COVER STORY – Bread, bagel stores compete for dough – Stores rise to the occasion and offer more choices for Milwaukee-area consumers
Milwaukee Journal Sentinel – Monday, September 28, 1998
Author: TOM DAYKIN, Journal Sentinel staff
Nationally, there might be a big hole in the bagel business. But it can’t be found in the Milwaukee area.
Ditto for stores that sell fresh-baked bread. Bagel and specialty bread stores are continuing to grow in Milwaukee — increasing the competition among retailers and broadening the choices for consumers.
“You just have to have a great product to be successful,” said Larry Rusinko, vice president of marketing for Panera Bread, which recently announced plans to open six to eight stores in the Milwaukee area.
“In a sense, the pie is finite,” Rusinko said, referring to the overall market for fresh-baked bread and bagels. “But I think people are always looking and are willing to go . . . where there is the best quality.”
The local growth is a contrast to the national picture, at least for bagel stores. Over the past year, the major bagel chains that have a presence in Milwaukee — Big Apple Bagels, Bruegger’s Bagels and Einstein Bros. — have closed dozens of stores and posted big losses as their aggressive expansion campaigns ran into trouble.
The red ink has flowed even as the bagel market continues to increase rapidly. Sales by both bagel stores and supermarkets increased 71.7% from 1994 to 1996, reaching $1.13 billion in 1996, according to Restaurant Business, a trade publication.ately held chains with stores in the Milwaukee area.
Also, Panera — a sit-down restaurant that builds its menu around fresh-baked bread — is expanding rapidly. Panera’s owner, Boston-based Au Bon Pain Co., announced plans in August to sell its namesake chain while continuing to expand Panera.
The travails of the bagel industry have their roots in the early 1990s, when the business was booming and the national chains embarked on their ambitious expansion plans.
“Everybody knew it was a high-growth segment in the food industry, and everybody thought they could be the biggest guy,” said Chuck Chapman, chief operating officer of Burlington, Vt.-based Bruegger’s Corp.
“In reality, it was irrational behavior,” Chapman said.
Those expansion plans included the Milwaukee area. In 1992, Bruegger’s, Big Apple and Einstein had no stores here. Today, they have a combined 26 stores in the metropolitan area.
In the rush to beat competitors to good locations, the bagel chains opened lots of stores without thoroughly considering whether their sales would justify their expenses, said Ernest Andberg, an industry analyst at Minneapolis-based R.J. Steichen& Co.
The main point was to grab market share, said Nancy Shipp, spokeswoman for Golden, Colo.-based Einstein/Noah Bagel Corp.
In addition to opening too many stores, the expansion plans took the focus away from customer service and the product, said Eric Nordstrom, district manager for Minneapolis-based Norstar Bagels, a Bruegger’s franchisee that includes the Milwaukee market.
“We fell flat on our face,” Nordstrom said.
As a result, 1997 was the beginning of the bagel industry’s shakeout. Losses grew, stock prices fell and heads rolled, including the resignations of Einstein/Noah’s chief executive officer and the chief financial officer of Chicago-based BAB Holdings Inc., the operator of Big Apple.
Perhaps the most stunning reversal occurred when Quality Dining Inc. sold Bruegger’s back to the chain’s founders less than a year after buying it — and recorded a $203 million charge.
The shakeout has continued into 1998. Big Apple, Bruegger’s and Einstein have closed dozens of poorly performing stores.
In the Milwaukee area, just one store has closed: a Bruegger’s at 4100 N. Oakland Ave., Shorewood, was shut down in August.
In addition to closing stores, the three bagel chains are taking different approaches to improving profitability.
Bruegger’s has closed 70 stores. The chain, which now has 362 stores, including four in the Milwaukee area, abandoned markets — such as Los Angeles and Houston — where it could not be the dominant player, Chapman said.
Bruegger’s also refocused on bagels, Chapman said. Its menu is very simple, centering on bagels, bagel sandwiches and soups.
“Philosophically, we decided we are a bagel chain,” Chapman said. “We’ve been spending a lot of time getting back on that page, instead of trying to be something we aren’t.”
