Minding the Store
Unlike the typical fast-growth company, six-year-old Saint Louis Bread Co. -- one of the hottest restaurant chains in the country -- has managed its rise without chaos. How?
Before he opened his first bakery/cafÉ and became expert in the nuances of sourdough starters and espresso-brewing times, Ken Rosenthal knew he wanted a chain of stores. His friends thought he was making a big mistake and tried to warn him off. A few had grown up in bakery families, and to a person they cautioned him that there was a reason most bake shops had long since shut down: they're ridiculously exhausting to run. "I'll never forget one story," says Rosenthal, 50, a lanky, even-keeled man. "This guy was working around the clock. He'd come home, get in the shower, turn on the water, and sit on the floor to rest. And when the hot water ran out and the shower ran cold, it was time to go back to work." Rosenthal shudders. "Oh my God! What a terrible story that is!"
It is terrible, but it reinforced his point: while a single shop wouldn't give him the life or the kind of business he wanted, a chain might. He and his wife, Linda, had spent 17 years running a women's clothing store, and the experience had left its mark. They had had little control over what they sold, buying a line of clothing only to be undercut on price by the big chains.
The bakery idea came to Rosenthal when he was visiting his brother in San Francisco. After the two had spent some time hanging out in North Beach cafÉs, Rosenthal's brother suggested taking the idea back to St. Louis. Rosenthal liked hearty bread, and he liked the idea of creating his own product line. "Once I developed it and perfected it, it would be my line -- good, bad, or indifferent." Since the cafÉ culture of the West Coast had yet to hit St. Louis, the market was wide open.
As it turns out, it was wide open and then some. No matter that when Rosenthal started, in 1987, all he knew about baking was that he didn't want to be the guy in the shower. By mid-1993 Saint Louis Bread Co. employed 565 people at its corporate office, central baking plant, and 17 bakery/cafÉs throughout the city. The company has been profitable almost since year one, with 1992 revenues of more than $13 million and a five-year sales-growth rate of 5,325%.
Standout success in the brutally competitive restaurant industry has come partly on the strength of the concept: the 11 bread varieties, along with the more than 25 types of muffins, Danish, and croissants, are baked the day they're sold. The old-time bakery counter at the stores brings in customers, while the soup-and-sandwich counter alongside does the volume -- two times that of the bakery. What's more, national food chains with similar concepts have so far left St. Louis alone, allowing Saint Louis Bread to establish a preeminent position.
But the company also has gotten where it is -- and set itself up for where it hopes to go, which is geographically out and financially up -- through small and steady steps of back-room improvements. This is not a company that has gone to hell and back. Instead, Ken Rosenthal and the team of managers he's added over the years have combined aggressive development with cautious calculation and a sense of what part of the operation must take priority each step of the way.
In its evolution Saint Louis Bread has passed through distinctive stages: after pre-start-up, that period of planning and self-education, came 15 months of operating one store. An initial expansion, over a year and a half, took the company to five stores. A more furious rollout, over two years, brought on another 12 stores. And since early 1993 the company has been sitting on a growth plateau, quietly preparing itself for further expansion both within St. Louis and into new territories outside the city.
"Each time you decide to grow again, you realize you're starting at the bottom of another ladder," says Rosenthal. "When we went from one to two stores, we had to commit to getting a refrigerated truck. We could have stopped at two stores and made a nice living, but we decided to move into the central baking plant and take on a tremendous overhead. We wanted to bring on a chief financial officer, and MIS and accounting people, and each time you do that you make a commitment to grow the company a little more."
The decisions were consistent with what Rosenthal had always wanted, to run a chain of stores. Through steady improvements in product mix, behind-the-scenes operations, public personality, and management -- to name four critical areas -- the company has blossomed. It is now, Rosenthal and his partners hope, poised for its next big surge. Here's how it all began:* * *
The idea stage: Mid-1986 to October 1987
For over a year, Ken and Linda Rosenthal worked to nail down their product concept: the deli and, especially, the bread.
Rosenthal threw himself into a self-education process in 1986 and 1987, traveling to San Francisco six times to visit bakeries. At one of them he got the concept of using a central baking facility for preparation and then doing final baking at the shops; at others he took hundreds of photos, often getting tossed out for doing so. Still other bakers took him on for tutoring by day and baking by night. In all, Rosenthal logged thousands of hours and paid out $50,000 for training and sourdough recipes.
