Executive Summary
Einstein Bros Bagels specializes in breakfast and lunch, offering a variety of food and beverages.
The franchise will be situated in a shopping center in El Paso, TX, which is conveniently located between University Medical Center and Texas Tech Health Science Center- Paul L. Foster School of Medicine. This location will provide easy access to our customers who can reach us by walking. Our bagel shop will have a comfortable and friendly store environment with elegant finishes and furnishings, offering reasonably priced, high-quality food. Currently, there are no Einstein Brothers Bagels franchises in the El Paso TX area.
The El Paso TX convenience food market is growing quickly, driven by population growth and higher median family incomes. The market is crowded with competitors, as more food franchises and restaurants offering similar products and services open in the area. Aggressive advertising is necessary to make the targeted customers aware of the business. The franchisor has identified the necessary resources, expertise, and skills to ensure the success of this franchise.
To open a franchise for this corporation, one needs sufficient financing and net worth. The production is subcontracted through the corporate offices. The cost of starting the franchise is comparatively high compared to other food-related franchises. Due to the significant amount of capital invested and the structure of the business venture, there will be available cash flow to operate the business. Although initially, gross margins are low, they improve over time along with the return on investment. Financing can be obtained through a bank, partnership formation, or through private investors.
The business venture is viable due to its location and unique products. Additionally, the timing is opportune, thanks to the expansion of the Texas Tech Health Science Center and the adjacent University Medical Center.
Business Concept
Mission Statement At Einstein Noah Restaurant Group, our mission is simple: to redefine the quick casual neighborhood cafe. “From our comfortable and friendly store environments featuring sophisticated finishes and furnishings to our reasonably priced, high-quality food, we offer places—quite simply—where people want to be. The concept of quick casual is more than a trend. In fact, the $6 billion segments is one of the fastest-growing niches in the restaurant industry. This significant growth is attributed to aging baby boomers who are willing to pay a little more for quality food in a comfortable environment and a youth culture that needs a place to, well, hangout. We provide both—with class. From cozy, warmly lighted lunch cafes with comfy chairs and community tables to convenient counter-order bagel delis, ENRG offers an array of quick casual options.
ENRG offers five different brands that cater to customers who want either a piled-high sandwich to go or a place to enjoy fresh salads and have business meetings. The focus is on providing convenient service that is not rushed, along with a pleasant atmosphere and friendly service. ENRG operates quick casual restaurants all across the country. With a dough production facility and a coffee roasting plant, ENRG ensures that customers can easily purchase and enjoy a wide range of bagel options, including traditional ones like hole-in-the-middles and innovative ones like the Bagel Dog. Additionally, ENRG also offers non-bagel options such as fresh salads and fudge brownies that are readily available for purchase, similar to buying the daily newspaper.
Einstein Noah Restaurant Group, Inc. is the largest owner/operator, franchisor, and licensor of bagel specialty restaurants in the United States. They currently have 649 restaurants in 36 states plus the District of Columbia as of December 30, 2008. Their restaurants specialize in high-quality food for breakfast, lunch, and afternoon snacks in a bakery-cafe atmosphere with a neighborhood focus. The company’s concepts are spread throughout the nation, with Einstein Bros. restaurants in 26 states and the District of Columbia, Noah’s restaurants in 3 states on the west coast, and Manhattan Bagel restaurants concentrated in the Northeast. Most of the Einstein Bros. and Noah’s restaurants are owned or licensed by the company, while most Manhattan Bagel restaurants are franchised, with one being company-owned. Their offerings include fresh bagels and other bakery items made on-site, customizable breakfast and lunch sandwiches on various bread options, gourmet soups and salads, assorted pastries, premium coffees, and a range of snacks.
Their manufacturing and commissary operations involve the preparation and assembly of consistent, high-quality ingredients. These ingredients are then delivered freshly to the restaurants via a network of independent distributors. The company strongly believes in maintaining control over the development, sourcing, manufacturing, and distribution of its main products as it plays a crucial role in ensuring both quality and profitability. In order to support this approach, they have created exclusive formulas, invested in processing technology and manufacturing capabilities, and formed partnerships with strategic suppliers.
Licensing and franchising the brands is a strategy that enables the company to expand its presence in different regions and enhance brand awareness. Moreover, it generates extra income without incurring substantial costs, capital obligations, and risks typically associated with opening new company-owned restaurants.
