Executive Summary
Einstein Bros Bagels will offer various types of food and beverages specializing in breakfast and lunch.
The franchise will be conveniently located in a shopping center between University Medical Center and Texas Tech Health Science Center- Paul L. Foster School of Medicine in El Paso, TX. Therefore, it will offer an accessible location for our customers within walking distance. The bagel shop will be known for its comfortable and friendly store environment featuring sophisticated finishes and furnishings to a reasonably priced, high-quality food. Currently, in the El Paso TX area, there are no Einstein Brothers Bagels franchises.
The market for convenience foods is expanding rapidly in the El Paso TX area due to increase population growth and increased median family incomes. The competition is plentiful in the El Paso TX market due to increased food-related franchises and restaurants opening in the area offering similar products and services. Aggressive advertising would have to be conducted to make the targeted customers aware of the business. The resources needed have been identified by the franchisor. The needed expertise and skills to make this franchise success is provided by the franchisor.
Without adequate financing and net worth one cannot easily open a franchise for this corporation. Production is subcontracted through the corporate offices. The cost to start the franchise is expensive relative to other types of food-related franchises. Because of the amount of capital infused and the structure of the business venture cash flow will be available to operate the business. Initially, gross margins are low but do improve with time as does the return on investment. Financing will be outsourced by a bank, forming a partnership or in the form of a private investor or investors.
This business venture is economically feasible because of the location and the products of the business make it lucrative and exclusive. The timing is also good because of the growth of the Texas Tech Health Science Center in conjunction with the growth of the adjoining 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.
Whether customers want a piled-high sandwich to go or prefer to pause over fresh salads and talk business, one of ENRG’S five brands will accommodate. It’s all about convenience that isn’t rushed, an atmosphere that doesn’t go stale, and service that comes with a smile. And we do quick casual all over the nation. With a dough production facility and a coffee roasting plant, ENRG makes sure everything bagel-like—from standard hole-in-the-middles to the ingenious Bagel Dog—and not so bagel-like—from fresh salads to fudge brownies—are as easy to buy and enjoy as the daily newspaper”- Einstein Noah Restaurant Group.
Description of Business Einstein Noah Restaurant Group, Inc. is the largest owner/operator, franchisor, and licensor of bagel specialty restaurants in the United States. As of December 30, 2008, it had 649 restaurants in 36 states plus the District of Columbia. As a leading fast-casual restaurant chain, their restaurants specialize in high-quality foods for breakfast, lunch, and afternoon snacks in a bakery-cafe atmosphere with a neighborhood emphasis. Collectively, their concepts span the nation with Einstein Bros. restaurants in 26 states (i.e. Texas) and in the District of Columbia, Noah’s restaurants in 3 states on the west coast and Manhattan Bagel restaurants concentrated in the Northeast. Currently, Einstein Bros. and Noah’s restaurants are predominantly company-owned or licensed, while Manhattan Bagel restaurants are predominantly franchised, with one company-owned location. Their product offerings include fresh bagels and other bakery items baked on-site, made-to-order breakfast and lunch sandwiches on a variety of bagels, breads or wraps, gourmet soups and salads, assorted pastries, premium coffees and an assortment of snacks.
Their manufacturing and commissary operations prepare and assemble consistent, high-quality ingredients that are delivered fresh to the restaurants through the network of independent distributors. The company believes in controlling the development, sourcing, manufacturing, and distribution of its key products is an important element in ensuring both quality and profitability. To support this strategy, they have developed proprietary formulations, invested in processing technology and manufacturing capacity, and aligned themselves with strategic suppliers.
Licensing and franchising the brands allows them to increase their geographic footprint and brand recognition. The business also generates additional revenues without incurring significant additional expense, capital commitments, and many of the other risks associated with opening new company-owned restaurants.
Company History
In the early years, Einstein Noah Restaurant Group operated and franchised specialty coffee cafes in the northeastern United States under the brand names of New World Coffee (New World) and Willoughby’s Coffee and Tea (Willoughby’s).