The Rosenthals picked out a storefront in a strip mall in Kirkwood, Mo., an upscale suburb that seemed primed to pay slightly more for better quality bread. The location also fed the "neighborhood bakery" image the Rosenthals wanted to develop. Start-up capital totaled $350,000: the Rosenthals took $125,000 from their savings, got a $125,000 Small Business Administration loan, and took out a $100,000 second mortgage. The point of no return came when they bought equipment from a bankrupt bakery.
In October 1987, sailing on a $10,000 marketing campaign consisting of a 50,000-postcard mailing (the only explicit marketing the company would do until 1993), and with Ken, Linda, and 15 full- and part-timers at the helm, Saint Louis Bread Co. opened its doors.* * *
On-the-job learning: October 1987 to January 1989
"We made lots of mistakes, but we were in a very forgiving neighborhood," says Rosenthal. The product took a while to perfect: if a loaf of bread turns out to be doorstop material, it's hard to pinpoint what in the process went awry -- maybe the mixer put in the wrong ingredients, or maybe someone put the dough in the cooler too early. The Rosenthals invested in an expensive espresso maker, even though cappuccino quaffing wasn't even close to a rage. "We wanted to make sure that when coffee did hit, people would look at us as being at the forefront," Rosenthal says.
At the same time, the company's community image began to take shape. The Rosenthals decided not to sell day-old bread, in part so that customers would have no question about freshness. Instead, the company began a relationship that continues to this day with church groups and Operation Food Search, an organization that picks up and delivers goods to food pantries in St. Louis. From day one, the store gave away all its leftover bread each evening.
Within a few months, Saint Louis Bread had a regular clientele. The good part was that the Rosenthals were getting orders for bread. The bad part was that they were still figuring out how to fill them. Two months after the company's launch, they completely misjudged their Christmas sales. "We didn't know what we didn't know," says Rosenthal. "To make a long story short, we thought we had five hours more than we did, but everybody showed up for their bread orders at 7 a.m. We weren't ready for them. It got to the point where the counter people wouldn't go out front." That was the day Rosenthal started documenting things: what times of what days got busy; how much product was moving when.
In an attic crawl space above the baking area, the Rosenthals crafted an office. (An exposed pipe at forehead level was wrapped in towels to keep people from getting knocked out.) There the fiscally conservative Rosenthal, loath to string along suppliers, paid his bills as they came in. He also resisted bringing in equity partners, determined to finance through cash flow and whatever bank debt he could muster up. It often was not easy. "I lived," he admits, "in constant fear that we weren't going to succeed." Sales the first nine months were $245,600, almost at break-even.* * *
The first expansion: January 1989 to June 1990
By late 1988 the Rosenthals felt ready to expand. They picked a site in funky University City, just west of St. Louis. The spot was too small to have its own full-scale production, so the first store trucked over partially made bread. The bread would still be proofed -- the prebaking process of humidifying the dough to make it rise quickly -- and baked on-site. That store opened in January 1989. Eleven months later, with bank debt covering about half the $300,000 start-up cost, Saint Louis Bread opened a third store; stores four and five came in April and June of 1990, also half financed by loans.
The product mix was now stable. The company's public personality was being shaped by having stores that reflected the "personality" of their locations (college-area shops, for instance, have blond wood floors and more small tables, for a cafÉ feel) and by expansion of the company's charitable programs into fund-raising for local schools.
Attention to operations was the critical focus at this phase of growth. The Rosenthals got hooked up with Stern Fixture Co., an equipment-supply company, which helped them think about more efficient ways to design their deli operations. "Sandwiches were something they were doing as an adjunct to their bread business," says Mal Dardick, a designer and the chairman of Stern. "And we said, 'What are you going to do if everybody likes the product and they all come at once and you can't turn the food out quickly and cleanly?' We helped them think about better layouts for mass production."
In the fall of 1989 the company moved its mixing and shaping operations to a factory, another significant step. The first stage of baking could be done there, and then the goods could be trucked out. Taking on the space was a commitment to expansion: the plant was 12,000 square feet, and Saint Louis Bread needed only 3,000 of that. "I truly felt we would never use all the space -- all you could see was space," says Rosenthal. "We'd gone to the next plateau, but we were at the bottom of it."