Company History
In the northeastern United States, Einstein Noah Restaurant Group ran specialty coffee cafes called New World Coffee (New World) and Willoughby’s Coffee and Tea (Willoughby’s) in its early years, both operating and franchising them.
During that time, in addition to serving coffee, the company also offered fresh and high-quality gourmet foods and pastries. Their business strategy focused on becoming a franchisor and expanding through acquisitions. This led to the acquisition of Manhattan Bagel Company, Inc. (Manhattan) in 1998 and Chesapeake Bagel Bakery (Chesapeake) in 1999, making them a significant franchisor of bagel restaurants and, to a lesser extent, coffee cafes. In 2001, they expanded their strategy to include company-operated restaurants along with franchised and licensed locations. This expansion was made possible by acquiring the assets of Einstein/Noah Bagel Corp. (ENBC) and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L.P. These assets included two brands: Einstein Bros. Bagels (Einstein Bros.) and Noah’s New York Bagels (Noah’s). The acquisition in 2001 involved utilizing a significant amount of short-term debt and mandatory redeemable preferred equity, which have since been refinanced and restructured.
Forms of Ownership
Einstein Noah Restaurant Group, Inc. operates under the brands Einstein Bros. Bagels (Einstein Bros.), Noah’s New York Bagels (Noah’s), and Manhattan Bagel Company (Manhattan Bagel).
The Company operates in three business segments: the Company-owned restaurant’s segment, the manufacturing and commissary segment, and the franchise and license segment. The corporate support unit incorporates overhead and other activities associated with the business segments, along with interest on debt and depreciation on assets. The Company-owned restaurant’s segment encompasses Einstein Bros. and Noah’s brands. The manufacturing and commissary segment produces and distributes bagel dough and other products to restaurants, licensees, franchisees, and other third parties.
The franchise and license segment of the company earns income from royalties and other fees associated with the use of trademarks and operating systems developed for the Manhattan, Einstein Bros., and Noah’s brands. The majority of the company’s total revenues in fiscal 2008 came from restaurant sales at the Einstein Bros. and Noah’s company-owned restaurants, approximately 91%. Einstein Bros. offers a menu containing breakfast and lunch options such as fresh-baked bagels, hot breakfast sandwiches, cream cheese, specialty coffees and teas, creative soups, salads and sandwiches, and other selections.
Noah’s is a deli-inspired restaurant located in the neighborhood. They serve a variety of sandwiches, fresh-baked bread, home-style soups, and sweets. They also offer bagels. Their menu is available for breakfast and lunch. They have a selection of fresh-baked bagels and other baked goods. They make deli-style sandwiches to order, which include popular options like pastrami, corned beef, and roast beef. All their bread and bagels are baked fresh daily on the premises. Other items on their menu include soups, salads, desserts, freshly brewed coffees, and various cafe beverages.
Manufacturing and Commissaries
The Company has a bagel dough manufacturing facility in Whittier, California. They have a supply contract with a sole supplier to produce bagel dough as per specifications. These facilities provide frozen dough and partially-baked frozen bagels for the Company-owned restaurants, franchisees, and licensees. In fiscal year 2008, the Company had five United States Department of Agriculture (USDA) inspected commissaries strategically located to serve the existing Company-owned, franchise, and license restaurants.
The main focus of these operations is to supply restaurants with food products, including sliced meats, cheeses, and pre-portioned kits for creating salads. The Company buys other ingredients, such as meat, lettuce, tomatoes, and condiments, from third-party suppliers. The Company also offers franchise opportunities for Einstein Bros. and Manhattan Bagel brands, with 71 franchised locations across the United States as of the end of fiscal 2008.
At the end of fiscal 2008, there were 152 license restaurants for the Company in the United States, and they opened 32 new license restaurants. The decision to open a franchise location of Einstein Bros. in El Paso, TX is based on several factors that will contribute to its success:
- Targeting both middle-class and higher-income clients, including doctors, nurses, staff administrators, faculty members, and family members of patients.
- Proximity to neighboring businesses such as the El Paso Health Department and its public health officials.
- Conveniently located within walking distance of Texas Tech Health Science Center- Paul L. Foster School of Medicine, University Medical Center, and the El Paso Health Department.
