The rocky road to transition

By Margaret Steen

Cincinnati ice cream maker Graeter's Manufacturing Co. has survived more than 145 years without altering its original manufacturing process. But the family did need to confront questions about ownership structure as the fourth generation took over.

For more than 145 years, Graeter's Manufacturing Co. has built its success on steadfast adherence to its process: making ice cream by hand, one batch at a time, in 2.5-gallon French pot freezers, regardless of the technological innovations adopted by competitors.

The company has withstood the challenge from mass-produced ice cream. What almost destroyed it was a rocky generational transition.

"When I was a little kid at the plant my great-grandmother started, we had four freezers," says Richard Graeter, 52, president and CEO. Today, the company's new plant has 36 freezers. "We grew by multiplying the number of small-batch machines. Without that small-batch process, you can't make Graeter's ice cream."

The company owns 43 neighborhood stores in cities including Cincinnati, Columbus, Chicago, Cleveland and Pittsburgh. Graeter's ice cream is also sold at 10 franchisee-operated stores and three other venues. All the stores sell Graeter's candy, and some also have bakeries, which help to keep sales up during the winter months.

Today, Graeter's, headquartered in Cincinnati, makes more than 1 million gallons of ice cream per year and supplies more than 6,000 grocery stores nationwide.

The company's annual revenues have climbed from about $5 million when Richard started in 1989 to more than $50 million now. About 1,000 people work at Graeter's in the peak summer season.

To get the company to where it is today, the family had to confront thorny issues of inheritance and control. The Graeters are now working to ensure that future generations experience smoother transitions.

Humble beginnings

The company was founded around 1870 by Louis Charles Graeter, who arrived in Cincinnati when ice cream was a novelty.

After operating stores in various downtown Cincinnati locations, Louis and his wife, Regina, moved to the new upscale neighborhood of Walnut Hills. They made ice cream in the back of their home and sold it in the front parlor; the living quarters were upstairs.

When Louis was fatally struck by a streetcar in 1919, Regina took over the business. She built it over the next several decades, through the Great Depression and two world wars, into a chain of ice cream stores.

"Back in my great-grandmother's day, you made it and you ate it," since there were no freezers, Richard says. "My grandfather used to drive a horse-drawn wagon delivering ice cream to people's homes in a metal pail nested into a wooden bucket packed with salt and ice. They would eat it for dinner, and he would pick up the empty pail the next day."

Around the same time as Louis's death, the business faced another challenge: Commercial ice cream was now easy and cheap to make, owing to modern refrigeration and machinery.

"My great-grandmother refused to adopt these new processes and stuck with artisanal ice cream," Richard says. "Mechanized, mass-produced ice cream companies pushed the little guys out of business—except for Graeter's. As neighborhoods lost their ice cream parlors, Regina went in and opened a new Graeter's."

In the depths of the Great Depression, Regina bought a defunct printing plant, where she continued making small-batch, hand-swirled ice cream in French pots.

After Regina died in 1955, her son Wilmer bought out the shares of his younger brother, Paul. Wilmer's three sons, Richard (Dick), Louis and Jon, joined the business and later ran it together. Their sister Kathy also worked in the business; another sister, Carole Palmer, never did.

When Wilmer's sons wanted to retire, though, painful questions arose.

The fourth generation

"The family culture was that if you wanted anything in life, you had to work," says Robert Graeter, 61, vice president of quality assurance and sourcing. "If you wanted the benefits that were provided, you had to work in the family business. That was the expectation set for me very early on."

Richard (son of Dick) and Robert and Chip (sons of Louis) grew up helping with the business. Although they started out on different paths, they all ended up working for Graeter's.

"By high school, I knew that this was my destiny," Richard says. He was mentored by his uncle Jon, who did the finances and other office work. Richard majored in accounting and finance in college and worked for his uncle during the summers. Later he went to law school. As he was finishing, in 1989, his uncle was injured in an accident and was not able to return to work.

"Nobody had a clue about what he did or how he did it but me," Richard says. He finished law school while doing his uncle's job in the evenings. When he graduated, he turned down a job offer from a law firm and returned to Graeter's, though in 1992 he briefly took a job at a different law firm.

In 1994, Richard returned to Graeter's to help with expanding the plant and running the accounting, finance and legal functions of the business.

Robert did not plan to join the family business full-time, though he did help out in the factory every summer starting in eighth grade. After college, he worked in retail in California for a time, then returned to manage the remodeling and opening of a new Graeter's store. Later, he went to Michigan to get an MBA, returning after graduation to Cincinnati for a job with Procter & Gamble. In 1990, after his uncle had retired, the company needed his help, so he returned to take over management of the nascent wholesale business.

Robert's brother Chip Graeter, 53, says he always considered business and family to be connected.

"My earliest memories are just the incredible amount of effort and hard work that the third generation put into the business. They worked seven days per week, 10 to 12 hours per day, every day," says Chip, chief of retail operations. He would help at the plant when he was young, putting lids on ice cream or stamping flavor names on the tops of the pints. Later he worked in the retail stores, where his aunt Kathy mentored him.

