Nathan’s Famous, Inc.

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Nathan’s Famous, Inc.

1400 Old Country Road, Suite 400
Westbury, New York 11590
U.S.A.
(516) 338-8500
Fax: (516) 338-7220

Public Company
Founded: 1916
Employees: 690
Sales: $28.9 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: NATH
NAIC: 722211 Limited-Service Restaurants

Nathan’s Famous, Inc. is a chain of fast food restaurants, perhaps best known since its inception for its hot dogs. Since its inception, Nathan’s signature product has been its hot dog, but other menu items include hamburgers, chicken strips, salads, and french fries. There are approximately 190 company-owned and franchised Nathan’s outlets in 17 states, Israel, and Aruba. Whereas some Nathan’s outlets are traditionally formatted restaurants, many of them are smaller and more compact—such as carts, kiosks, and snack bars. These smaller outlets often are located in nontraditional sites such as airports, schools, entertainment venues, military facilities, and convenience and department stores. Aside from the company’s owned and franchised outlets, Nathan’s branded products are sold through more than 500 points of distribution in 33 states and three countries. The company also is engaged in several co-branding ventures with other fast food outlets, including Burger King, TCBY, Pizza Hut, and Raskin Robbins. Under the co-branding agreements, Nathan’s products are sold in its partner restaurants as a complement to their own product lines. Nathan’s also owns Kenny Rogers Roasters, a 100-unit chain of chicken restaurants in the United States and Asia, and has entered into an agreement to acquire Miami Subs Corp., a chain of 194 restaurants.

Early 20th Century: Nickel Hot Dogs and Innovative Marketing

In 1915 Coney Island—a seaside resort area in Brooklyn, New York—was one of the world’s largest and finest amusement areas. With three amusement parks, beaches, arcades, sideshows, shooting galleries, restaurants, and saloons, the long narrow strip of land at Brooklyn’s south end was a destination spot for visitors looking for fun. One of the many thousands who visited Coney Island in the summer of 1915 was Nathan Handwerker, a Polish immigrant who worked in a restaurant in downtown Manhattan. While visiting, Handwerker saw a “help wanted” sign in one of Coney Island’s most popular restaurants—a large beer garden called Feltman’s Restaurant. Deciding to leave Manhattan and settle in Coney Island, Handwerker took the job at Feltman’s.

Handwerker’s new job was to slice rolls for a kind of sandwich Feltman had invented. The sandwich, consisting of boiled tubes of spiced meat on a roll, was the hot dog—and Feltman sold them by the thousands for ten cents each. Two of Handwerker’s co-workers were a pianist and a singing waiter who performed together: Jimmy Durante and Eddie Cantor. Although both Durante and Cantor later were to become well-known and successful, at the time they could not even afford the price of Feltman’s hot dogs. They suggested that Handwerker start his own hot dog stand and undercut Feltman by selling the sandwiches for a nickel each.

In 1916 Handwerker and his wife, Ida, did just that. With a savings of $300, the Handwerkers bought an 8-foot by 25-foot space at the corner of Surf and Stillwell Avenues, one block from the beach. Nathan installed walk-up counters in the building and hung up big red signs that advertised his five-cent hot dogs. Ida, meanwhile, developed a spicy recipe that used all beef and lots of garlic. The Handwerkers added roast beef sandwiches, hamburgers, and french fries to the menu, and “Nathan’s Famous Frankfurter & Soft Drink Stand” was launched.

Things did not go exactly as planned, however. Rather than the new stand’s lower price drawing customers away from Feltman’s, it instead made them suspicious about the quality of Nathan’s food. Because his price was so much lower, many assumed that he must be using inferior meat. This problem was exacerbated by an already shaky public opinion of hot dogs in general. When Feltman had first started selling them, it was rumored that they were made of dog or horse meat. Although those rumors had for the most part died away, the eating public was still skeptical. Handwerker, however, believed in the quality of his product—and he came up with an ingenious way to convince others of it. He hired people to dress up as doctors, complete with lab coats and stethoscopes, and stand in front of his restaurant, eating hot dogs. Handwerker reasoned that the sight of medical professionals munching on Nathan’s hot dogs would allay customers’ health fears and give his restaurant the stamp of approval. To drive the point home, he posted a new sign reading, “If doctors eat our hot dogs, you know they’re good!”

