McAlister's Deli's Product Placement

McAlister’s Deli searches for the right locations for franchisees to sell more sandwiches.

By David Farkas, Senior Editor -- Chain Leader, 3/1/2004

CEO Philip Friedman is overseeing the expansion plans of franchisees at McAlister's Deli with the goal of boosting sales volumes in each restaurant.

McAlister’s Deli is putting franchisees in their place. The fast-growing quick-casual chain has hit the brakes on company expansion to focus on finding high-volume sites for franchisees, who are expected to open at least 23 units this year. That would bring the total of McAlister’s Delis to 145; they’re expected to ring up sales of $157 million in 2004, a 19 percent increase.

The Ridgeland, Miss.-based chain hired a site-analysis company last year to make sure future McAlister’s Delis produce sales matching the unit economics model set forth by the two industry veterans who acquired the chain in 1999. Officials have also fine-tuned production, improving labor costs and speed of delivery, and begun a small but concerted brand-imaging campaign via television ads.

“Our goal is to increase unit volumes,” says Philip Friedman, McAlister’s Deli chief executive and remaining partner. He believes volumes of between $1.2 million and $1.3 million are possible when the 3,800-square-foot restaurants are put in the right spots. Some franchised units, in Charlotte, N.C., for example, already produce in excess of those sums, he claims.

Like other franchisors eager to attract experienced franchisees, Friedman believes higher volumes, and thus returns, are key to getting them to sign on. In fact, the 57-year-old executive figured the concept would easily lure multiunit operators after he and Michael J. Stack, who left in 2002, purchased the company from its founder for approximately $8.3 million.

The duo told Chain Leader in late 1999 that after-tax earnings would grow 40 percent, handsomely rewarding their backers. Their expectations depended on aggressive expansion: 30 percent or more for five years. Friedman believed it was possible to open 300 McAlister’s Delis, mostly through franchising. At the time, 16 franchise groups operated 42 units. Plans called for 100 more units over the next three years, primarily in the Southeast. Today, 42 groups operate 103 restaurants. Thirty-two franchisees will account for this year’s aggressive growth.

The company itself planned to add three units to the existing 12 in 2000. It ended up doubling its size to 23 in the interim.

Lotsa Bread
You could scarcely fault the veterans’ optimism. Market research shows sandwich chains are among the industry’s fastest growing categories. Systemwide-sales gains at 558-unit Panera Bread and 2,500-unit Quizno’s Classic Subs, for instance, easily outpaced the nation’s largest chains in 2002, reports Technomic Inc., a Chicago consultancy currently compiling 2003 market share data.

In the tiny but fast-growing quick-casual segment, sandwich chains (or “bakery-cafes”) are king, accounting for the biggest ($1.5 billion) and fastest-growing (14 percent compounded) chunk of the $6.7 billion market, according to Technomic. In comparison, the second largest group, Mexican concepts, racked up sales of $1 billion last year.

In their rush to capitalize on a good thing, however, Friedman and Stack hadn’t realized the entrepreneurial company and its franchisees lacked depth. “We thought we had the infrastructure in place to grow rapidly,” Friedman admits. “After seeing the capability of the system, we had to regroup and work hard at training.”

Some 3,800-square-foot franchised units already generate $1.2 million to $1.3 million in volume.

At that point, he adds, the company pulled back its aggressive franchise strategy. “For a good year or so, we were not advertising,” he says.

College Station
Opened in 1989 in Oxford, Miss., the first McAlister’s Deli was the brainchild of a dentist named Don Newcomb and his assistant, Debra Bryson. They turned an old filing station into a limited-service but upscale restaurant with big menu boards listing made-to-order sandwiches, salads, soups and baked potatoes.

Orders were assembled from precooked ingredients that were whipped into a salad or sandwich on order and heated in one of a dozen Lincoln steamers. Potatoes were baked in convection ovens, bread toasted in rotary toasters. Unlike the competition, friendly servers brought food to the table and refreshed drinks. Customers, who ate from baskets with plastic utensils, often praised the concept’s signature sweet tea, which now accounts for 12 percent to 15 percent of sales.

Within five years, Bryson, Newcomb and his sons, Chris and Neil, were running three units in the college towns of Oxford, Hattiesburg and Tupelo. Each rang up more than $1 million a year. A fourth restaurant, in Ridgeland, opened doing $1.7 million. Franchising began to take off.

A few years later, however, Newcomb, already a wealthy man from real-estate investments, no longer wanted to deal with franchising. That’s when veterans Stack and Friedman stepped in with backing from local insurance firms. With some tweaking and brand enhancement, McAlister’s Deli seemed like an exceptional opportunity to them. The highly profitable restaurants might throw off even more cash once they applied their considerable expertise.

The partners—Stack was CEO, Friedman, president—were counting on their experience. Stack was a fixture in executive suites in such companies as Western Sizzlin’, Marriott Corp. and Host International. He was a former franchisee of Chi-Chi’s. Friedman, a graduate of the University of Pennsylvania’s Wharton School, also worked for Marriott Corp. and Host International. He’d been president of Panda Management Corp. a few years earlier.

“When we got into it in ’99,” Friedman explains, “we thought we’d be in for four to five years, the normal investment horizon.” He intended to sell the thriving company to a strategic or financial buyer and pay off his investors. But the company’s inability to attract multiunit franchisees who could open territories quickly delayed plans, as did a site miscalculation in Atlanta. There, the company opened six of its own outposts in less-than-desirable locations.

“We’re in our fifth year now, and the horizon will be another year or two,” says Friedman. “It’s changed.”

