industry.
Ritthaler, a 68-year-old former senior vice president in charge of taxes and international finance at Gulf & Western, believes he has his niche in the snack-chip marketplace. "Move over, potato," proclaim several of his prospective point-of-purchase materials. His chips, named Tropic's, are sliced not from spuds but from yuca, an ungainly root crop little known in the United States but one that he believes can be profitable, provided he takes an unusual step for a small business: vertically integrating the company. Running 180 degrees counter to today's trend toward low-overhead, virtual companies, Ritthaler is growing his own raw materials on a 5,000-acre company-owned and -operated farm in Venezuela. Just down the road from the farm is a propagation lab that's big enough to jump-start as many as 100,000 cuttings in sterile test tubes, as well as the company's climate-controlled greenhouses, which baby the young plants for another four weeks before they're planted. Thanks to irrigation installed last year, Ritthaler expects to have year-round harvests to supply the company's processing and packaging plant, which he just recently equipped with a fourth automatic bagging machine. There are 100 employees at the plant when it's in full production, and Ritthaler has 25 to 30 full-time field workers. He has made a partner of his general manager, Mara Cristina Gonzlez, who's in charge of administration.
Also staked to a share of equity is a trusted member of the Ritthaler family, Gerald's cousin's son Brent, who heads operations--a Renaissance man's job to be sure, even for someone who grew up drilling wells, fixing farm equipment, and helping to achieve record corn crops on a 2,000-acre family farm in Nebraska, for this job goes far afield of the fields. Brent Ritthaler created the spice mixtures for the various Tropic's flavors. He's learned from expert consultants about frying oils and temperatures. He designed the Tropic's package and even did the photography. One of his next challenges will be finding or, more likely, creating equipment to automate the processing of another, in-the-works product from this wonder root. In building a business around a single plant, the elder Ritthaler talks passionately of processing yuca (pronounced you ´-ka, not yuck´-ka) the same way a packing house processes pork--"right down to the squeal of the pig."
Ritthaler first envisioned yuca as the root of all earnings a decade ago, when a Venezuelan agronomist told him he'd found a way to triple the yields of this Central and South American food staple, which is a starch that's also used in textiles and food processing. His interest grew when he learned that most of the world's yuca is grown on small plots of land. He crunched some numbers. "I put it on paper. It pointed off the charts," he says.
The opportunity beckoned so brightly that Ritthaler decided to try his hand at a start-up. At various times during his career at Gulf & Western he'd occupied each of the four corner offices on the 37th floor of the company headquarters building, in Manhattan, and at one point he headed the largest corporate staff, some 130 employees. He sat in on annual business plan meetings for every division of the conglomerate, participated in acquisitions, and even served on the board of Cinema International Corp., a joint venture between Paramount and Universal. After leaving G&W, in the 1980s, Ritthaler managed overseas businesses divested from the conglomerate, some of which he and a couple of partners later bought. They ranged from auto-parts stores to industrial-hardware manufacturers and distributors. Still, he had virtually no start-up experience when, in 1988, he began growing yuca after purchasing a 300-acre farm in Venezuela. "Most of my corporate career I was a staff person," he says. "Now, when you're starting to create something, it's a good feeling."
The whole enterprise, Ritthaler admits with a laugh, "kind of took on a life of its own." He soon realized that farming yuca, even with the promise of higher yields, would leave him growing a perishable commodity that would be subject to price fluctuations, and that he'd be forever at the mercy of processors. Then, in 1990, he tasted a locally made yuca chip, and the path to profits seemed clear. He would take yuca from the field to the consumer by processing it as a healthful gourmet snack chip he could sell at a premium price. And Ritthaler's ace in the hole, his point of difference from other snack-food manufacturers, the key competitive advantage he would gain by vertical integration: a better-tasting chip.
The path to profits may be clear to Ritthaler, but the road hasn't been easy. There have been the other businesses to run. Additional farmland to acquire in Venezuela. Buildings to erect. Seedlings to germinate. Laborers to hire. And bad luck to endure. In June 1997, not long after Ritthaler got his processing plant fired up, a real fire broke out in the flour mill. That set him back nearly a year. Delays in well drilling and importing irrigation equipment proved disastrous when a crippling drought affected his crop last spring before his installation of irrigation, which to date has cost about $300,000.