In addition to coffee, they also served fresh, high-quality gourmet foods and pastries. The business strategy in those years was to be a franchisor and grow through acquisitions. With the acquisition of Manhattan Bagel Company, Inc. (Manhattan) in 1998 and Chesapeake Bagel Bakery (Chesapeake) in 1999, it became a significant franchisor of bagel restaurants and, to a lesser extent, of coffee cafes. In 2001, the business strategy evolved to include company-operated restaurants as well as franchised and licensed locations as it completed the acquisition of substantially all of the assets (the Einstein Acquisition) of Einstein/Noah Bagel Corp. ENBC) and its majority-owned subsidiary, Einstein/Noah Bagel Partners, L. P., which operated 2 brands: Einstein Bros. Bagels (Einstein Bros. ) and Noah’s New York Bagels (Noah’s). The Einstein Acquisition in 2001 was accomplished by issuing a substantial amount of short-term debt and mandatorily redeemable preferred equity, which have since been refinanced and restructured.
Forms of Ownership
Einstein Noah Restaurant Group, Inc. operates under the Einstein Bros. Bagels (Einstein Bros. ), Noah’s New York Bagels (Noah’s), and Manhattan Bagel Company (Manhattan Bagel) brands.
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 consists of overhead and other activities related to the business segments, as well as interest on the debt and depreciation on the assets. The Company-owned restaurant’s segment includes Einstein Bros. and Noah’s brands. The manufacturing and commissary segment produces and distributes bagel dough and other products to the restaurants, licensees and franchisees and other third parties.
The franchise and license segment earns royalties and other fees from the use of trademarks and operating systems developed for the Manhattan, Einstein Bros. and Noah’s brands. Company-owned restaurants During fiscal 2008, approximately, 91% of the total revenues were generated by restaurant sales at the Einstein Bros. and Noah’s Company-owned restaurants. Einstein Bros. offers a menu that provides food for breakfast and lunch, including fresh-baked bagels and hot breakfast sandwiches, cream cheese, and other spreads, specialty coffees and teas, creative soups, salads and sandwiches, and other menu offerings.
Noah’s is a neighborhood-based, deli-inspired restaurant that serves a variety of sandwiches, fresh-baked bread, home-style soups, sweets, and bagels. Noah’s offers a menu for breakfast and lunch, including fresh-baked bagels and other baked goods, made-to-order deli-style sandwiches, including such favorites as pastrami, corned beef, and roast beef on fresh bread and bagels baked on premises daily, soups, salads, desserts, freshly brewed coffees, and other cafe beverages.
Manufacturing and Commissaries
The Company operates a bagel dough manufacturing facility in Whittier, California, and has a supply contract with a single supplier to produce bagel dough to the specifications. These facilities provide the frozen dough and partially-baked frozen bagels for the Company-owned restaurants, franchisees, and licensees. In fiscal 2008, the Company operated five United States Department of Agriculture (USDA) inspected commissaries geographically located to serve the existing Company-owned, franchise and license restaurants.
These operations primarily provide the restaurants with food products, such as sliced meats, cheeses, and pre-portioned kits that create the various salads. The Company purchases other ingredients used in the restaurants, such as meat, lettuce, tomatoes, and condiments, from a group of third party suppliers. Franchise and Licensing The Company offers Einstein Bros. franchises to qualified area developers. It has a franchise base in the Manhattan Bagel brand. At the end of fiscal 2008, the Company had 71 franchised locations throughout the United States.
At the end of fiscal 2008, the Company had 152 license restaurants throughout the United States and opened 32 new license restaurants. Why open a franchise location of Einstein Bros. in El Paso, TX? The reason this business concept would bring high value to this geographic location can be based on the following factors to make this venture a success: It will target both the middle class and higher-income earning clients (i. e. doctors, nurses, staff administrators, faculty but not limited to the public we also service such as family members of patients) as well as neighboring businesses such as the El Paso Health Department (i.e. public health officials), it will be located in close proximity, in other words within walking distance, to Texas Tech Health Science Center- Paul L. Foster School of Medicine, University Medical Center, and the El Paso Health Department which will provide convenience for its clients in saving time for accessibility and at the same time obtaining quality products at a good price. In addition, this establishment currently doesn’t exist in the city of El Paso and the franchise would like to further expand throughout the state of Texas.