Solid Sandwich Base
People close to the company are high on the concept itself. “They have a fabulous concept and a unique positioning. They’re starting from a solid base. The trick for them is to get in the right trade areas,” says Bill McClave, principal of Birchwood Resultants, the site-modeling firm that Friedman hired to improve the chain’s chances for greater volumes.

“There isn’t anyone in the quick-casual category that’s as focused on sandwiches as McAlister’s,” says Dennis Lombardi of Technomic, who has consulted the chain on strategic issues. “When you look at the menu, that becomes crystal clear.”

Of the 57 items on the menu, 32 are sandwiches, divided into three sections: Signature, Deli and Combination. There are the standards like Smoked Turkey, Corned Beef, Grilled Chicken and BLTs. But McAlister’s also makes specialized sandwiches, combining kielbasa with beef, for example, and yellow-fin tuna with pecans.

Although the food is prepared quickly, ticket times are longer than traditional fast-food because orders are assembled from scratch and brought to the table. Research demonstrated that families liked the concept for its extra level of service, diverse menu and high-quality ingredients. Friedman recently upgraded McAlister’s hoagie loaves, which are now toasted instead of steamed.

McAlister's is experimenting with reducing unit size to 3,000 square feet while maintaining sales volume.

Lombardi does worry that as the company seeks franchisees in markets outside the Southeast, the word “deli” could prove troublesome. “In the Northeast, ‘deli’ has a different connotation. It’s a place to buy cold cuts by the pound,” he says. “It could work against them.”

However, he says McAlister’s Deli rates quite high among all fast-casual concepts. “They scored pretty well in relation to 20 other quick-casual concepts. Attribute ratings were relatively high,” acknowledges Lombardi, who conducted Technomic’s proprietary study of quick-casual chains. McAlister’s Deli was a sponsor.

Heading South
That was small consolation in Atlanta where business was heading south. Over the last few years, the company opened six of its own restaurants in B-level sites, which worked in small towns but caused problems in its first major metro area. “It’s not a smart move to go into ‘B’ real estate in a big market like Atlanta,” concedes Chief Development and Administrative Officer Pat Walls.

Management figured the stores would do a booming lunch business, which accounts for about half of daily sales in other smaller markets. While lunch business was good, research showed Atlantans perceived the concept as a place for dinner. “That was a revelation for us,” says Friedman. “We are not the first place they think of for lunch. What happens in Atlanta is, you are defined as a lunch or dinner place, and we picked better lunch [sites] than weekend [sites]. What we don’t do there is dinner.”

Searching for a sales-growth formula, Senior Vice President of Operations Pete Petrosian trimmed ticket times to 8 minutes and began local store marketing. “We’ve gone to a line system that speeds up the [ordering] process. In the past, sandwiches would be manufactured by one person,” he explains. “We now have a line system where you can adjust labor depending on business.” The units can serve 2,000 lunches in an hour, officials say.

Reaching the Black
The goal, according to Petrosian, is $20,000 a week, $2,000 above break-even, for all but one unit (open for lunch only). So far, one has reached that level, the others are close, he says.

To help reach that goal systemwide, the company is learning where to put its restaurants to have the greatest impact on sales volumes. About 18 months ago, Friedman hired Birchwood Resultants to develop a model of a high-volume site. The project was budgeted at $140,000.

McAlister's ticket times are longer than traditional fast food because orders are assembled from scratch and brought to the table.

To build the model, McClave analyzed about 80 comparable units open for 18 months as well as 27 company McAlister’s Delis open for less than 18 months. The results indicated that 10 units shouldn’t have been opened. Walls agreed with the data, though he would have kept one or two sites. Still, he adds, “If we would not have built those eight sites, we would have paid for the analysis instantly.”

Today, Walls is urging franchisees to consult with Birchwood before they begin negotiating for sites. Although franchisees are not privy to the complete report, they do receive an executive summary detailing sales projections.

Heritage Enterprises, a three-unit franchisee in Louisville, Ky., picked its own sites before using Birchwood. “We had them analyze our third unit, and they said it was outstanding,” says James H. Gillenwater Jr., a principal with no foodservice background.

So why use Birchwood at all? “How long do you think you can continue to bat 100 percent?” he asks rhetorically. Heritage, which plans to open more units within the next three years, already has analyzed eight potential sites using the model; several have been approved, he says.

Although Friedman won’t open any company stores this year, four units are planned for 2005.

Sales Support
Meanwhile, he is making sure new franchisees, like Heritage, are getting enough support from corporate. They have Birchwood at their disposal at no charge. He’s also trying to boost volumes via three TV commercials produced for $120,000 early last year by a Memphis agency. The company advertising committee budgets 1.5 percent of sales to marketing.

“It’s brand marketing,” Friedman says. “Our purpose was to communicate the McAlister’s experience. We used comedy and shot the commercials in our restaurants in one day.” Tested in Jackson, the ads bumped sales by double digits, he claims. They were later aired in small, company markets, like Hattiesburg, Miss., and Birmingham, Ala.

Although most McAlister’s Delis are freestanding, Friedman has experimented with end-cap and in-line locations while maintaining sales volumes of $1 million-plus. The size of these units, however, remains nearly the same as freestanders: 3,400 to 4,000 square feet. Over time, he intends to shrink the size to 3,000 square feet.

“My goal,” he says, “is to continue to improve through-put and efficiency in the kitchen, and see if we can continue to reduce prototype size.” And, of course, to increase sales in precisely the right locations.