Chip also worked elsewhere after college, including for Delta Airlines, but in 1989, his aunt and uncle took him to lunch and convinced him that the business needed him—and that it was time to start his Graeter's career.

A difficult transition

The arrival of Robert, Chip and Richard at around the same time "created some friction," since there was no clear plan for transferring ownership to the next generation, Robert says.

The key difficulty in the transition was that while the members of the third generation had been equal partners in the business, one partner had one child in the business, another had two, and the third had none. (A related issue was who would be CEO.)

The family considered many options. "Do we split the business up and everybody goes their separate ways? Do we have different levels of ownership? Or do we go forward as equal partners?" Robert says.

If ownership were passed down according to bloodlines, Richard would own half the company; Chip and Robert would split their father's share and each own one-quarter. (The company would redeem the shares of Kathy, who had no children.) The idea of unequal ownership caused tensions. These were finally resolved when the three fourth-generation members met with a psychologist—without their parents present.

The key question addressed at that meeting was "What did the business need to survive?," Robert says. "We all had very different skill sets. Our business psychologist consultant helped us realize that, and that if we worked together we would be better and stronger than if we split up the business."

Working as a trio, however, would require "commitment from everybody involved—and the way we could get commitment from everybody was to be partners," Robert says.

They realized that "the only way we could really build the business to its potential was if the three of us worked together and trusted each other implicitly," Richard says. "We decided that we were stronger together."

They discussed ways to partially offset the financial sacrifice Richard would make if they each were granted a one-third share. And Richard began to realize that one-third of the company they could build together might well be larger than one-half of a company that was stagnating because the owners didn't work well together.

Another key to the successful transition, Richard says, was that the members of the third generation "did not demand to maximize their value out of the company," even though they could have gotten more money by selling to an outside party. "Keeping greed in check and living well, but within due bounds, has been the single most important key to the Graeter family's success through four generations," Richard says.

By 2004, Richard, Robert and Chip were equal partners and owners of the business. They divided responsibilities based on their interests and skills: Richard is the CEO. Robert focuses on product, sourcing, product development and manufacturing. Chip oversees the retail stores.

Richard's father, Dick, retired from the business shortly after the transition in 2004. He passed away in 2014. Louis kept coming in to work after the transition, doing odd jobs and helping make candy, until a fall made it impossible for him to continue. Kathy still works every day in the retail stores.

Professionalizing the operations

Although Richard is the CEO, "we are very much a consensus-managed company," he says. The company's leadership team includes a number of non-family members, and an annual bonus is divided equally among all team members. The three owners meet separately only to discuss issues like the transfer to the next generation.

Those discussions are only in the initial stages, however.

The three current owners agree that any of their children who want to join the company should work elsewhere first and prepare themselves to contribute to the business, though they have not created formal plans or rules.

The fifth generation is not actively involved in the business yet; only a few of them are old enough. Richard says his son Will, who is in high school, plans to study food science and food business management to prepare for a career in the business. In the future others may be interested as well.

Although they have not changed the governance much since taking over the company, Richard says they have put in place a buy-sell agreement that governs what happens if one of the owners dies, leaves the company or retires. A goal for the near future is to look again at governance and succession planning now that the business has grown.

The business does not have a formal family council or board of directors, though Richard says setting up a board of advisers or directors would likely be part of the process of moving to the fifth generation.

With the help of consultants, the company has also formalized systems and processes. For example, Graeter's created a training program for the retail store employees, since the customer experience is such an important part of the business.

Customers anticipate the introduction of new flavors each summer. Graeter's stores also host special events such as Dogs' Night Out, featuring special frozen dog treats and vendors selling wares geared toward dogs and their owners.

Graeter's "Guest Service 101" training for new employees—many of whom are high school students in their first job—emphasizes that ice cream is a non-essential, discretionary purchase, Chip says. "What we need employees to do is match the quality of the product with the same level of guest service—make sure they leave with a smile on their face," Chip says.

Paul Porcino, a consultant with TransformaTech Consulting, started working with Graeter's in 2007, after the transition had been made to the three fourth-generation partners.

"They didn't have clarity on how to move forward, where to go next and how to build the business in a way that met their true goals for the brand," Porcino says.

Ultimately, they concluded that letting franchisees manufacture as well as sell the ice cream was too much of a risk, since the core of the Graeter's brand is the quality of the product. They bought back some of the franchises and required the others to stop making their own ice cream.

The company also worked to standardize the manufacturing equipment and processes and started to predict demand further in advance. This predictability enabled the company to expand to new markets, including other grocery stores.

Looking to the future

The new systems and the new plant have laid the foundation for a stable business, which the current generation hopes to turn over to the next.

In the next decade or so, Robert says, the family will have to decide whether to pass the business to one or more family members who are committed to running it, to find a way for the family to own the business without running it, or to sell (which he says is not the family's goal).

For the future, they are banking not only on the management team and systems they have developed, but also on the allure of ice cream.

"I think people are always going to want something cold and sweet and a place to bring their family together and share an experience," Robert says.

Margaret Steen is a freelance writer based in Los Altos, Calif.

Copyright 2017 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

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