"I think we offer building managers a lot of advantages," says Cardin. "Our food is simple but high quality. We have the skills and experience to control the operation, to supervise the quality of the service, and to maintain the value of the site."
Most prime office space in desirable markets is managed by giant firms like Trammell Crow Co. that would prefer not to deal with mom and pop, who too often have "questionable finances and questionable business sense," according to Jeff Johnson, northern California leasing manager for Chicago-based JMB Realty Trust.
Johnson has placed one of the first O! Delis in an Oakland, Calif., building run by JMB, one of the nation's largest commercial-property owners. "Of all the different leases we work on, the ground-level food-service lease can be the most difficult. If [O! Deli] makes it easy, if it comes in with professionalism, a strong concept, and strong resources, I think it's going to be attractive to a lot of building owners."
That would make O! Deli attractive to a lot of potential franchisees as well, but for a location-related reason more subtle than high foot traffic or great lease terms: lifestyle. During his research mission at the feet of America's business brokers, Cardin discovered that people loved to buy delis. Why? "Everybody thinks they can run one, you don't need much capital to pick one up, and everybody thinks they can assess the risk -- and know whether a deli will make it or not -- on a gut level. It's a business they understand."
The trouble with most delis, though, as with restaurants, is the schedule. The days are long -- most delis stay open into the evening -- and often include weekends. The hours are legendary for their misery.
But not at O! Deli. The concept and most locations conspire to shut the shops down whenever people aren't in their offices. And Cardin has tried to add other lifestyle sweeteners, too: the concept caters largely to regular customers who enjoy what they're getting, which means they ought to be pleasant to deal with (unlike the customers at a transmission shop); and it requires no specialized employees (increasing personnel flexibility and eliminating any anxious and vulnerable reliance on a few skilled workers). The selling point is simple: O! Deli aims to be fun.
It also, of course, aims to make money. Though the franchise fee of $25,000 is higher than some sandwich shops (Subway charges $7,500 and an 8% royalty, compared with O! Deli's 6%), the total start-up investment of $75,000 to $125,000 is much lower than the price of opening, say, a Burger King, which could run as high as $1 million.
The low entry fee was important to Cardin even before he invented O! Deli. About $100,000, he found, was the price that kept most potential buyers in the game, including those looking to purchase a job. By fitting the concept under that limit, he not only made franchises comparatively easy to sell, but also less risky for franchisees because the units are easier to resell. The small price tag offers other benefits, too. While the standard Burger King produces higher revenues and gross profits, its return on investment doesn't come close to Cardin's projections for O! Deli. Historically, the hamburger chains return about a dollar of sales per year for every dollar invested. An O! Deli franchise that meets the unit forecast of $300,000 in sales can be expected to kick back about $2 in revenue for every dollar put in. A big difference, if Cardin is right.
It's hard to imagine that the office Cardin and Sanfellipo share, a walk-up above their San Francisco pilot store, has changed much in the two and a half years since it opened. Unlike their restaurant decor, their literature, or their board of directors, it looks and feels like the start-up that the company remains: cramped, noisy, and littered, with desktops awash in stained coffee cups and mail.
It's equally hard to imagine that the place will look different two years hence. O! Deli will still be a start-up. When the current fiscal year -- its first as a public company -- ends on March 31, the two executives expect to have 20 stores operating and annualized systemwide sales of $6 million. They will again have lost money, though they won't predict how much.
They will predict when they'll turn the corner: at the 50-store level, which may come as early as year end, fiscal 1990. It will be at least fiscal '91 before O! Deli shows a full-year bottom line that's black.
Getting to positive cash flow will have cost the company about $2 million, twice what Cardin anticipated -- a run-up he attributes to increased development and franchise support investment to prepare for swifter-than-expected expansion.
However much the need for it outstripped forecasts, capital was not hard to come by. Cardin has kept away from both venture capital money and bank debt, opting to raise $85,000 by selling 8.5% of the company privately, selling some dividend-paying preferred stock to directors and shareholders for $240,000, taking out a $150,000 Small Business Administration loan, and contributing $150,000 himself.
Last summer, O! Deli collected what will soon be $1.7 million more in cash by going public through a reverse merger with a Denver-registered blind-pool public shell. At root, the deal involved selling 35% of the company to the shell company's investors for the cash. Equally important to Cardin, it enabled O! Deli to become public at enormously reduced cost, both financially and bureaucratically. (O! Deli is traded in the pink sheets.)
Can O! Deli reasonably hope for the kind of rapid future growth its projections call for (500 units by 1993 and 2,000 by '98)? Maybe. Though only 11 stores were operating when Inc. went to press, O! Deli had agreements for 240 more. Fifty-two of these were sold directly, to single-unit franchisees or in territories (such as the deal with a Massachusetts-based, multi-unit Burger King franchisor to build 20 stores in five years). But O! Deli expects quicker growth to come from two other franchise marketing approaches.
The first makes use of joint ventures with "area franchise developers." A New Jersey company, Delimax Corp., has agreed to build 190 O! Delis in New Jersey and Connecticut over 10 years. For these units, Delimax will in effect function as franchisor, performing all the tasks that O! Deli corporate normally does. For taking on that management load, the area-development franchisor gets half the 6% royalties, which are still sent to O! Deli, and half the initial franchise fee for each store. So O! Deli's net is cut 50%, but its management investment drops almost 100%. Similar deals are being discussed with others.
