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OPERATIONS

Facelift

Franchisor O! Deli had trouble securing contracts for new locations.
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There's nothing mysterious about starting a company smartly. Find a good idea. Plan it carefully. Raise the necessary finances. Then take a deep breath and resign yourself to everything taking more time and more money than expected.

Like many companies we've revisited a year after an Anatomy appearance, O! Deli is growing slower than planned, spending more than projected, but still anticipating as rosy a future as first envisioned. The O! Deli design: to franchise hundreds of daytime delicatessens in office buildings all over the country. Founder Rick Cardin, with his Harvard M.B.A., Harvard doctorate, and management consulting background, was convinced he had not just a good plan for making and selling turkey sandwiches, but a good plan for making and selling businesses. He's still convinced.

"It's been harder than we thought," says Cardin, "but I'd do it again. The design of the concept and the target we're marketing has made sense and proven correct."

The biggest obstacle for the San Francisco-based company has been nailing down location contracts. Cardin and partner Joseph Sanfellipo aimed to negotiate lease space in top-quality office buildings. They're confident the spaces are there by the thousands, but getting in with powerful realtors has taken time and a track record.

"Landlords are very conservative about their locations," says Sanfellipo. "It took us longer to cultivate these relationships than we hoped. But now we at least have a reputation that gets us in the door." To help, the company brought on a manager from JMB Properties, one of the nation's largest commercial-property owners. Jeff Johnson had placed one of the original O! Deli sites; he now does much of O! Deli's landlord negotiation. As of April, O! Deli had 17 sites in operation, 3 fewer than projected. Cardin says another 18 are set to be up and running by midsummer or fall.

Over the past year the company undertook a subtle makeover, redoing its brochure in a marble-granite look, decorating with new photos, redesigning menu boards. Cardin and Sanfellipo also have made designer coffee a new cornerstone of both the menu and store layout, in the belief that flavored coffees and espresso will increase the frequency of customers' visits and create an appealing gourmet image to realtors.

These so-called Caffé Vero sections -- kind of a store within a store -- are now being tested in several shops. The new design will cost franchisees an additional $10,000 ($20,000 if they go with a stand-alone cart), but Sanfellipo thinks the coffee corners can add a phenomenal $100,000 in sales annually to each store.

Additional revenue will also come from higher prices. While Cardin's original ambition was to keep lunch tabs under $4, the company decided to make the portions a little larger and raise the tab to about $5. "We were wrong," says Cardin about his perception that prices had to stay low to keep people returning. "The market is more sensitive to quality and service than price."

The company's $1.4-million corporate loss last year reflects in large part the cost of developing its new -- and as of the close of the fiscal year, unopened -- stores, says Cardin. Over the year O! Deli exercised warrants for $1.4 million and borrowed $250,000 from shareholders, both of which Cardin said he anticipated having to do.

The company's current goal is to have 400 stores open by 1993. Still strong believers in the franchise model, Sanfellipo and Cardin say it can work. "Companies are criticized for expanding too rapidly and too broadly," says Cardin, "but that's much more true if those units are company owned. With franchisees who have an owner's mentality, what's important is that we're easily accessible by telephone, get timely reports from the locations, and are giving them the help they need to run the business." -- Leslie Brokaw

* * *

The Company The O! Deli Corp., San Francisco, a publicly traded, national chain of franchised sandwich shops ("In Search of the Perfect Business," March 1989, [Article link])

Experts' Concerns

* Emphasis on growth: In aiming to open 500 units within three years, will the company lose control of operations?

* Concept: Are there enough office building locations available to let O! Deli stick with its concept of catering to "working people during working hours"? RESULTS TO DATE 3/31/90 3/31/89
Units operating
17 11

Franchises sold 265 240

Systemwide sales(annualized) $5 million $3.3 million

Corporate revenues $753,000 $580,000

Corporate profit (loss) ($1.4 million) ($650,000)




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