Quality bags bagel race: Bruegger's for sale

Nation's Restaurant News, May 26, 1997 by Mark Hamstra

MISHAWAKA, Ind. - The indigestion Quality Dining Inc. suffered from swallowing Bruegger's Corp. last year has cleared the plate for others in the national bagel-expansion race to help themselves to a bigger slice of the pie.

But so far only the No. 2 player, Einstein/Noah Bagel Corp., appears poised to take the lead in establishing a national identity.

Eleven months after completing the acquisition of Bruegger's Corp., Quality said it would sell the nation's largest bagel chain and take charges of $140 million to $170 million related to the sale, including charges for staff and overhead reductions. The company said it also would evaluate shuttering some of its 114 corporate units, which are located primarily in Midwestern markets.

Although many had seen last June's acquisition as a means for Bruegger's to gain access to public capital, Quality was unable to finance the rapid expansion that observers and dissident board members felt was necessary for the bagel chain to maintain a marketshare lead on Einstein/Noah, which is opening stores at the rate of about one per day.

Bruegger's founders, Nordahl Brue and Michael Dressell, who left and then rejoined Quality's board of directors after the acquisition, had pressured Quality's management to sell the Bruegger's brand, saving that the management was "incapable of growing and developing the company." When asked whether they meant that the management lacked the skills or lacked the capital, Brue said that "by the point they had neither."

Franchisees who had been operating the concept since before the acquisition have been frustrated by the bad publicity that has surrounded the brand. "It just doesn't seem that they were equipped to deal with a franchising system," said Vincent Morrissey, an 11-unit Bruegger's operator based in Omaha, Neb. "It's a great little concept. People love our product. ... It was just mismanaged at the top."

Quality had been one of the nation's most-profitable public franchisees, operating licensed units of Chili's Grill & Bar, Burger King, Spageddies Italian Kitchen, Grady's American Grill and Bruegger's before acquiring first the Spageddies and Grady's chains from Brinker International and then Bruegger's from that chain's founders. Quality's stock, trading at about $35 a share at the time of the Bruegger's acquisition, tumbled to less than $5 a share at presstime in a relatively steady, 11-month decline.

"Development, I'm sure, across the country will be curtailed," Morrissey said. "You can't go out and talk to a banker anymore now."

Quality's franchise-partner expansion plan, similar to the Boston Market and Einstein/noah programs, called for Quality to expand the Bruegger's brand by providing convertible loans to franchisees. The plan never worked, observers said, because Quality could not raise the funds to provide to its operators.

In a prepared statement Quality chairman, president and chief executive Daniel Fitzpatrick said 'the value of the Bruegger's brand to Quality Dining has deteriorated since our decision to acquire the concept in early 1996." The company declined to discuss the divestiture further.

One industry source who asked not to be identified said that the Bruegger's acquisition "was just too much for Quality to handle," particularly since the company still was involved in assimilating Spageddies and Grady's. The source added that even though Brue and Dressell were involved in talks to acquire Bruegger's, other companies might be more likely to make a higher bid for the chain.

The news of Quality's planned divestiture came just as the other major players in the niche made announcements portending their own growth. Einstein/Noah reported more than $5 million in first-quarter profits; Big Apple Bagels parent BAB Holdings Inc. completed its acquisition of My Favorite Muffin; Manhattan Bagel secured two loan pools for its franchisees; and Chesapeake Bagel, which was acquired by AFC Enterprises Inc., received a new president and a new chief operating officer.

Although Einstein/Noah -- which operates or franchises about 450 units of the Einstein Bros. Bagels and Noah's New York Bagels concepts -- has the most aggressive growth strategy in the near term, other players feel they can still carve out a significant niche and contend for national leadership.

"The reality of the business is that we haven't even scratched the surface," said Gary Gerdemann, who is a spokesman for Einstein/Noah. "Retail [bagel] sales were $2.7 billion last year. That's nothing. That's a drop of water in the ocean when you look at the potential for this business ... barely one-third of Americans eat bagels on a regular basis."

Gerdeman and others in the industry feel that bagels, long popular in certain markets in the Northeast, Florida and California, have the potential to become a significant part of the diets of Americans across the country.

"There's no clear-cut market leader today that's running away with [the bagel segment]," said Bill Van Epps, the new president of Chesapeake who previously had spearheaded the international expansion efforts of AFC sister chains Churchs and Popeyes. "There is no KFC of the category. We see the opportunity to run away with it."