Saint Louis Bread also began filling out its executive ranks. After the fourth store opened, Linda Rosenthal left the day-to-day management to care for the couple's four children, though she has continued to be involved in store design and product development. Shortly before that, Doron Berger, a neighbor and confidant, had joined as a partner, working on regulatory compliance and purchasing. In 1990 Myron Klevens, another old friend with extensive experience both in real estate (he was a local developer) and in management (10 years at $7.7-billion Emerson Electric) came on, also as a partner. Both Berger and Klevens, now 45 and 50, put in nominal amounts of cash -- along with commitments of sweat equity -- for 17% equity each. A former employee of Seattle-based Starbucks Coffee Co., the coffee retailer and cafÉ chain, joined Saint Louis Bread to beef up its coffee purchasing and brewing training.* * *
Becoming a presence: June 1990 to January 1993
As the company continued to expand, the pace of everything picked up. While savvy neighborhood site selection was crucial, it became clear, too, that the company had to keep getting better at every level if it were to grow without spinning out of control.
The factory began focusing on getting new products introduced every 90 days; the trick was to keep customers invigorated. In August 1991 the company opened its only non-Saint Louis Bread store, the Rendezvous CafÉ, which is positioned as a slightly more sophisticated version of Saint Louis Bread. The menu is very similar, and the restaurant serves as a test site for new menu items, from salads to soups to desserts.
Still relying on its extensive community involvement instead of advertising to attract and retain customers, Saint Louis Bread introduced Operation: Dough-Nation in 1992 to collect cash contributions from customers for local food pantries and to match those donations with fresh bread offerings. "Saint Louis Bread is just a remarkable organization," says Bill Nordmann, the executive director of Operation Food Search, which coordinated the distribution of almost $9 million worth of food from 900 stores and restaurants last year. "Its generosity, its community spirit..." All told, Saint Louis Bread's contributions to Operation Food Search alone totaled $700,000 in bread last year, and the company was involved in 60 other fund-raising and community events.
By mid-1992 the company was up to 10 stores and already had another 7 in development to open that fall and winter. The pace, Doron Berger says, had begun to feel frantic. "It was like running so hard that you can't breathe, but you have to keep running." Things weren't out of control yet, but it was getting harder for the three partners to visit all the stores as often as they wanted: their daily visits began to drop to every other day, or once a week.
In addition, margins were a little soggy: 1990 sales were $2.8 million, with net income of just 1.4%, and 1991 sales were $5.8 million, with margins at 1.7%. (Au Bon Pain, a publicly traded cafÉ chain, has margins of 5.5%.) Turnover also was not so hot, at the industry average of about 100% annually.
In mid-1992 the partners decided to do something that's anathema to people who thrive on growth: they would stop growing. After the flurry of openings that fall, they wouldn't open any stores for at least nine months. "It was time to take a breath, sit back, and make sure everybody was thinking about the same thing and that we all had the same vision," says Rosenthal. After planning in three- to six-month spurts, they figured they'd plan for the next one to two years.
"The opportunistic approach this company had taken," says Richard Happel, who came on in late 1991 as CFO, "wouldn't work anymore. Everyone here knows we have a window of opportunity, and we're anxious to capitalize on it. But the owners, above all else, understood that without the substructure, the superstructure would never hold. We reached the point where the controls and the information systems we had in place were woefully inadequate for a larger organization. And if we didn't stop soon, we were going to reach the point where we had total chaos."
The partners decided to go through extensive strategic planning. They brought in an outside team of facilitators, which took a group of 10 managers through a two-month, 50-hour program of evaluating every aspect of the business. They reached agreement on how many stores there should be, where those stores should be, and what volume they wanted to plan for, and then they wrote out detailed schedules for every step needed to get there. Two documents emerged: a business plan and a calendar of actions to meet strategic goals.
As a result the company began investing, for instance, in state-of-the-art point-of-purchase registers (at $30,000 a pop) that would allow it to better track everything from sales per hour and sales per stockkeeping unit (SKU) to sales by stores and labor per dollar generated. At the bakery, new equipment began automating processes on the line so the company could make more product with the same number of people. Thirty suppliers were given a seven-page synopsis of the strategic summary, to keep them up-to-date on the company's plans. "Most food-service people are not organized at all," says Paul Landsbaum, president of Stern Fixture, which now supplies Saint Louis Bread with all its furniture, fixtures, and equipment. "What makes Saint Louis Bread different is that it approached the food-service business from the viewpoint of a retailer," Landsbaum notes. "The company excels at displaying its wares and attracting the sale. And because it gives us projections, we can go out to our suppliers and strike volume deals on Saint Louis Bread's behalf."