As he stood by his trade show booth in October, watching hand after hand reach for his five flavors of yuca chips, Ritthaler was hoping to finally roll out his product in the United States in early 1999. Tropic's has been sold in a few outlets in south Florida since last June. The chips are available in five flavors: Original, Picante 'n' Cream Cheese, Sour Cream 'n' Onion, Garlic 'n' Cilantro, and Original Barbecue. Visitors to the Tropic's booth almost universally applauded the black package, which suggests the upscale nature of the chips: the package photograph shows them in a Waterford crystal bowl against a Caribbean sunset. And most people seemed to like their taste and crunch. Not only are Tropic's chips thicker than traditional potato chips, and therefore better for dipping, they're considerably less greasy. Yuca chips absorb less oil than potato chips, allowing the company to proclaim that its chips contain "40% less fat than regular potato chips ." Also higher in fiber than potato chips, Tropic's chips have no preservatives, no artificial color, and no cholesterol, enabling Ritthaler to position them as all-natural. And switching to a more expensive kind of sunflower oil, he says, will extend the product's shelf life from four months to six.
"I like it. I think it's an excellent product," said John Jarvis, president of Jarvis Sales Co., in Aurora, Colo., an independent snack food broker, after he'd just sampled the chips. "This yuca chip is different. We'd look at it as something new we're coming out with. Take a look at the bag. Look at the colors. This is class. That's going to help." Like dozens of tasters who had sampled the chips before him, Jarvis handed his trade-show badge to the vice president of sales and marketing at Tropic's, Robert Anderson, who scanned it into a device that captured Jarvis as an interested lead.
Comments like those only reinforce Ritthaler's abundant faith in his product, a characteristic entrepreneurial zeal that has fueled him during Act I of his start-up journey: creating a tasty niche product in an attractive package. "I know it will sell," Ritthaler says. "I wouldn't be this far if I didn't. I'll do a taste test with any potato chip in the United States. I'd be very surprised if I didn't win."
The market and competitors
By many measures, Act II of the Tropic's story--year one of its marketing push--will be no less challenging than its protracted opening act. Ritthaler may well need that safari jacket. For in forgoing a commodity business and its inherent pitfalls, he's run headlong into a different set of problems in the archly competitive snack-food business, a jungle of an industry in which the challenges only begin with an 800-pound gorilla.
In the salty-snack business, Frito-Lay casts an intimidating, $10 billion shadow. The undisputed King of Chips has gobbled up foot after foot of supermarket shelves, typically commands entire rows inside vending machines, and rules supreme in other venues such as Subway sandwich shops, where franchisees can stock as many as 12 varieties of chips--all made by Frito-Lay. "I don't think yuca would be worth their time and effort," says Ritthaler, who believes his narrow niche will protect him from Frito-Lay's mass-market might. "There are too many other things they could do to get a faster return."
In the years it's taken Tropic's to ready its rollout, a key portion of the playing field has changed. Until recently, the natural-foods industry served as a low-cost-of-entry incubator for small companies like Ritz Foods. Those days are disappearing, if not already gone. "It's kind of like all bets are off," says Steven Hoffman, publisher and cofounder of Natural Business, an industry journal. For one thing, the number of new natural-foods products has soared, increasing competition. When Ritthaler first set his sights on yuca, the new-products showcase at the Natural Products Expo was just that, a single glass case. Today it takes several such cases to house all the wanna-bes. And the cases don't contain any of the favorite-son competition that's out there--the growing number of house brands now shelved at outlets like the Whole Foods Market chain. "There's such a plethora of new products and such a fight for shelf space. Just as that led to slotting fees in the supermarket industry, we're now seeing those kinds of things in the natural-products industry," says Hoffman. And there are fewer distributors. Industry growth has sparked the inevitable consolidation, concentrating entrÉe increasingly in the hands of two companies, Tree of Life and United Natural Foods.
The players have also changed as Ritz has ramped up. Goya, an established maker of ethnic foods, has introduced cassava (another name for yuca) chips in metropolitan New York supermarkets. In Ritthaler's neck of the woods, Florida, no fewer than three small food companies that sell primarily to the Spanish population, also through supermarkets, have expanded production from plantain chips to yuca chips. While none of those products is positioned as a premium chip, a well-established, high-end brand of nonpotato chips--Terra chips--already stares out at Ritthaler from the very shelves he covets.
Ritthaler may claim that he's not competing directly with Terra chips, noting that yuca chips make up only a small proportion of the colorful vegetable chips in the Terra bag. (The others are made from taro, parsnip, sweet potato, batata, and ruby taro, which is taro that has been dyed red with beet juice.) And it could be that Terra's success with regal retail price tags--the chips sell for as high as $4.79--will make it easier for Tropic's. Terra has done the groundbreaking work of establishing the premium-chip category. Generally priced at a dollar or two below the competition, Tropic's chips could look like a bargain.