Norstar, which purchased the Bruegger’s Milwaukee franchise in January, agrees with sticking to the basics. Nordstrom said the expansion of menu items means more employees, more training and more hassles — with customer service suffering.
However, both Einstein and Big Apple are taking the opposite approach.
“The consumer needs new products,” said Tom Fletcher, BAB Holdings chief executive officer. “They get tired of the same old thing.”
To that end, Big Apple is adding two other brands to its bagel stores: My Favorite Muffin and Brewster’s Coffee. BAB Holdings owns My Favorite Muffin stores and Brewster’s Coffee shops, and is adding Big Apple bagels to those stores in an effort to increase sales of all three brands, Fletcher said.
Big Apple also has expanded its bagel sandwich line with hopes of attracting a bigger share of the lunch business, Fletcher said.
Finally, Big Apple introduced a new line of specialty bagels, called BAB’s Choice, earlier this year. With flavors like Cinnamon Danish and Amazon Banana Nut, the BAB’s Choice bagels cost 75 cents to 85 cents apiece, compared with 50 cents to 65 cents apiece for the chain’s basic bagel line, Fletcher said.
Big Apple, which closed 12 stores in 1997, is adding stores in 1998. BAB Holdings has 286 stores and expects to have 300 open by the end of 1998. Big Apple has 14 stores in the Milwaukee area, with another one about to open.
“Main Street — our customers — are still buying the bagel product,” Fletcher said.
Denise Quinn is one of Big Apple’s new franchisees. She opened her Germantown store in March, and plans to have her Sussex store open by the end of September.
Quinn decided to get into the bagel business — despite its well-known problems — because she believes in the product.
“They’re not a `here today, gone tomorrow’ thing,” Quinn said.
Einstein, like Big Apple, is expanding its lunch menu in hopes of capturing more business later. The average lunch ticket is $4.25 per customer, said Shipp, compared with the average breakfast ticket of $3.80 per customer.
Einstein has greatly expanded its offerings of soups, salads and other products, including focaccia pizza and deserts, Shipp said. She said there’s little danger about straying from the core product — bagels — because the expansions were complementary moves.
Einstein, which has closed 25 poorly performing stores, has taken other steps to improve its business. Einstein has 542 stores, including eight in the Milwaukee area.
The company has converted its franchised stores to company-owned stores, Shipp said. That has created a more centralized and efficient cost structure, she said, and allows for more control over the quality of the stores.
Also, store general managers are now receiving 30% to 40% of their compensation in the form of bonuses, Shipp said. That makes for more innovative management, and has reduced turnover, she said.
While the bagel stores duke it out, the bread stores have continued to grow.
Great Harvest opened its first Milwaukee-area store in 1990.
“We were the only bread company in the city,” said Jill Hall, who owns the area Great Harvest stores with her husband, Rodd.
Since then, the competition has grown tremendously. Breadsmith opened its first area store in 1993. Around that same time, the bagel chains began moving into Milwaukee.
Also, supermarkets have since greatly improved the quality and variety of fresh-baked breads they sell, Rodd Hall said.
“There is just a lot more bread out there,” Jill Hall said.
But Great Harvest has continued to add stores. The company has around 130 nationwide, and the Halls opened a second store in 1994 in Elm Grove. They plan to open their third, in Greendale, by the end of 1998.
The increased number of local bread and bagel stores has had a measurable effect on Great Harvest, Rodd Hall said. But the business is still solid, he said.
The greater competition “has made us much better business managers,” he said. “We have learned to focus much more on everything, from merchandising and marketing to financial management.”
The Halls have expanded their menu, adding a greater variety of breads and fresh-baked cookies, as well as coffee, soup mixes and jams.
And because Great Harvest doesn’t make hard-crusted breads, the Halls earlier this year began selling products made by New Berlin-based Wildflour Bakery.
“That was a matter of looking at what clearly was a desire of the marketplace,” Rodd Hall said.
The Halls also are considering a move into the wholesale market by selling Great Harvest bread to supermarkets. While that would open a new revenue stream, it also would bring complications, including the likelihood that the Halls would have less contact with their retail customers.
Said Rodd Hall, “All else being equal, we’d rather sell directly to customers. We want to know them.”