- This convenience will save clients time and provide them with quality products at a good price.
- Einstein Bros. is currently not present in the city of El Paso, and the franchise aims to expand throughout the state of Texas.
Therefore, currently, there is scarce to no competition in the area for a business venture that sells similar products, making this venture unique.
Market Feasibility
Einstein Bros. franchising is seeking to establish franchise area development agreements in new geographic markets or areas that can support both franchised and company-owned restaurants. In 2008, Einstein Bros. actively promoted its franchise rights and signed multiple deals for multiple locations. Currently, Einstein Bros. plans to expand its presence through a substantial increase in franchise and licensed restaurants nationwide. This expansion strategy will generate additional revenue without significant expenses, capital commitments, or risks associated with opening new company-owned restaurants. Furthermore, the company aims to expand its geographic footprint and enhance guest recognition of its brands.
In terms of growth, the number of licensed restaurants in the United States at the end of 2008 was 152. In 2008, Einstein Noah Restaurant Group opened 32 new licensed restaurants and has plans to open 30 to 35 more in 2009. Additionally, there are seven development agreements in place for an additional 47 restaurant locations expected to open by 2016. This franchise is experiencing a significant increase in market growth as it strives to meet client demands.
Competition/Competitors
“We face competition from fast-casual and quick-casual restaurants that franchise and license their brands in the states where we operate,” according to Einstein Noah Restaurant Group. The restaurant industry, specifically fast food, is extremely competitive, with multiple established competitors across different geographical locations. While operating mainly in the fast-casual sector, it also recognizes fast-food and full-service restaurants as direct competitors.
Several fast-casual and fast-food chains, such as McDonald’s, are placing a greater emphasis on breakfast options and expanding their range of coffee choices. This may lead to heightened competition in the breakfast time segment. Moreover, apart from existing competitors, it is possible for one or more new formidable rivals with significantly larger funding, marketing capabilities, and operational resources to enter the market and directly compete against us. Additionally, in almost every major urban center, like El Paso, where our presence currently exists or is anticipated, there may already be local or regional competitors.
This may make it more difficult to attract and retain clients. In addition to outside competitors, other numerous factors including changes in consumer tastes and preferences often affect restaurants. Shifts in consumer preferences away from our type of cuisine and/or the fast-casual style could have a material effect on the results of operations. Dietary trends, such as the consumption of food low in carbohydrate content, have negatively impacted sales in the past and may continue to do so in the future. Changes in clients’ spending habits and preferences may also adversely affect sales.
The results will depend on the ability to respond to changing consumer preferences and tastes. Additionally, it is important to consider that recent local and state regulations require prominent disclosure of nutritional and calorie information. This may lead to decreased demand for certain products that are perceived as high in fat or calories. Advertising and marketing play a crucial role in the business process for Einstein Bros. Their franchise program specifically targets certain markets/regions and utilizes various local promotional media, including print advertising, radio, and billboards.
Both company-owned and franchised locations must buy local advertising and contribute to the brand’s marketing fund. The marketing fund helps stores by providing in-store promotional materials.
Technical Feasibility
Resources
The financing needs to start up the business are crucial, as the cost of a new franchise is about $600,000 (See Finance Section). The funds will be allocated for equipment, leasehold improvements, furniture and fixtures, and raw materials necessary for starting production.
Locations
The average size of an Einstein Bros. restaurant is around 2,200 to 2,500 square feet, with approximately 40 seats. These restaurants are typically found in neighborhood or regional shopping centers. They are designed to provide a comfortable and casual atmosphere that is appealing to customers, while also reflecting the brand’s personality and strong connection to the local community. With this in mind, a suitable shopping center in El Paso, TX has been identified as a potential location that meets these requirements. It is currently available for lease.
Staffing
On average, a crew usually employs around 15 to 20 individuals who work both full-time and part-time.
Every restaurant is required to have a full-time operating partner, specifically a qualified General Manager who has met our certification requirements, present on the premises at all times. Additionally, it is necessary for you to be ready to handle the daily operations and oversight of your business. As for production, franchisees must obtain proprietary products either through our designated suppliers or directly from us. Currently, franchisees obtain raw materials from multiple suppliers, but for the majority of our key products, they rely on a single supplier. A single source is used by franchisees for the purchase of all cream cheese.