Another of Handwerker’s innovative promotional tactics was to become deeply embedded in Coney Island culture: the Nathan’s Fourth of July Hot Dog Eating Contest. The 12-minute contest to see who could eat the most hot dogs began the first year Nathan’s opened. Quickly becoming an annual favorite, it drew attention, headlines, and crowds of customers.

1920s-40s: Nathan’s and the Nickel Empire

If there was any question that Nathan’s hot dog business was sustainable, those doubts were put to rest in the early 1920s when the New York subway system was extended to reach Coney Island. Up until then, the resort area had been patronized primarily by visitors who had private transportation—that is, those of the middle and upper classes. The subway access, however, brought in a whole new set of customers, many of whom recently had immigrated and were extremely poor. Jumping at the new opportunity afforded them, these New Yorkers fled the miserably hot city in droves each weekend for a visit to the seaside. The Coney Island crowds swelled dramatically—from approximately 500,000 visitors per day to more than a million per day. Because the subway ride to the resort cost only five cents, the Island came to be called the “Nickel Empire.”

Nathan’s was perfectly positioned to profit from the influx of new visitors. Its already good location at the corner of Surf and Stillwell became even better when the city built the Coney Island subway station directly across the street. Every weekend, thousands of visitors disembarked right in front of Nathan’s counter. In addition, Handwerker’s lower-priced hot dogs proved to be very appealing to the new cost-conscious crowd. Business picked up rapidly, and soon there were 50 employees working in the Nathan’s stand. Hungry Coney Island visitors lined up at the 20-foot lunch counter until they overflowed into the street, and Nathan’s sold an average of 75,000 hot dogs every summer weekend. In addition, the restaurant sold hundreds of gallons of root beer, Coca-Cola, and malted milk shakes.

During the 1920s and 1930s, while Coney Island remained a thriving hot spot, Nathan’s Famous became truly famous. Politicians, sports figures, and celebrities often were photographed eating Handwerker’s hot dogs during visits to the popular resort. Nathan’s famous hot dogs became closely associated with Coney Island and New York—a “must-have” for any visitor to the city. As his business grew, Handwerker turned his original small lunch stand into a 30,000-square-foot restaurant.

1950s-80s: Ownership Changes

Despite their success, the Handwerkers did not attempt to expand their hot dog empire for four decades, preferring to feed the New York masses from their original Coney Island location. “Coney Island was his life,” Handwerker’s son, Murray, said of his father in a February 1996 interview with Nation’s Restaurant News. “He spent almost all his time at that one store and around Coney Island.” In the mid-1950s, however, Handwerker’s family convinced him to open another Nathan’s hot dog stand on Long Island, which had become a popular residential spot after World War II. Once started, Nathan’s continued expanding at a leisurely pace, focusing mainly on properties in Brooklyn and Queens. In 1968 the small chain of eateries went public.

In the early 1970s Nathan Handwerker went into semi-retirement and his son, Murray, became the company’s president. Under Murray’s leadership, Nathan’s began establishing restaurants in other states, including New Jersey and Connecticut. The company also grew through a series of franchise agreements in various states. By the late 1980s, Nathan’s had approximately 40 restaurants.

After almost 20 years of growth as a publicly held company, Nathan’s Famous went private again in early 1987, when a New York investment firm, Equicor Group Ltd., purchased all of the company’s shares for $8.50 per share—a total price of around $19.5 million. The years immediately following Nathan’s purchase by Equicor were rocky ones, as bad management and rising overhead led to a record loss. At the beginning of the 1990s, just when it looked as though the new owners were going to sink Nathan’s, sweeping changes in management left the company in the capable hands of a new CEO and president—Wayne Norbitz.

1990-96: New Tactics

Under Norbitz’s leadership, one of the company’s first initiatives was to cut operating expenses dramatically. Another was an aggressive franchise drive, which enabled the chain to grow without risking its own capital. The changes were effective, and Nathan’s again became profitable. In 1993 the company went public for the second time in its 77-year history. The capital raised—$15 million—enabled Nathan’s to pursue further growth, opening a dozen more restaurants at various locations in the New York region.

Company Perspectives:

Our mission is to be the premier provider of brand name quick-serve food, offered through restaurants and a variety of other retail environments. We will achieve this by aggressively focusing our efforts on our guests. We will provide each of our guests with a memorable and delightful experience by delivering unparalleled service, quality products, and great value that goes beyond expectations.