In management, Rosenthal brought on David Hutkin, a real estate developer who found Saint Louis Bread its third site. Hutkin had decided, back in 1989, that he wanted to buy the company. "Ken was very polite, very gracious, and told me to get lost," he says. But like a persistent suitor, Hutkin kept in touch with letters and phone calls, and continued finding real estate as the company expanded. By early 1992 he had asked to be a franchisee. The partners agreed, but eventually, they decided that what the company needed more was a franchise manager. By May 1992 Hutkin was set to come aboard in September as president of a new entity, The Bread Co., which would coordinate franchising efforts.
However, at the end of the strategic-planning process, Rosenthal decided The Bread Co. should be less of a separate business and opted to make Hutkin, then 40, CEO and president of everything. The planning had helped refocus the partners on their strengths. "If we were going to really make this thing grow in a professional, well-managed way, it was going to require a much narrower view of things we each had to do," Rosenthal says. "I had been on the point for five years, and I'd started thinking that it might be nice not to be there."
Linda Rosenthal says that turning over the titles to Hutkin didn't seem to be a traumatic decision for her husband: "Ken just told me that that's what he thought he should do, because there are so many things you have to do as president -- everybody comes to you with everything -- and he wanted to concentrate on production." The company separated ownership from management -- the Rosenthals remained two-thirds owners, with Ken becoming chairman -- and Hutkin took the helm. As difficult as the decision may have been initially on Klevens and Berger, the four seem to have crafted a closely interconnected management team.
The company finally had cash, too, to hire more management talent: in addition to Happel, who was brought on as CFO from Western Union, where he'd been manager of financial operations, it hired a director of store operations with 20 years' experience in the restaurant and franchise business, and an MIS chief.* * *
The future: January 1993 to...
"1993 will be an important year in the history of Saint Louis Bread Co. Its success will not be measured in its growth, but in how it will position itself to grow substantially in 1994 and beyond." That's from the company's business plan, and, indeed, 1993 has been the year the company deliberately prepared for further expansion not only within the city but also to locations well outside St. Louis.
With new-product development still continuing (forays into tiramisu and jalapeÑo bread, for example), Saint Louis Bread developed its first marketing budget. It began joint promotions with companies including Blockbuster Video, with whom it's offering a kind of buy-one-get-one deal. ("We're thinking about using an early Clint Eastwood still," says Hutkin, "with him holding a video in one hand and a baguette in the other.") Klevens's visual mantra, which he pulls from his desk, is a November 1991 Business Week cover. "Value Marketing," screech the cartoonish bubble letters. "Top Quality! A Fair Price! And Great Service! It's the Way to Sell in the 90's!"
The company's focus has been to prepare for franchising, which the Rosenthals had thought about -- and put on the back burner -- almost since day one. "You give away a big percentage," says Hutkin, "and you don't make as much money, but it's a cheaper way to grow."
Trudging through the tedious task of drawing up a legal document, Hutkin has been mapping out three types of areas for testing franchising -- Kansas City, Mo., a medium-size metro market; Springfield, Mo., a smaller and less urbane city of 150,000; and a yet-unnamed small town of 25,000 in Missouri or Illinois. "Franchising is a lot of things, but in large part it's another layer of distribution," says Hutkin, whose office is ringed with maps of St. Louis and the United States, dotted with color-coded pushpins. "We have to make sure there's not a hitch."
Getting products to the farther sites was a matter of figuring out everything from what kinds of boxes to use to how you package the product to how you ensure quality. "We tested this in a prototype store for months," says Rosenthal, "running it as though it were 200 miles away." The first two people who signed on as franchisees both have territories, in which they're expected to operate four to six stores each.
The company's plans also call for a ramp-up in the number of company-owned units: another 4 by the end of 1993, and 10 in 1994, mostly outside the city. The focus is on areas where there's a void -- places that don't already have upscale bakery restaurants.
To add to the management voices, Hutkin has begun setting up an advisory board of outsiders. The company has also launched an advisory board of insiders. Staff people from all areas discuss and make recommendations on such issues as holiday schedules, vacations, and tuition reimbursement. Training, too, has been revamped by the director of store operations, Jeffrey Rains. "A new hire used to come through in a couple of hours," says Hutkin. "'Here's the creed, here's the mission statement, there's the store.' Now, new hires spend 10 hours paid time with a manager, getting cross-trained in how to run the register, how to make sandwiches, how to make cappuccino." There are 56 training modules, covering focused areas such as "Espresso Standards" and "Product Packaging," with different jobs requiring different combinations of training. By this past summer all new hires were being trained under the new system.