About two blocks from the Halls’ Whitefish Bay store is the corporate headquarters of Breadsmith, which specializes in hard-crusted breads.
Breadsmith, like Great Harvest, is growing. The privately held company has 53 stores, with plans to have 56 by the end of 1998. It has three stores in the Milwaukee area, with plans to have a fourth.
“What we’re trying to do is build one quality store at a time,” said founder Dan Sterling.
Naturally, Breadsmith is focused on bread, Sterling said. But he’s also ready to begin experimenting with new products, including carry-out sandwiches.
“We can do it without increasing our overhead,” he said.
Another possibility is the pizza business. Each Breadsmith store has fresh dough and a hearth-style oven, he said, so selling pizzas for carry-out is not a huge leap.
Still, Sterling doesn’t want Breadsmith to become a sit-downrestaurant like the bagel stores. Competition among restaurants, he said, is so intense it resembles a “bloodbath” — something Sterling plans to avoid.
Meanwhile, another player — Panera Bread — is entering the market.
St. Louis-based Panera — known in its hometown as St. Louis Bread Co. — sells loaves of bread for carry-out. But unlike Great Harvest and Breadsmith, Panera also is a sit-downrestaurant with a menu centering on its fresh-baked bread.
Rusinko, Panera’s marketing vice president, said the company — which has around 100 stores — plans to have 130 by the end of 1998. In addition to 50 new stores this year, Panera plans another 130 new stores in 1999.
Panera plans to have its first Milwaukee-area store open soon, with plans for six to eight in the area over the next three years.
Rusinko said Panera won’t founder like the bagel chains.
That’s because Panera is expanding largely through franchisees, Rusinko said. The company has set high minimum net worth standards for its franchisees, he said, and has largely selected experienced, well-established operators of other franchised restaurants.
The franchisee for the Milwaukee area is John Golinvaux, who operates 17 Pizza Hut restaurants in Iowa and Illinois. Golinvaux and Rusinko both said Panera successfully appeals to consumer tastes.
“I think it speaks for what people want today: the quality and freshness of the product,” said Golinvaux, whose operations are based in Clinton, Iowa.
While Panera is a sit-down restaurant , about 35% to 40% of its sales come from carry-out items, Rusinko said. Much of the company’s marketing effort stresses the use of bread as part of the evening meal, he said.
The Panera concept might be familiar to people who have been to Milwaukee-based Daily’s Bakery Inc.
Daily’s, a sit-down restaurant with a menu built around fresh-baked bread, opened its first store in 1992. Daily’s at one time had three stores in the Milwaukee area, but closed two of them in 1997 and canceled plans to franchise the concept.
Owner Bruce Gendelman said Daily’s was affected by the bagel chains that entered Milwaukee. Daily’s is now primarily a wholesaler, selling bread to restaurants such as Eddie Martini’s.
Gendelman said he’ll watch with interest as Panera enters the market. He believes there’s room in Milwaukee for the chain.
But, he added, “The restaurant business can be tough.” Caption: Photos color 1,2 KAREN SHERLOCK STAFF PHOTOGRAPHER Left: Collin Braam, 5, of Whitefish Bay, munches on a miniature pumpkin loaf at Breadsmith, 418 E. Silver Spring Drive, Whitefish Bay. Right: Christopher Saldwell (left) and Kevin Wieczorek prepare loaves of traditional rye bread at Breadsmith in Whitefish Bay. Photo color 3,4 GARY PORTER STAFF PHOTOGRAPHER Left: Big Apple Bagels uses its Brookfield store, 3845 N. 124th St., as a training ground for employees from all over the world. Through training seminars and hands-on work, trainees learn how to make bagels and run a store. Below: Michael Salzberg (second from right) shows trainees how to clean a bagel divider/former, break it down and put it together at the Brookfield store. Photos color 5,6 GARY PORTER STAFF PHOTOGRAPHER MAKING DOUGH WITH BREAD AND BAGELS Top: Tim Malouf uses a baker’s peel to take fresh loaves of French bread from the oven at Breadsmith in Whitefish Bay. Above: George Rose, head of training for Big Apple Bagels, loads an order at the Brookfield store. Story on Page 16