Einstein/Noah Bagel Corporation
Einstein/Noah Bagel Corporation
14103 Denver West Parkway
Golden, Colorado 80401
Fax: (303) 216-3403
Web site: http://www.einsteinbros.com
Incorporated: 1995 as Progressive Bagel Concepts, Inc.
Sales: $371.9 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: ENBX
NAIC: 311811 Retail Bakeries; 722211 Limited-Service Restaurants
Einstein/Noah Bagel Corporation is the number one chain of retail bagel stores, with more than 433 Einstein Brothers Bagel stores and 112 Noah’s New York Bagels stores in 29 states and Washington, D.C. The eateries offer a variety of creative bagel breakfast and lunch specialties, as well as complementary menu selections such as soups, salads, and baked sweets, and the company’s own coffee brand, Melvyn’s Darn Good Coffee. The bagel shops highlight the welcoming atmosphere of a neighborhood café, where customers are encouraged to relax and linger.
An Ambitious Conception
Einstein/Noah Bagel Corporation originated as Progressive Bagel Concepts, Inc. (PBCI) in March 1995 when Boston Chicken, Inc. acquired three of the foremost retail bagel companies located in diverse regions of the country. The owners of Offerdahl’s Bagel Gourmet, Inc. of Fort Lauderdale, Bagel & Bagel, Inc. of Kansas City, and Brackman Brothers, Inc. of Salt Lake City, found that their store concepts were compatible in that they offered creative bagel flavors in an upscale, neighborhood setting. They joined together for the purpose of creating a national retail chain specializing in baked bagels and complementary products. PBCI began as a chain of 24 bagel shops, ten Offerdahl’s stores, five Bagel & Bagel stores, and nine Brackman Brothers stores. Also, five additional Brackman Brothers stores were in various stages of development.
Boston Chicken supported its new bagel operation both structurally and financially. To promote rapid development of bagel franchises, PBCI modeled Boston Chicken’s structure of franchise area developers for the Boston Market chain of restaurants. Under that arrangement the company provided loans convertible to equity interest to regional franchisees for store development. The owners of the original bagel chains became franchise developers for their regions, and shared resources with Boston Chicken’s area developers. PBCI benefited from Boston Chicken’s basic infrastructure such as computer and communications systems, administration, and real estate for offices and bagel shops. Boston Chicken supported the new bagel company with an $80 million senior secured loan, convertible to majority stock equity interest. PBCI gathered additional financial resources through a private stock offering, which garnered $20 million.
PBCI opened its first Einstein Brothers bagel store in Ogden, Utah, in June 1995. The store featured bagels baked fresh all day, and served in a neighborhood café atmosphere, often with an outdoor patio, and decorated with warm earth tones and wood trim in the interior. Bagels and cream cheese “schmears” were offered in traditional as well as new, inventive flavors. Mass production techniques and inexpensive ingredients allowed the company to offer bagels at 45 cents a piece. After some experimentation at the Ogden store, PBCI decided to launch the Einstein Brothers Bagels brand on a large scale and Einstein Brothers was registered for trademark status.
The company sought rapid expansion of the Einstein Brothers Bagels brand through the acquisition and conversion of bagel stores, as well as through new store development. In August 1995 PBCI acquired Baltimore Bagel Company, a chain of 13 stores in San Diego, and two stores in Orange County, California. Nine Bagel Stop stores in Denver were acquired and converted to the Einstein Brothers brand concept. The Brackman Brothers stores completed their change to the Einstein Brothers concept in January 1996. Targets for franchise development included Chicago; Detroit; Milwaukee and Madison, Wisconsin; Albuquerque; Las Vegas; Denver; and Tucson, and Phoenix, Arizona. PBCI became Einstein Brothers Bagels, Inc. (EBBI) in December 1995.
Though retail bagel store sales were strong, financial success was elusive. At the end of the first year, EBBI reportedly lost $68.1 million on revenues of $70.4 million. The loss was attributed to initial investment costs such as furniture, fixtures, franchise fees, grand opening promotions, and other expenses. Start-up expenses ranged from $269,000 to $592,000 per unit. EBBI ended 1995 with almost 60 stores.
EBBI became the number two bagel retailer in the United States, behind Bruegger’s Bagel Bakery, with the acquisition of Noah’s New York Bagels, Inc. (NNYB) of Alameda, California. Boston Chicken increased its earlier loan to EBBI to $120 million in February 1996 to fund the purchase. NNYB stores, founded in 1989, featured kosher bagels and other kosher deli products in the atmosphere of a New York bagel shop at the turn of the 20th century. The acquisition included 37 stores in California and Seattle, while negotiations for development of an additional 40 to 50 stores all along the West Coast were underway. Starbucks owned a 20 percent interest in NNYB, which was transferred to an undisclosed level of ownership in EBBI. NNYB founder Noah Alper became vice-chairman of EBBI. The NNYB brand store expanded to 57 stores in three states by July 1996.