Therefore, at this time there is limited to none in regards to a competition where similar products are sold, making this business venture unique in the area.
Market Feasibility
“We intend to enter into franchise area development agreements in geographic markets where we either currently do not have Einstein Bros. restaurants or in markets that can support both franchised and company-owned restaurants. ” – Einstein Noah Restaurant Group. Einstein Bros. franchising is currently offering Einstein Bros. franchises to qualified area developers. During 2008, it actively marketed the Einstein Bros. rand franchise rights and signed several multi-location deals. Market Growth Status of development plans or expansion: Einstein Bros is currently planning to expand its presence through a significant expansion of franchise and license restaurants throughout the country. This strategy will allow the generation of additional revenues without incurring significant additional expense, capital commitments, or any of the other risks associated with opening new company-owned restaurants. They also expect to increase their geographic footprint and guest recognition of our brands.
Growth in numbers: At the end of 2008, there are 152 licensed restaurants throughout the United States. Einstein Noah Restaurant Group has opened 32 new license restaurants in 2008 and currently are planning to open at 30 to 35 new licensed restaurants in 2009. There currently have seven development agreements in place for an additional 47 restaurant locations that are expected to open on various dates through 2016. Based on this information, there is a significant increase in market growth for this franchise throughout the country as it tries to meet the demands of its clients.
Competition/Competitors
“We compete against similar fast-casual and quick-casual restaurants which franchise and license their brands in the states in which we operate”- Einstein Noah Restaurant Group. This type of industry (i.e. restaurant) is highly competitive and there are many well-established competitors that vary from geographical location. While it operates in the fast-casual segment of the restaurant industry, it also considers restaurants in the fast-food and full-service segments to be competitors.
Several fast-casual and fast-food chains are focusing more on breakfast offerings and expanding their coffee offerings (i.e. McDonalds). This could further increase competition in the breakfast daypart. In addition to current competitors, one or more new major competitors with substantially greater financial, marketing, and operating resources could enter the market at any time and compete directly against us. Also, in virtually every major metropolitan area, like El Paso (i.e. local coffee shops), in which it operates or expects to enter, local or regional competitors might already exist.
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 results of operations. Dietary trends, such as the consumption of food low in carbohydrate content have, in the past, and may, in the future, negatively impact sales. Changes in clients’ spending habits and preferences could also have a material adverse effect on sales.
The results will depend on the ability to respond to changing consumer preferences and tastes. One thing to also keep in mind is that due to the recent local and state regulations mandating prominent disclosure of nutritional and calorie information may result in reduced demand for some of the products which could be viewed as containing too much fat or too many calories. Advertising Marketing is obviously a key ingredient in the business process for Einstein Bros. This franchise program typically targets very specific markets/regions and utilizes local promotional media, from print advertising to radio and billboards.
Company-owned and franchised locations are required to purchase local advertising and to contribute to the brand’s marketing fund, which provides stores with support such as in-store promotional materials.
Technical Feasibility
Resources
The cost of a new franchise is approximately $600,000, therefore meeting the financing needs is essential to start up the business (See Finance Section). This will cover the costs of equipment, leasehold improvements, furniture and fixtures, and raw materials needed to start production of the business.
Locations
The average Einstein Bros. restaurant is approximately 2,200 to 2,500 square feet in size with approximately 40 seats and is generally located in a neighborhood or regional shopping center. Each restaurant is designed to create a comfortable, casual environment that is consumer-friendly, inviting and reflective of the brand’s personality and strong neighborhood identity. Therefore, a shopping center at the desired location in El Paso, TX has been identified to meet this request and is readily available to be leased.
Staffing
For an average crew, you can expect to hire 15 to 20 full-time and part-time employees.
Each restaurant must have a full-time operating partner. We’re talking about a qualified General Manager who has passed our certification requirements on the premises at all times. You should, in addition, be prepared to manage and control your business on a daily basis. Production The franchisees are required to purchase proprietary products through our designated suppliers or directly from us. Franchisees currently purchase the raw materials from various suppliers; however, they have only one supplier for most of our key products. Franchisees purchase all of our cream cheese from a single source.