But Tropic's will most certainly come face-to-face with Frito-Lay in vending, where space is just as tight as on supermarket shelves. Although vending operators are always looking for new products to enliven their displays and entice customers, they're more interested in counting profits. Margins and turns are what they're after. Frito-Lay's nationally branded products deliver for them, and rebate and incentive programs make them think twice about replacing a Frito-Lay bag with something else. A gourmet, premium-priced yuca chip probably won't be a slam dunk in vending, where research shows that the typical customer generally tries to buy the most product for the smallest number of coins.
Through the fall of 1998, as Ritz awaited its first major yuca crop to mature and be processed, the company kept its marketing efforts fairly low-profile. There'd been no point-of-purchase advertising--no mention of the health benefits, no pushing the taste advantage. Marketing director Robert Anderson and a second employee handled trade-show appearances, took out ads in magazines like The Gourmet Retailer, sent out sample shipments, and made preliminary sales calls. Anderson is an energetic 63-year-old. Ritthaler hired him because of his experience marketing a wide range of small, start-up products--everything from fresh pasta and a high-end frozen fruit bar to cocktail-table coin-operated video games. But with his yuca crops finally maturing in the fields, Ritthaler confides that he's about to add three more employees to the marketing force--the better to follow up on preliminary contacts with restaurants, food-service vendors, and a major airline.
Ritthaler has run through more than $5 million since he bought that first acreage. While he does have some outside financing, he has ponied up the lion's share in both debt and equity financing. He projects first-year sales of $10 million, about a quarter of that destined for markets outside the United States. According to Anderson, the company made shipments to Puerto Rico, Brazil, and Aruba last year, and there's interest from customers in Japan and Russia. Ritthaler projects that he'll have a marketing budget of about 20% of 1999's sales, which he expects to finance out of profits and a second insurance check from the fire. If necessary, he says, he'll seek bank loans in the United States.
Even though Anderson includes supermarket leads and restaurant contacts in his plan of action, 1999 projections pin 85% of U.S. revenues on sales to gourmet shops and natural-foods stores. Both would seem good markets for a more healthful, premium product, with a suggested retail price of $2.98 for a 7-ounce bag. Though that's about twice the price of standard potato chips, it's considerably less than that of some gourmet chips: some brands cost more than $4, or even $5, a bag. In the beginning, Ritthaler considered a retail target of $3.79 a bag, "just below the best premium bag out there." Then he reconsidered. "I think you limit yourself at that price. Over the $3 limit you hit a bit of a barrier with consumers. I'd rather sell six bags at $2.98 than two at $3.79."
While Ritthaler has yet to draw a salary for himself, he does hope to start paying down the company's debt, most of which he's personally financed. The plan early on is to plow earnings back into the company to grow the business. "We were never expecting a quick return," says Bill McKee, who reported to Ritthaler at Gulf & Western and has worked with him ever since, a total of 20 years. McKee is a nonactive investment partner in the yuca business but a very active co-owner with Ritthaler in his other businesses. "He's not afraid of taking risks, but they're not stupid risks," says McKee. "The margins are there, and the apparatus is set up after a long and difficult time."
After years of stirring the yuca pot while concentrating on his other businesses, Ritthaler is now devoting about 90% of his time to Tropic's. His exit strategy is neither near-term nor clear, beyond the idea that by age 75 or so he imagines he'll step back from day-to-day involvement and shift to chairman-of-the-board status. He's already got the acreage, he says, to grow sales to $100 million. And while he'd certainly entertain buyout offers, Ritthaler says it's more likely that he'd consider acquiring some small companies in the United States that fit with Ritz's product.
As for that initial sales projection of $10 million, Ritthaler chuckles and admits he's pretty much translating harvest into production into sales. "I'm kind of like that movie where they build a baseball diamond in the cornfield. If you build it, they'll come," he offers. One way or another, Ritthaler says, he'll sell what he grows.
To make good on that promise, some of the yuca might even find its way into a second product currently under development, a thin, crisp bread called casabe. Popular in South America, casabe would offer a healthful option for those with wheat allergies and might, as a unique product, help open the door for Tropic's yuca chips in natural-foods stores. Ritz might even branch into bird feed, as yet another way to tap more deeply into yuca: looking for a way to salvage a batch of substandard-quality chips (which was attempted with an El NiÑo-damaged crop), Anderson suggested crumbling them. The birds loved the seedless feed.
