Newer to the company's thinking is the second strategy: re-franchise existing chains that could be effectively repositioned as O! Deli. In some cases, O! Deli may buy a chain outright, then sell locations off individually as franchises -- collecting not only the franchise fee, but whatever profit it can make on the rollover of the business. In other cases, a chain might sell its locations directly to O! Deli franchisees, without O! Deli ever holding title. The franchisees get good value on depreciated facilities and equipment. The seller gets improved odds that the buyers, backed by a franchise system, will stay in business long enough to repay the note he usually has to extend. O! Deli is now negotiating with a 12-unit chain on this sort of deal, in which O! Deli has no financial risk.
If some of these plans sound a note of frenzy in what otherwise seems a fastidiously controlled program, Cardin and Sanfellipo are aware of it. Asked to name the stumbling blocks most likely to trip them, each talked about the pressure to grow. Yet ramping up fast is integral to their strategy. Remember Cardin's Guide: Rarely has the leader been overtaken in a franchise market. If that observation is accurate, some would say O! Deli is already too late to the game. The company's biggest competitor, Subway Sandwiches & Salads, has more than 2,900 units, adding more than 1,000 of them in the past year alone. Subway, Cardin would say, is "one-taste" fare, not exactly O! Deli's style. But that's an awfully fine line to draw.
Expanding too fast, becoming too spread out geographically, and delegating too much management oversight to outside contractors can rapidly give life to age-old franchising woes: loss of control, slippage of quality, deterioration of image. And how fast can O! Deli multiply without straying too far from its carefully honed concept, "selling sandwiches to working people during working hours," and all the site-selection and management-style criteria that strategy entails? Neither of the executives is sure.
They'll just keep trying to move the sandwiches. "If you have enough sales," says Cardin, "you can work out the rest."
For an update on this company, see Anatomy of a Start-Up Revisited: Facelift
Research assistance was provided by Leslie Brokaw.
EXECUTIVE SUMMARY
THE COMPANY
The O! Deli Corp., San Francisco
Concept: A publicly traded, national chain of franchised sandwich shops selling breakfast and lunch items at fast-food prices "to working people during working hours." Differentiated from competitors by location strategy, menu, and quality of management
Projections: Five hundred units by 1993; 2,000 by 1998. Capital based on the units' sales as they begin operations during the year. Systemwide sales of $112 million in 1993, with franchisor revenue of $9.4 million and pretax profits of $2.8 million
Hurdles: Preventing the push for fast growth from leading to poor locations, inadequate controls, diminished quality, and diluted image. Sustaining the concept, even if it limits growth
THE FOUNDER
Frederick A. Cardin, 42
Chairman and CEO
'A Consulting Job for Myself'
The truth, says consultant turned company builder Rick Cardin, is consultants don't invent new solutions, they find the old ones that fit. "You assume every problem you come across has already been dealt with by someone else, so you go see what they've done."
Which is exactly what Cardin did after deciding that becoming a franchisor was the best way to make a business out of creating and selling businesses. For nearly two years, he networked his way through the industry's elite (in the guise of prospective franchisee) and learned everything he could from at least 75 national franchisors. The research led to The O! Deli Corp.
Did it ever trouble him that the neighborhood deli has so steadfastly resisted franchising? Surely sandwiches would have gone the route of hamburgers, chicken, and pizza unless there were some compelling reasons they couldn't. "I think I know the reasons," Cardin says. "Perceived competition; low gross volume; fewer opportunities for vertical integration; and an unglamorous reputation." He adds: "I think our concept deals with them all."
FINANCIALS
O! Deli Projected Annual Operating Statement (per unit)
Sales (operating Monday-Friday, $300,000
@ $2.33/check) 7 a.m.-5 p.m.
Cost of Sales
Product (35% of sales) 105,000
Labor, including management
(20% of sales) 60,000
Labor benefits 12,000
Total cost of sales 177,000
Gross Margin 123,000
Direct Operating Expenses
Advertising 3,000
Utilities, maintenance, supplies, etc. 19,350
Royalties 18,000
Total direct operating expenses 40,350
Administration and General 7,900
Income Before Occupancy/Depreciation/Interest/Tax 74,750
Total occupancy costs 24,000
Income Before Depreciation/ 50,750
Interest/Tax
Profit Before Depreciation/Interest/Tax 17%
Projected Franchise Growth
1988
1983
1998
Units
5
500
2,000
Annualized systemwide sales*
($ millions)
1.5
150
600
*Annualized systemwide sales based on full volume for all stores open at end of fiscal year. For 1988, end of fiscal year is March 31, 1989.
