Einstein Noah CEO On Possible Sale, Future Plans

NRN.com|May 24, 2012 5:02 pm EST

Jeff O'Neill, chief executive of Einstein Noah Restaurant Group Inc., recently said the time is right for the parent of the Einstein Bros. Bagels, Noah's New York Bagels and Manhattan Bagel brands, to explore strategic alternatives.

In an interview with Nation's Restaurant News, O'Neill elaborated on why he feels it's the right time to look at options that might increase shareholder value — including a possible merger or sale — as well as the growth and savings opportunities that lie ahead for the Lakewood, Colo.-based company.

Why do you feel this is a good time for Einstein Noah to look at strategic options?

It really is a positive development for Einstein Noah. Results for the company are really strong and we're really optimistic about the year we have ahead.

When you look at the brand's momentum coming out of last year and the strength of the industry overall, we felt it was the perfect timing for a broad evaluation. Our financial performance was solid. We're acting from a position of strength, if you will.

We're in early phases of this. It's a process that's different for every company and it's going to last several months, probably through summer and possibly through the end of the year. In the meantime, I've got the organization continuing to focus on the goals we have so we can delight every customer every time.

In recent years, you've really expanded the specialty beverage program. Can you expand on how that's going?

Last year, we invested $8 million in our coffee program. This was improving the quality of beans. We basically purchased gold standard equipment to make specialty coffee, and then we brought in coffee specialists to focus on coffee stations in restaurants and make cappuccinos and lattes and all of those [drinks]. Our customers responded extremely well. Coming out of the year, our specialty coffee [sales] are up exponentially, overall total beverage sales are up 10 percent, which was beyond our expectations, and we've continued that momentum into the first quarter of this year.

We also just launched a line of low-fat smoothies at the end of April. Three to four weeks in, it's gone way beyond our expectations. We've been scrambling for supply a little bit because it caught us off guard.

It fits really well with the whole idea of combining the fact that we're the king of bagels -— we're the fresh-baked bagels — with a world-class specialty coffee and beverages program. Coffee and bagels go together. The other people out there may be offering world-class coffee, but they aren't offering fresh-baked-on-premises, by-the-hour bagels and fresh-prepared sandwiches. That puts us in a really unique position. We offer quality and freshness of a bakery/café with the speed of a QSR.

Catering is another area the company has grown. It's now 7 percent of the mix and growing by double digits. How have you done that?

We restructured the catering business coming into 2010, and the last two years it has grown by strong double digits. Last year it grew 20 percent, and we're continuing that momentum this year. We did a couple of things: Went to online ordering. We restructured our organization and outsourced our call center to ensure 24/7 service from catering point of view. We focused on national accounts, and it's been really rewarding as a team to see the response we've gotten, not only at breakfast but also at lunch.

I'd really like to get it to over 10 percent to 11 percent of our business. When we started, coffee was 8 percent and we got that up to 11 percent. That would be a good goal to reach double digits on catering as well.

Can you talk about growth?

Another key initiative is accelerating unit growth for Einstein Bros. through franchise and licensing development. We opened about 55 restaurants last year and will open more than 60 this year. Off the base that we have, we're looking at 10-percent growth in units, and that puts us in the top tier of the restaurant business. We've got a good pipeline of franchisees and franchisee openings, and we plan to continue opening corporate restaurants as well.

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We also have licensed restaurants, through players like Sodexo and Aramark. Think about college campuses, airports, healthcare facilities and hospitals. These are a great area of growth for us, and we've got over 250 restaurants in the licensed area right now.

With plans to open 10 to 15 company units a year, we're on track to open 60 to 80 units in 2012. The emphasis is on existing markets and a good balance between franchised, licensed and corporate units.

How is your drive-thru testing going?

It started with franchisees. About 70 percent of franchisees of the Einstein Bros. brand opened with new restaurants with drive thrus. They're doing [average unit volumes] close to $1 million, and that payout is very strong for us — especially at breakfast, when consumers are time-starved.

If we're going to be in QSR, drive thrus need to be a bigger part of our business going forward. A little more than a year ago, I hired as a chief restaurant officer Brian Unger from McDonald's. He has in the last year established a very tight focus on how to execute speed and quality through a drive thru. So, with that expertise, I'm now really excited about the opportunity we have with drive thrus.

How many have drive thrus do you have now?

A little over 30 units company wide and other 15 or so franchised units have drive thrus. It's still considered in test because we're still growing it and learning. But we plan to add a good percentage of drive thrus into new restaurants going forward.

You've talked a lot about cost savings, and said you cut $2.7 million last year and plan to cut another $3 million this year. How do you plan to do that?

We pulled together cross-functional team with marketing, operations, purchasing and distribution. We wanted to look at things that either add to the customer experience or are invisible to customer experience.

So, for example, historically, when we cooked eggs, we would put them in an egg boat. That was a one-use kind of item; we used it once and threw it out. That was the only way we could get them. So we went to our supplier to ask for reusable egg boats. It took eight months and they designed an egg boat with multiple uses. Now we clean as we go along and reuse them. It makes a ton of sense from an environment point of view, but, as importantly, we saved over $750,000 by not having to repurchase egg boats for every restaurant.

We redesigned our grab-and-go bagel buckets with a cream cheese holster that replaced two bags, and that saved us about $400,000 to $500,000 in packaging.

We also closed our commissary. We looked at what commissary was doing for us in system, and it was largely cutting and pre-portioning meat and cheese. That was 80 percent of what they were doing. So we looked at outsourcing. Our suppliers said, 'We can do that for you.' We're now getting pre-portioned meat and cheese through our suppliers and that saved more than $1 million. The other 20 percent of tasks that used to be handled by commissary is now done in restaurants, like making our chicken and tuna salads. We're saving a little money there on waste.

These are some of the things. As we look at getting the right team together, we can come up with great initiatives for ongoing savings. That's how we managed to save almost $3 million last year and another $3 million this year. You can see it by looking at the cost of goods and the cost of labor, which have come down. It's part of the reason we've had such a great increase in our bottom line.

Contact Lisa Jennings at lisa.jennings@penton.com.
Follow her on Twitter: @livetodineout