Revered Ice Cream Establishment Finds Itself on Brink

MIDDLETOWN, R.I. – It seemed like a good match at the time.

Here was Newport Creamery, a food and ice cream chain locally owned for three generations and revered by Rhode Islanders — many reared lapping up those milkshakes quirkily called "Awful-Awfuls" after the slogan "Awful Big, Awful Good."

And here was Robert Swain, a Florida businessman who had mostly fared well with investments in real estate, oil and gas, crafts and restaurants. Born in Hingham, Mass., Swain fondly remembered sucking down many a vanilla Awful-Awful while in the Navy's officer training school in Newport in the late 1960s.

It was March 1999, and the scenario was set: willing seller, eager buyer. A reputable franchise.

Two years and $9 million of Swain's own money later, Middletown-based Newport Creamery is on shaky financial footing, and has filed for bankruptcy protection.

An aggressive regional, even national, expansion plan has been jettisoned. Eight restaurants — more than one-sixth of the total — have been closed this summer in Connecticut, Massachusetts and Rhode Island, and more may follow.

"Listen, I've been accused by different people of wrecking this restaurant and destroying its assets," Swain, 55, told The Associated Press in a telephone interview as he drove toward Newport, where he and his wife rent a place. "How could I? Look at the numbers. I've been putting in money that was needed. It's a good brand, and I hope we'll be running it for a long time."

According to court records, the privately held company owes at least $2.5 million. The creditors range from food and napkin suppliers to the electric company. The chain hasn't paid real estate or personal property taxes to some cities and towns since last year, court records show.

Analysts are skeptical Newport Creamery can recover, pointing out that family style restaurants are squeezed between fast food restaurants with broadened menus and casual restaurants such as TGI Friday's that are attracting consumers interested in a more entertaining dining experience.

Newport isn't the only New England chain to be struggling: Friendly's, based in western Massachusetts also has been downsizing.

Also, prices of milk fat, the principal ingredient in ice cream, have jumped 71 percent over the past six months, causing retail prices to rise and ice cream consumption to fall.

"There's no silver bullet (to recovery)," said Bill Hale, an analyst with the Hale Group, of Danvers, Mass., which specializes in developing strategies for food chain restaurants. "There's no quick solution, like 'I can do one quick thing, build more units, sell more ice cream.' I bet it's more complicated than that."

Swain and executives say its core stores are profitable. They say they have learned from their failed expansion, and will grow "in concentric circles," focusing first on high-traffic areas where patrons recognize the Newport Creamery brand.

There's even talk of putting Newport Creamery's ice cream in the White Hen convenience chain's 55 New England stores, which Swain bought two months ago for an undisclosed price.

Analysts say Swain needs to stabilize his core eateries and demonstrate profitability to convince lenders Newport Creamery can rebound.

"If I'm Newport Creamery, I now have facilities and menu and service systems that I need to change," Hale said. "That takes capital, a vision, a plan and people to implement it. I can imagine Newport Creamery is sitting there saying, 'I have a vision, I have a plan, but I don't have the capital to change it."'

Swain has been in bankruptcy court five times in the past decade for failed real estate and bath and beauty product ventures, according to published reports.

The Newport Creamery bankruptcy filing was submitted in June to a court in Tampa, Fla., but Rhode Island Attorney General Sheldon Whitehouse and many area creditors are seeking to have the case switched to Rhode Island.

In March 1999, Swain, on advice from brokers, bought Newport Creamery for $7.6 million in an all-cash transaction. The chain had been owned by the Rector family, which started a milk business in Newport in 1928. The first restaurant, serving only ice cream, opened in 1940. Sandwiches and food were added in 1953.

Swain knew it had lost about $3.4 million over the past six years, had only $50,000 in the bank, had deferred maintenance on its ice cream making plant, and had closed 12 restaurants in the mid-1990s.

Although others may have sensed disaster, Swain saw opportunity.

He felt the brand's signature product — ice cream — was good enough to go beyond the region. His attorney and longtime adviser in Florida, Domenic Massari, said Swain wanted to expand to 300-400 franchises across the country in three to four years.

"It was presented to him as a business with great name recognition in Rhode Island that could be expanded with his expertise," said Massari.

In less than a year, Newport Creamery bought 14 stores from Bee Bee Dairy in Connecticut, Bergson's Ice Cream in Massachusetts and A.C. Petersen in Connecticut — increasing its holdings by 44 percent.

The company nearly doubled its marketing budget, paid to renovate the new eateries, and refashioned its logo. It added another shift at the ice cream plant to supply the new stores. It promoted employees to manage many of the new locations.

The new acquisitions never took hold, the new managers with little experience couldn't control labor costs, and Newport Creamery hemorrhaged money, company executives say. The former Bergson's restaurants lost $1.1 million this year alone, according to documents the company gave to The Associated Press.

"If you think about it, the stores we acquired were in the periphery of existing stores, but that was just not the case," Swain said. "We finally concluded the marketing of those stores was just prohibitive. The brand just wasn't as well known as we thought. It was not a known name. Most people think it delivers milk."

After closing its Westerly store on Tuesday, Newport Creamery is down to 34 restaurants in the region after peaking at 46 shops, said John Sheehan, its in-house counsel.

The company also got hit by a cool summer last year and rising milk fat prices. Its plant was closed for a month for repairs. Refrigerators in some restaurants failed. Creditors were calling. Swain was injecting his own money to keep it going — $1.5 million as of his last infusion in June.

Analysts question whether a small chain with $30 million to $40 million in annual sales can generate enough per unit sales to overcome relatively high overhead costs. Simply selling more ice cream and Awful-Awfuls won't cut it, they say.

"The future for family restaurants is it's a very competitive environment," Hale said. "Unless you have something special to offer, it's difficult to sustain yourself."

Executives are confident the bankruptcy proceedings will give Newport Creamery time to pay its debts, reorganize and move forward.

"Right now, we're back to basics," Swain said. "It means we're back to operating stores with quality service, good food at reasonable prices. And we'll expand it one by one."