Focus Brands’ Clear Focus

Research and co-branding are driving CEO Steve Romaniello’s strategy for Focus Brands.

By David Farkas, Senior Editor -- Chain Leader, 7/1/2007

Around noon on a recent day in Alpharetta, Ga., Focus Brands CEO Steve Romaniello’s attention is drawn to a marker board above his head in the kitchen of a busy Schlotzsky’s Deli. Someone has scrawled the eatery’s budgeted vs. actual cost of goods and labor in blue ink for the previous week. The company restaurant was 9 percent over budget with prime costs (minus managers’ salaries) of only 46 percent.

“Those are very strong numbers,” says Romaniello, who’s also president of Schlotzsky’s. “Had I known they were there, I might not have shared them with you.”

Not that Romaniello is being unduly modest in front of a visitor touring his company’s stable of concepts (see “Brand Stable,” below) . It’s that as franchisor of the 385-unit sandwich chain, which the Atlanta-based holding company acquired last November, he’s careful about what he reveals lest franchisees believe they should be posting similar performances.

Most franchisees don’t come close, particularly when it comes to annual sales volumes, according to Romaniello. Those outside of the Atlanta-based company’s core markets—Dallas; Austin, Texas; and Topeka, Kan., for instance—ring up between $600,000 and $800,000. Although above the sandwich category average of about $450,000, those volumes remain well below company stores, where sales reach $1 million or more, he claims.

Working Together

That could change as Schlotzsky’s franchisees begin co-branding with Carvel Ice Cream and Cinnabon, two franchise systems Focus Brands purchased in 2002 and 2004, respectively. The company also picked up the international arm of Seattle’s Best Coffee in the Cinnabon deal from former owner AFC Enterprises. This summer Focus Brands closes in on its latest acquisition, 345-unit Moe’s Southwest Grill. More on Moe’s in a moment.

“Franchisees are eager to [co-brand],” declares Roy C. Thomas, a 16-year Schlotz-sky’s franchisee and president of Schlotzsky’s Franchisee Advisory Council, who will open the first co-branded unit in September, in Midland, Texas. His co-branded restaurant—a new 3,800-square-foot Schlotzsky’s—will feature both treat brands.

“We have to keep [Schlotzsky’s] open from 10:30 in the morning to 10:30 at night, and this is the best answer we’ve ever had,” he says. He predicts sales in the new unit will climb 20 percent because of the additional products, which are consumed at times other than lunch—Schlotzsky’s biggest daypart. Carvel, however, is unknown in Texas, and Thomas is counting on Schlotzsky’s reputation for what he describes as “premium quality” to provide a halo for it. Carvel, a legendary ice-cream shop on the East Coast and in south Florida, is all but unknown elsewhere in the country.

Likewise, Schlotzsky’s reputation for high-quality food isn’t a given in markets outside its home state of Texas. To figure out what customers think of Schlotzsky’s, Romaniello commissioned a study to answer several burning questions about the brand image. “We have a little bit of an identity crisis, which we intend to figure out,” he concedes.

One thing he wanted to know was whether to axe the word “deli” from the chain’s name because it confuses customers. “We haven’t finalized our recommendation on that,” says Technomic Inc. Principal Melissa Wilson, who presented the results in early June and is also analyzing Schlotzsky’s long menu. “There are some attributes of ‘deli’ that Schlotzsky’s would get credit for, like made-to-order sandwiches. And there are some they wouldn’t be identified with. For example, they don’t sell cold cuts by the pound.”

A Marriage Made in Atlanta

The research also turned up evidence that Schlotzsky’s would make a good fit with the company’s other brands. “Given that Schlotzsky’s is perceived as more fast casual than fast food, there seems to be an opportunity. The key is to know how to integrate the daypart strategy and products,” Wilson advises.

Romaniello, 40, has been learning as much as he can about daypart usage in co-branded restaurants. Carvel is already in 20 Schlotzsky’s in Texas, as is Cinnabon. In San Diego, Carvel and Westbury, N.Y.-based hot-dog chain Nathan’s Famous share space. Although the company hasn’t reported any results, Carvel President Gary Bales says, “It’s starting to look good for us.”

Thomas, for his part, says co-branding is a “no-brainer” and maintains that Focus Brands is “doing everything they can to make franchisees’ existence better.”

The sentiment is hardly surprising. Schlotzsky’s Deli, which once boasted 700 units, was founded by Don and Delores Dissman in 1971. Ten years later, the couple sold the chain to real-estate investor John Wooley for $3 million, who took it public in 1995 and grew the system to 759 units before profits disappeared and the company entered bankruptcy in ’04. Bobby Cox, a Texas restaurateur and real-estate tycoon, bought the chain at auction for $28.5 million in December ’04. Franchise owners, enraged at Wooley, cheered the sale. Cox, who took Schlotzsky’s private, beefed up marketing and opened company stores in Atlanta.