Also, franchisees purchase a majority of the frozen bagel dough from a single supplier, who utilizes its proprietary processes and on whom they are dependent in the short-term. All of the remaining frozen bagel dough is produced at their dough manufacturing facility in Whittier, California. Although to date they have not experienced significant difficulties with its suppliers, the reliance on a single supplier for most of its key ingredients subjects them to a number of risks, including possible delays or interruption in supplies, diminished control over the quality, and a potential lack of adequate raw material capacity.
Any disruption in the supply or degradation in the quality of the materials provided by the suppliers could have a material adverse effect on the business, operating results, and financial condition.
Expertise & Skills
It is fundamental that you bring a solid business background as well as the financial capacity to make a franchising investment. Einstein Bros is focused on a rigorous pre-selection process that brings only those candidates to the table that will create a win-win for Einstein Bros. and its franchisees.
Toward the end, it will be required that any franchising candidates have either first-hand or partnered experience in the restaurant industry. Einstein Bros senior management positions are filled with industry veterans who bring a strong operations background to the business to assist in opening up the franchise. They’ve got experienced leadership in all supporting departments. In addition, the program extends to day-to-day operations in each neighborhood store, from training to supplying the right manuals for thorough field support. They also have an in-house culinary department that ranks with the best in the industry.
The culinary researchers and seasoned chefs are in a constant quest for the next thing. As a result, the franchisees, in turn, will get the opportunity to showcase that cutting edge culinary progress in their area. Note: Einstein Noah’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.
This brings us to the next section of the study.
Financial Feasibility
Fixed costs Excluding tenant improvement allowances that typically received from the landlord in a leased location, the cost of a new franchise is approximately $600,000 (median value), depending on square footage, layout, and location. The fixed costs include equipment, leasehold improvements, furniture and fixtures, and other related capital. Note: For 2009, it is anticipated that the tenant improvement allowances will average approximately $50,000 per restaurant/franchisee which will reduce cost.
However, the amount of the allowance can vary widely depending on the location of the restaurant and other terms of the lease. There is an intention to upgrade at least 45 of the current restaurants during 2009, which will include approximately $80,000 in capital costs and approximately $49,000 in deferred maintenance costs, for a total cost of approximately $129,000 per restaurant.
Cash Flow
Being part of the restaurant industry, it is predominantly a cash business where cash is received at the time of the transaction.
It is believed it will generate sufficient cash flow and have sufficient availability under our revolving credit facility to fund operations, capital expenditures, and required debt and interest payments. The inventory turns frequently since the products are perishable. Accordingly, investment in inventory is minimal. The accounts payable are on terms that are believed to be consistent with those of other companies within the industry. The primary driver of the operating cash flow is the restaurant operations, specifically the gross margin from the company-owned restaurants.
Therefore, it focuses on the elements of those operations including comparable store sales and cash flows to ensure a steady stream of operating profits that enable each franchise to meet its cash obligations.
Gross Margin
The current gross margin is currently at 20%. This increase to revenue and gross margin was attributed to price increases and the expanded role within the distribution chain for sales to the franchise and license locations. Note: Global demand for commodities such as wheat has resulted, and could in the future result, in higher prices for flour which would increase the cost.
The prices of the main ingredients are directly associated with the changing weather conditions as well as economic factors such as supply and demand of certain commodities within the United States and other countries. The ability to forecast and manage the commodities could significantly affect the gross margins. Any increase in the prices of the ingredients most critical to the products, such as wheat, could adversely affect operating results.
Return on Investment (ROI)
The franchising profit (ROI) will be based on a number of variables including location, operating expenses, retail sales mix, sales margin, occupancy costs, and financing costs. Unfortunately, only a rough estimate can be determined at this time based on a different location. The ROI is estimated to be -2% for the first year and for the following years the ROI will fluctuate between 40 to 50 percent. The break-even point for this business venture will occur in one and a half years if projected sales are realized.
Financing ($)
The franchise agreement requires an up-front fee of $35,000 per restaurant and a 5% royalty based 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 thru this business corporation? Einstein Bros does not offer financing at this time but financing could be obtained through banks, private investors, and or forming a partnership for additional capital.