In March 1996, EBBI entered the New England bagel market when it purchased Finagle A Bagel, a chain of three stores in Boston. Finagle A Bagel President Larry Smith was named head of the EBBI team that would develop Einstein Brothers Bagels franchises in New England.
1996 Stock Offerings Feed Expansion
EBBI had franchised more than 152 retail bagel eateries in 15 states when it filed with the Securities and Exchange Commission for an initial public offering and two private offerings of stock in May 1996. In conjunction with the IPO, the company changed its name to Einstein/Noah Bagel Corp (ENBC). ENBC expected to raise about $80 million through the offerings. The actual public offering took place on August 2, 1996 with 2.7 million shares offered at $17 per share. The value of ENBC stock rose to $21.25 per share and ended its first day of trading at $20.50 per share, a 21 percent increase in value. The public offering raised $46 million for debt repayment and franchise expansion. A separate public offering comprised 425,000 shares purchased by company officers, employees, and board directors. Moreover, Boston Chicken converted a $120 million loan into two million shares of ENBC, a 60 percent majority stock interest.
With new funds available the company’s goal was to have between 275 and 300 stores in operation by the end of 1996. ENBC continued to follow the Boston Chicken franchising model to replicate Einstein Brothers and Noah’s New York Bagel brand concepts quickly. A September 1996 distribution agreement with Marriott Distribution Services would facilitate expansion through its capacity for wide distribution of supplies and materials. In October 1996 Lone Star Bagels L.P. signed a development pact in which it agreed to develop more than 100 Einstein Brothers Bagels stores in Dallas-Fort Worth, Houston, and Austin, Texas. Peter Tucker, head of Lone Star Bagels, opened the first store in Dallas that month and planned five more stores by the end of 1996. ENBC had 315 stores in operation in 26 states and Washington, D.C., at the end of 1996.
ENBC made a secondary stock offering in December 1996. That offering raised more than $85 million when ENBC sold three million shares at $30 per share. Though Boston Chicken purchased 500,000 shares, its majority interest was reduced to 53 percent ownership of ENBC. The new source of funding and information from area developers prompted ENBC to increase the 1997 estimate of new franchises from a possible 300 stores to as many as 350 stores. Five regional franchise developers committed to operate a total of 668 stores by the end of 1998.
Proceeds from the stock offering provided $32 million to Gulf stream Bagels, area developer for Florida. A 2,200-square-foot store would cost from $350,000 to $425,000 to develop, but bagel stores in Florida generated more than $15,000 average weekly sales. Gulfstream planned to open more than 20 Einstein Brothers stores in South Florida markets, such as Tampa, Naples, Palm Beach, and Miami in 1997. With a goal to open 100 to 150 stores, Steve Messing, chief development officer for Gulfstream, also considered Pensacola, Jacksonville, and Tallahassee. Gulfstream also owned and operated Melvyn & Elmo’s Bagels, another ENBC brand which opened in Atlanta in May 1997, with 20 new stores planned to open by the end of 1997.
On August 17, 1997, EBBI opened its 500th bagel shop, and became the number one retail bagel company in the nation, surpassing Bruegger’s at 473 stores. As of October 1997 ENBC had 546 bagel stores in 29 states and Washington, D.C., operated under various brand names, primarily Einstein Brothers and Noah’s New York Bagels.
New products were introduced to attract lunch business such as sourdough baguettes, and focaccia sandwiches, tortilla roll-ups, and a pizza bagel. For St. Patrick’s Day, ENBC introduced the Lucky Green bagel, made with “magic Irish green flour that imparts the Luck O the Irish on anyone who eats it.” The company created its own coffee brand, Melvyn’s Darn Good Coffee, sold fresh brewed in five daily variations, or in whole bags.
Despite some success at the store level, ENBC’s stock values tended to perform poorly. In January 1997 the stock peaked at $33 per share, but declined significantly thereafter. In August the stock had dropped to $11 per share, resulting from an expectation that expansion would slow down. On October 30, 1997, ENBC stock fell further, to $10.25 per share. Financial considerations led to the closure of five of the ten regional franchise offices.
Conversion to Company Ownership
In November 1997 the board and management decided to reorganize its structure, changing all of its outlets from franchisee ownership to company ownership. ENBC did not own any of the 546 restaurants, but received royalties and earned interest on loans to franchisees. Company ownership shifted store profits to ENBC. Under the plan four area developers merged into the fifth, Einstein/Noah Bagel Partners, L.P. Area franchisees retained a 23 percent equity interest under Bagel Store Development Funding, L.L.C., while loans made to area developers were converted into a 77 percent ownership in the retail bagel stores.
1998 Focus: Store-Level Improvement
Conversion to company ownership of the bagel stores reflected ENBC’s objective to reorient its strategy. The company focused on improving sales and reducing operating costs at stores already succeeding, rather than continuing to open new stores. By March 1998 ENBC closed 25 stores with inadequate performance. Some did not fit the brand concept of a community-oriented, neighborhood cafe. The closures resulted in a $2.4 million write-down. ENBC changed its original projection of 150 to 200 store openings in 1998, and reduced the number to 25 to 50 new stores for the year.
