At last, in November 1985, they opened their first O! Deli, the company-owned test store, on the corner of Market and Van Ness in San Francisco. They figured O! Deli would be a store that sold sandwiches to working people during working hours -- a chain of franchised sandwich shops, each open Monday through Friday, 7 a.m. to 5 p.m. The delis would serve healthy, high-quality sandwiches, soups, breakfasts, and snacks -- at fast-food prices -- from locations primarily in office complexes and financial districts. The company would grow to 500 units by 1993, and to 2,000 by 1998.
It would, pledged the characteristically ebullient Sanfellipo, "replace the mom-and-pop deli the way 7-Eleven replaced the corner market and McDonald's replaced the hamburger stand. This is one of the last segments of the food business that hasn't been franchised."
Said Cardin (momentarily immodest): "Ten years from now, we'll be able to do a case study of how to start a business right."
It's a nice story. And, as we'll explain later, it's probably what enabled O! Deli to go public last summer, netting $1.7 million in cash despite never having made any money and not yet fielding more than a handful of units. To paraphrase market maker Michael Underwood at Denver's RAF Financial Inc.: of a strong team and a sexy tale are attractive investment properties made.
Still, there are a lot of sandwiches to be sold on the way to 2,000 units. And a lot of franchisees to be signed up -- and kept happy. If the concept doesn't make sense at the store level, then it won't matter how well Cardin, Sanfellipo, and crew perform their "consulting" role. The mail sacks at O! Deli corporate won't be heavy with royalty checks if franchisees can't find customers.
Not to worry, claims Cardin. Signs of America's hunger for sandwiches are legion especially among O! Deli's target customers. A U.S. Commerce Department report estimates that franchised sandwich shop sales grew 31% in 1988, to $1.3 billion. Though that rate is more than double the growth of the runner-up among eight restaurant categories, the sandwich category remains in its infancy, accounting for less than 2% of the franchise restaurant market. "With a national trend toward more healthful eating," says the report's author, "lighter fare like sandwiches will be in demand, particularly for lunch. Sandwich shops appear to be one of the prime growth markets for prospective restaurant franchisors."
The healthier-food shift is widely acknowledged -- it's why McDonald's sells salads now, and it's why O! Deli sells nothing greasy, deep-fried, or grilled. And the lunch trade is O! Deli's chosen high ground.
Statistics indicate that almost half of all fast-food sandwich-shop traffic comes at lunchtime. Cardin will chase the lunch crowd, and its promise of lucrative repeat business, in two specific ways. First, by offering what he calls a "varied-taste" menu at fast-food prices, and second, by operating where the lunch crowd lives -- office complexes and industrial parks.
O! Deli's prices couldn't be higher than customers would be willing to pay every day. Research suggested that a "complete lunch" -- sandwich, drink, dessert -- should run between $3.50 and $4. That meant the average sandwich needed to go for about $2.50 or $3 -- which is low. To keep the prices there, while still using high-quality ingredients and preserving the 35% food and paper cost that protects gross margin, O! Deli serves slightly smaller portions than some sandwich customers have come to expect. (No problem, says Sanfellipo: "At O! Deli you pay only for what you eat," not for New York-deli inspired overflow.)
The taste, too, had to be a potentially everyday choice. Cardin likes to say that most fast-food chains, even such rival sandwich makers as Subway Sandwiches & Salads, Sandwich Chef, and Schlotzsky's Sandwich Shops, are "one-taste" concepts. Who, he asks, wants to eat an oil-and-vinegar splashed hero every day of the week? O! Deli counters with a studiously traditional and nonfad menu, raised on the pillars of turkey, ham, roast beef, and cheese.
What ties together these menu and pricing strategies, and perhaps does the most to differentiate O! Deli from its competitors, is the company's location strategy.
Follow the logic. Because the shops are relatively inexpensive to build and run (little space, no grilling equipment, small staff) they don't need to match hamburger-joint revenues in order to make an adequate return. Because they don't need to generate big sales, and because they're conceived to encourage repeat business, the shops can be content just to serve working people during the workday, and to cater to a relatively small market area. And finally, because they can be content to serve people in their workplace, and because the absence of cooking makes the shops attractive to commercial landlords leery of grease and odor, they can locate in office towers, where most other chains can't. The result? They're closer than any competitor to their perfect customer, the only customer they think they need.
Is this enough of a market to generate $300,000 per shop in annual sales? The folks at O! Deli think so. Cardin calls the projection "conservative," though the national average for sandwich-shop revenues is about $260,000. The key is the repeat business. Already, O! Deli claims, 60% of its customers return three times a week.
If location is counted on to lure customers, it is counted on even more to lure franchisees. "For one thing," Sanfellipo says, "it is the perfect franchisor response to the constant franchisee question, 'What can you really do for me?' " What O! Deli thinks it can do is get sites and achieve lease terms that few shop owners could capture on their own.
The good fit between O! Deli's concept and the standard granite-and-glass office plaza enables the company's management to pitch the shops to landlords as commercial-property amenities -- the sort of perk that makes buildings more attractive to tenants. Delivering tenants, of course, is the sort of benefit that makes retailers more attractive to landlords.