Rosenthal and his team believe that, having stopped and put in place those changes, they're now in a position to take on the next stage of growth with more steadiness. "We know the concept works well, we know the acceptance is excellent, and we know it can be a bigger company," Rosenthal says. The executives' roles are better defined. A bonus program for store managers and assistant managers is in place. The company's deli and bakery products are updated regularly, its role in the community is solid, and its operations and new computer systems are helping track inventory, sales, and margins better (although the four partners -- addicted as they are to the beepers and cellular phones that keep them in touch throughout the day -- are unapologetically computer illiterate).
The company carries $900,000 in bank debt, which the owners don't think is excessive for a company tracking at more than $17 million annually. They are assuming that one day Saint Louis Bread will go public. For now, they're content to focus on expanding some more.
"How big, I don't think we can say, and I don't think anyone has visions beyond maybe a couple years down the road," muses Rosenthal, sitting across from a framed quotation by Calvin Coolidge about persistence being the root of success. "We sort of know where we're going immediately, and we know that the challenge is, How well can we do it outside of the St. Louis market?"
The first franchise opened this past June. The owner, Jim Magers, has 17 years' experience in restaurants as both a franchisee (with the 130-unit Penguin frozen-yogurt chain, in California) and as a franchiser (as an operations manager with a company that owned 70 franchises), and says it was the concept that made him put in the call to Ken Rosenthal. "We knew, from watching Saint Louis Bread in St. Louis, that they were doing very well -- even before talking to them, we could tell their sales volumes were high." Saint Louis Bread's sales per square foot average $404; the industry median is $177.
By 11:30 a.m. on a weekday, Magers's Springfield store is packed, with a line out the door. Baking here, as at all the shops, started around midnight and continues until about 11 a.m. Like most units, the shop opened at 6:30 a.m. and would stay open until 8 or 10 p.m. "Foolishly," says Magers, "I invested in a security system. We're closed for only about an hour a night." It takes 45 employees to run the cafÉ: seven in the back, baking, the rest out front. Walking through the store, chatting with customers, Magers taps at breads to check the crusts. (He himself bakes two nights a week.) His commitment is to build six units in all. In his second month he'd already begun looking at sites. By its third month, the Springfield franchise had become the third-highest-volume store in the system.
Back in St. Louis, the company has two three-inch-wide loose-leaf notebooks (A-L and M-Z) filled with 400 inquiries from potential franchisees. But the owners want some time to watch the ones already in the loop before making more commitments. They say the bread can go 500 to 700 miles from the plant before freight becomes economically disproportionate. "There's a big Midwest," says Klevens. "We'd like to be kind of the itsy-bitsy spider -- here's St. Louis, and here's someplace else, here's someplace else, and sort of link them all up."
SAINT LOUIS BREAD CO. TIME LINE
The big idea "Friends ask, 'Why in the world a bakery?"
Take first of six three- to four-week trips to San Francisco
Begin paying for tutoring and recipes
Make final purchase of used equipment
Have start-up capital: $350,000 from savings, second mortgage, and SBA loan ($125,000)
Open first store"We were in a very forgiving neighborhood."
Give daily leftovers to church groups for food pantries
Begin to track daily cycles, develop forms
Get kinks out of bread production
Open store number two
Fiscal year ends. Revenues, $973,300; net margin (pretax), 3.8%
First partner joins
Move to central baking plant "I truly felt we would never use all the space."
Linda Rosenthal leaves day-to-day operations
Open store number five
Fiscal year ends. Revenues, $2.8 million; net margin (pretax), 1.4%
Second partner joins
Fiscal year ends. Revenues, $5.8 million; net margin (pretax), 1.7%
Change fiscal year. Six-month revenues, $5 million; net margin (pretax), 4.5%
Hire MIS chief
Begin two-month strategic planning "It was time to take a break."
Name a new CEO and president; hire director of store operations
Fiscal year ends. Revenues, $13.3 million; net margin (pretax), 5.6%
Open store number 17
Create first marketing budget
Begin putting together outside advisory board; name internal associates' advisory board
Open first franchise, in Springfield, Mo. "The challenge now is, How well can we do it outside the St. Louis market?"