Despite the hurdles--past, present, and future --investing partner McKee remains a believer. "When Jerry gets involved in something he makes it work, no matter what," says McKee, adding that he believes Ritthaler's run at yuca is at least partly about "adventure and challenge."
If so, Ritthaler's gotten his wish.
John Grossmann is a writer based in Mountain Lakes, N.J.
Ritz Foods' financial projections
The future in yuca, as Ritthaler sees it
|Cost of sales and operating expenses:||$8,500,000||$10,625,000||$13,260,000|
|Net profit after debt service and before taxes:||$1,000,000||$1,425,000||$1,940,000|
What the experts say
Getting a new snack chip to market is a very complicated business
Michael Schall, president, Guiltless Gourmet, in Austin, Tex., maker of the first baked tortilla chip
There are four things you need to know to compete in the snack food industry: dis-tri-bu-tion. If you use the best distribution for this type of product, you run the risk of being a few items among 6,000 or 8,000 items handled by specialty or gourmet food distributors. Specialty distributors play a critical role in bringing new, specialty, niche-type products to retailers where smaller marketing budgets don't justify warehouse or direct distribution. That's fine for high-margin items like capers or hearts of palm, but if you don't have people in the stores to replenish snack-food items with a higher sales rate, you're going to be out of business. Frito-Lay has people in the stores, in some cases, twice a day, seven days a week.
Even then, the distributor isn't the essential sale. You have to go to the retailers and sell them on the item's quality, flavor, marketing support, and consumer "need," so their buyers will say, "Those yuca chips are great; I'll bring them in."
A one-product company with several flavors has got to stay highly focused. You've got to know which retailers to call on. We use market research that helps us identify, based on the demographic significance of our product, what store addresses--not what chains--are attractive.
There's an old story about a father and son. The father is extremely wealthy and gets his son a business in the snack food industry. Two years later the son tells an acquaintance, "I made my dad a millionaire in the snack food business." His friend says, "Yeah, but your father was a multimillionaire before you started."
J. Gary Shansby, general partner of the Shansby Group, in San Francisco, the food investment company that bought and sold Terra chips
Tropic's might have something very good. The problem is, the company has most likely fallen in love with the process and the quality, and taking a premium chip product to the commercial market is a real tough assignment.
Food seems like the easiest thing in the world to understand, because we all eat and we all think we know it. But it's probably the most difficult business to execute, because it's very competitive, and the most difficult business in food is the salty-snack business. Why? Because of Frito-Lay. It's a brand with enormous muscle. It's like playing against the 1998 Yankees. Frito-Lay is the most aggressive, deep-pocketed food competitor in America.
If he's spent $5 million and hopes to get to $10 million in revenues, he'll never make money. The investment is too big and the potential too small. I wouldn't personally invest in his company. I think he's late. At this point, with a premium product, I think he's got an uphill battle.
John Raiche, East Coast director of marketing, United Natural Foods Inc., in Dayville, Conn.
It sounds quite similar to a product we already carry--Terra chips. I don't believe United Foods would increase its overall snack-food business were it to have this product. There's only so much room on our trucks and in our warehouses. There's a little more to succeeding in this industry than coming up with a unique, high-quality, good-tasting product and making it available. How is Ritz going to build a customer base? Does it have a sales force? Has it hired a broker network? What sort of marketing tools will it make available? To what extent would it fund marketing programs provided by United Natural Foods?
We've been down this road before. Taro was a comet about seven years ago. We were selling triple-digit cases per week of a product called Ray's Taro Chips. That company is out of business now, I think. The snack-food category is so fickle. I could see how you could get a store owner excited about this product. It happened with taro chips. They come in, they're hot, they have shelf placement. And then customers tire of them and move on. All of a sudden your sales are half what they used to be, then a quarter. Then they're gone.
James Shufelt, president of the Snack Food Association, an international trade association based in Alexandria, Va.
There's nothing homogeneous or uniform about the United States in terms of eating habits. Much of what we eat is based on ethnicity. There are clearly regions of the United States where one type of food product is more popular than another. It's important to know where the potential is for a given product.
That should be Ritthaler's first marketing move: he needs to define that segment of the population that is familiar with yuca. Once he locates those ethnic groups, he needs to find the outlets that are interested in what are essentially low-volume, attractively packaged products. Those outlets would give his products the best chance of survival on the racks.