In February 1998 Robert Hartnett was named CEO of the company. Hartnett had successfully led Gulfstream Bagels, area developer for Florida and the southeastern United States. Einstein Brothers stores in Florida generated ten percent higher sales than an average Einstein store. Under Hartnett those stores had successfully implemented local marketing programs and introduced new products. Also, Hartnett originated an effective compensation package for store managers. Similar strategies were implemented throughout the company in 1998, such as improvement of hiring and training practices, and measurements of store-level performance on a weekly basis. An incentive plan for store managers was launched systemwide. To increase revenues, ENBC enhanced in-store merchandising and raised menu prices.
ENBC strategy to improve sales led to the introduction of seasonal menus and catering services. New cream cheese schmears included mango in the summer and cappuccino in the fall. The fall lunch menu added soups, bean salad, and sourdough baguette sandwiches with such ingredients as goat cheese and kalamata olive spread. Winter holiday offerings included bagel buckets, with a baker’s dozen of bagels and two varieties of cream cheese. Holiday specialty items included spiced cranberry lite cream cheese, gingerbread cookies, and cranberry walnut poundcake. Due to its popularity in 1997 the company offered Mel’s Holiday Brew again in 1998.
ENBC sought corporate business when it introduced its, “Fancy Schmancy Catering” in November 1998. The program offered Breakfast Nosh Boxes of cinnamon rolls, scones, and muffins as well as bagels and cream cheese. Lunch Nosh Boxes featured baguette or bagel sandwiches, including napkins and utensils. Nosh boxes were designed to serve 15 or more people. Individual box lunches and assorted sweets were also available.
An Unknown Future
Creditor demands on parent company Boston Chicken led it to place a majority interest in ENBC up for sale in May 1998. While no one stepped forward to purchase ENBC and the offer for sale was withdrawn, Boston Chicken remained open to unsolicited offers. After Boston Chicken filed for Chapter 11 Bankruptcy reorganization in October 1998, ENBC distinguished itself from Boston Chicken, stating in an October 7, 1998 Denver Post article that, “Our operations are separate and our concepts are distinctively different.” Nevertheless, financial problems at Boston Chicken affected stock values at ENBC which declined to $1 per share on October 21, 1998.
In August 1998 ENBC petitioned the NASDAQ National Market to remain listed on its stock exchange. ENBC was no longer in compliance with that market’s criteria, a $5.00 per share price for 90 days and minimum net tangible assets of $4 million. ENBC’s bid to remain on the National Market was based on a disagreement as to the net worth of the company. The NASDAQ defined a $70 million “minority interest” on its ENBC balance sheet as a liability. ENBC defined that amount as an asset in the acquisition of the area franchises. The NASDAQ National Market transferred ENBC to the NASDAQ Small Cap Market, and the company retained its stock symbol, ENBX.
Despite its financial tribulations, ENBC continued to succeed at the store level. A one-time charge of $212 million for goodwill in purchasing area franchise developers for more than their book value led to a loss of $31.8 million in 1998, but systemwide revenue increased 23 percent to $371.9 million in 1998. Previously, average store sales suffered from heavy use of coupons and discounts, but store weekly average sales reached $13,103 in 1998.
In March 1999 Einstein Brothers Bagels won an award from the Restaurant and Institutions Magazine. The 19th Annual Choice in Chains Award was presented to Einstein Brothers Bagels for First Place, Platinum, in the Bread/Bakery category. Winners were determined through consumer surveys commissioned by Restaurants and Institutions magazine, which rates more than 100 regional and national chains on attributes such as the quality of food, customer service, convenience, menu, atmosphere, value and cleanliness. More than 2,800 adults participated in the survey.
At the end of 1998 and the beginning of 1999 ENBC continued to reorganize for profitability. High overhead expenses led to the closure of company field offices, while staff at the Golden, Colorado headquarters dwindled from 350 employees to 160 employees. Executive positions were slashed from 24 positions to ten. By the end of 1998, ENBC closed 43 stores and opened 15 new stores. In early 1999, ENBC closed ten stores, opened five new stores, and only planned another five openings. CEO Hartnett expected franchise development to resume in 2000 under direct company supervision, rather than the elaborate financial arrangements which led to Boston Chicken’s difficulties.
In 1999, Boston Chicken began looking to sell its interest in ENBC, but no buyers were immediately forthcoming. A new chief financial officer for ENBC, Paula Manley, was appointed in June of that year, and she was able to report encouraging financial results for the early quarters of the year. Revenues were increasing and net losses decreasing, attributable to increases in per store sales and reductions in the work force. Despite its troubled relationship with majority shareholder Boston Chicken, ENBC remained the company’s top bagel shop as a new century approached.
Einstein/Noah Bagel Partners, Inc.; Einstein/Noah Bagel Partners, L.P. (77%).
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