Franchisees primarily buy frozen bagel dough from one supplier, who uses their own methods and is currently crucial to their operations. The rest of the frozen bagel dough is made at their manufacturing facility in Whittier, California. While they haven’t faced major issues with suppliers so far, relying on one supplier for most key ingredients exposes them to various risks. These risks include potential supply delays or interruptions, reduced control over quality, and insufficient raw material capacity.
Any interruption in the supply or deterioration in the quality of the materials supplied by our suppliers could significantly harm our business, financial condition, and operating results.
Expertise & Skills
Having a strong business background and the financial capacity to invest in franchising is essential. Einstein Bros has a thorough pre-selection process to ensure that only candidates who will benefit both Einstein Bros and its franchisees are considered.
Toward the end, it is necessary for franchising candidates to have either personal experience or partnership experience in the restaurant industry. Einstein Bros fills senior management positions with industry veterans who have a solid operations background to help open the franchise. They have experienced leaders in all supporting departments. Moreover, the program covers day-to-day operations in every neighborhood store, including training and providing comprehensive field support manuals. Additionally, they have an in-house culinary department that is among the top in the industry.
The franchisees have the opportunity to showcase cutting-edge culinary progress in their area thanks to the constant quest of culinary researchers and seasoned chefs. It is important to note that Einstein Noah’s management is responsible for maintaining effective internal control over financial reporting, and for assessing its effectiveness, as stated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.
Next, we will move on to the next section of the study.
Financial Feasibility
Fixed costs for a new franchise, which do not take into account any tenant improvement allowances typically provided by the landlord in a leased location, are around $600,000 (median value). The actual cost may vary depending on the size of the space, its layout, and its location. These fixed costs consist of expenses for equipment, leasehold improvements, furniture and fixtures, as well as other related capital. Please note that in 2009, it is expected that each restaurant/franchisee will receive an average tenant improvement allowance of approximately $50,000, which will bring down the overall cost.
The amount of the allowance for restaurant upgrades can differ depending on factors like location and lease terms. The plan is to upgrade around 45 existing restaurants in 2009, with each restaurant requiring approximately $80,000 for capital costs and $49,000 for deferred maintenance costs, totaling around $129,000 per restaurant.
Cash Flow
As a member of the restaurant industry, cash is primarily used for transactions and received immediately.
The company is confident that it will generate enough cash flow and have enough funds available from its revolving credit facility to finance its operations, capital expenditures, and necessary debt and interest payments. Due to the perishable nature of its products, the inventory is frequently turned over and therefore requires minimal investment. The terms of the accounts payable are believed to be similar to those of other companies in the industry. The main contributor to the operating cash flow is the company-owned restaurants, particularly the gross margin they generate.
Thus, the focus lies on various aspects of the operations such as comparable store sales and cash flows. This ensures a consistent flow of operating profits, enabling each franchise to fulfill its cash responsibilities.
Gross Margin
The gross margin is currently 20% and this increase is due to price increases and expanded role in sales to franchise and license locations. However, it is important to note that global demand for commodities like wheat has already led to higher prices for flour, which could further increase costs in the future.
The prices of the main ingredients are influenced by weather conditions and economic factors like supply and demand in the United States and other countries. Forecasting and managing these commodities can greatly impact gross margins. If the prices of crucial ingredients, like wheat, increase, it could have a negative impact on operating results.
Return on Investment (ROI)
The franchising profit (ROI) depends on various factors: location, operating expenses, retail sales mix, sales margin, occupancy costs, and financing costs. However, due to the lack of specific information about the current location, only a rough estimate can be provided. The projected ROI for the first year is estimated to be -2%; however, for subsequent years, it is expected to fluctuate between 40% and 50%. If the projected sales materialize, the break-even point for this business venture will occur in one and a half years.
Financing ($)
The franchise agreement mandates a $35,000 per restaurant initial fee in addition to a 5% royalty contingent on sales.
- The estimated initial investment to develop a franchise location ranges from 492,000-858,350 (median 600,000 in the El Paso area).
- The minimum net worth of 1 million and 400,000 of liquid/cash assets is needed and required to open the franchise.
- Advertising fees are up to 5% of gross sales.
Is financing available through this business corporation? Einstein Bros does not provide financing currently, but financing can be acquired from banks, private investors, or by forming a partnership for additional capital.