Business in the new restaurants was uneven, however, with some locations falling short of sales expectations. Norbitz became increasingly convinced that for Nathan’s to thrive, it needed to rethink its whole strategy. He felt that the company’s strongest asset was its brand equity and that, therefore, its strategy should capitalize on that asset. He and his management team began to look for ways they could do just that. “Nathan’s distinguished history and reputation for quality foods have enabled us to develop and maintain a strong brand identity, particularly in markets where we are best known,” the company’s 1994 annual report read. “The Company has used the strength of this brand equity as a cornerstone of its expansion strategy.”

One of the main tenets of Nathan’s new expansion strategy was to focus on captive market settings, such as airports, malls, department stores, and entertainment venues. Because space was extremely limited in these types of settings, the company began moving away from the larger, more traditional restaurant concept. Instead, it developed a line of carts, kiosks, and countertop modules—small, flexible units designed to allow for rapid and low-cost start-ups in an extremely wide range of settings. Then it began looking for likely locations—nontraditional venues where substantial traffic already existed—and forging alliances with the companies who owned those locations. Some of the company’s first such alliances were with Caldor, a chain of discount department stores, Home Depot, a chain of home improvement stores, and Unocal, a chain of gas stations. By 1994, Caldor was Nathan’s largest franchisee, with 57 Nathan’s Famous outlets opened in their department stores. Nathan’s also had ten outlets in airports, 19 in highway travel plazas, and six in gas stations by the end of 1994. Other strategic alliances included institutional food service operators, who began offering Nathan’s products in stadiums, university campuses, and convention centers.

Another key tenet of the company’s expansion strategy was the addition of a supermarket retail income stream. Through a licensing agreement with SMG Inc., a specialty meat packaging and distribution company, Nathan’s hot dogs became available in grocery stores and supermarkets in the New York area in the early 1990s. By the mid-1990s, they were the largest selling brand in the New York supermarkets, earning Nathan’s in excess of $1 million annually. In 1996 the company signed another license agreement with Gold’s Pure Food Products Co Inc. to distribute Nathan’s mustard and salsa in New York area stores.

By the end of 1996, Nathan’s was operating 205 outlets, most of which were smaller units in nontraditional settings. Through aggressively seeking new franchise partners, the company had established a presence on eight college campuses, six racetracks, and 34 airports and travel plazas. One could also find Nathan’s in convenience stores, convention centers, hotels, and bowling alleys as the company continued to tap new markets. Nathan’s also initiated a co-branding strategy in 1996, bundling its products with such nationally knowns as Kentucky Fried Chicken, Pizza Hut, Burger King, and TCBY Yogurt to appeal to a broader customer base within the captive market settings.

1997-99: New Markets

In 1997 Nathan’s took its brand equity marketing a step further, with a new “branded product program.” The program allowed food vendors to purchase Nathan’s products and offer them on their menus without paying licensing or franchise fees—a desirable option for many vendors. “In a time when consumers have clearly made their preference for branded products known, the prospect of replacing the sale of non-branded hot dogs with Nathan’s has an enormous appeal,” Norbitz wrote in the company’s 1997 annual report.

The branded product initiative proved to be a vehicle for rapid growth. Attracted by the low-capital, low-hassle terms of the program, more than 250 new outlets had begun offering Nathan’s products by the end of 1998. Including these new outlets, the number of total outlets offering Nathan’s products at the close of fiscal 1998 was 491, as compared with 230 outlets at the end of the previous year.

Nathan’s made another rapid jump-up in size in 1999, this time by acquiring the Kenny Rogers Roasters chain of restaurants. Roasters, which consisted of approximately 70 U.S. locations and 30 Asian locations, came under Nathan’s ownership in April of 1999, for a purchase price of $1.25 million. Nathan’s planned to continue to operate the Roasters chain as a wholly owned, separate subsidiary. Also in 1999, the company entered into an agreement to purchase Miami Subs Corp., a chain of 194 owned and franchised restaurants.

Future Plans

As it readied to move into the year 2000, Nathan’s held out great hope for its Branded Product program, believing that there was a vast, yet untapped opportunity for growth in that area. The company also expected to continue its expansion strategy of locating in nontraditional settings and targeting captive markets. Nathan’s was also pursuing new opportunities in supermarket retailing by preparing to break into the home meal replacement market—a $47 billion industry projected to grow around nine percent yearly. Nathan’s planned to offer about 60 home meal replacement items in supermarkets, including mashed potatoes, creamed spinach, chicken strips, and, of course, hot dogs.