Romaniello, meanwhile, was looking for a “host” chain for Carvel and Cinnabon. He figured a sandwich shop with sufficient traffic fit the bill, because franchisees would likely embrace well-established brands (as would a franchisor) as a way to boost sales. What’s more, sandwiches were perceived as fresh and, in some cases, healthful.

We Love Sandwiches

“There’s a lot to love about the category, which is very fragmented except for a couple of players,” Romaniello enthuses.

He initially approached Cox as a co-brander, but the more he looked into Schlotzsky’s, the more he liked it. “What was left was a very stable system with a great deal of momentum,” Romaniello recalls, citing same-stores sales above 10 percent.

Focus Brands, an affiliate of private-equity firm Roark Capital Group in Atlanta, acquired Schlotzsky’s in November for an undisclosed sum. Romaniello and Roark Managing Partner Neal Aronson have worked together since 1995 when the two joined U.S. Franchise Systems, a hotel franchise company.

Interestingly, Roark had acquired another franchised sandwich chain in an auction, Ridgeland, Miss.-based McAlister’s Deli, in 2005. The 235-unit operation remains outside of Focus Brands. “We had growth momentum, and during the auction process, our management made it clear we could deliver on our plans,” says longtime McAlister’s CEO Phil Friedman. “It was very important to me to be independent.”

Neither Romaniello nor Friedman anticipates real-estate conflicts, which could hamper the growth of each system. Both executives acknowledge the issue of who gets dibs on sites they both want hasn’t come up. Friedman says there is no policy on how to resolve such a situation.

Schlotzsky’s franchise owners were more concerned with shared data. They fretted Focus Brands would hand over sales information to McAlister’s Deli given that Roark, in essence, owns both chains. “It’s a logical conclusion, but it doesn’t happen because we [Schlotzsky’s and McAlister’s] are separate companies,” Romaniello insists.

Chasing Chipotle

Sharing competitive information isn’t likely to be an issue with franchisees when it comes to Moe’s Southwest Grill. That’s because it’s Focus Brands’ first foray into the Mexican grill category. Much like sandwiches, the segment is dominated by one player, Chipotle, and otherwise fragmented into a dozen other players. Romaniello announced in April he was buying Moe’s assets for an undisclosed sum from Atlanta-based Raving Brands. The sale, which involves the transfer of some 40 people, is expected to close in August.

“The timing is perfect for this transaction,” says Raving Brands President and COO Stephen LaMastra, who approached Focus Brands last year with a deal in mind. “Moe’s needed a bigger platform to grow on.”

LaMastra, an attorney, may join Focus Brands as president of Moe’s, according to Aronson. “Steve is a terrific person and a really good leader,” says Aronson.

Romaniello believes Focus Brands’ resources can catapult the mostly franchised Moe’s into second place in the category. In November he reorganized Focus Brands into an infrastructure that features shared services such as finance, legal, IT, supply chain and human resources, and brand presidents who oversee operations, real estate, marketing and franchise sales.

Denver-based Chipotle, which rang up $819.8 million last year, now gobbles up nearly 30 percent of a category worth about $2.3 billion, according to Technomic Inc. Third place Moe’s, which rang up $210 million in ’06, has about a 9 percent market share, trailing Baja Fresh (16 percent) and Taco Cabana (10 percent).

“This is a terrific category with enormous room for growth,” Romaniello says when asked why Focus Brands wanted a Mexican chain in its stable. “And we thought Moe’s occupied a unique and differentiated position.” He mentions research that shows the concept is fun and irreverent and capable of drawing families.

“My instincts tell me [Moe’s growth] is Eastern seaboard down to Florida and across the Southeast. But I’d rather let the brand study, consumer intercepts and real estate thing we do tell us specifically,” he adds.

Trouble Shooting

Still, Romaniello concedes there’s plenty of hard work to do, particularly on the franchisee front. Some franchise owners in Southern California blame Raving Brands for a lack of marketing support, which has led to the closing of several units, they argue. Others, in Georgia and Tennessee, have filed a lawsuit in a U.S. District Court in Atlanta alleging they were misled about how Raving Brands collected funds for charity, advertising and supply-chain distribution.

Two Georgia-based plaintiffs in that suit, who spoke on the condition of anonymity fearing reprisals from their current franchisor, declared they were happy with the sale, citing Focus Brands and Roark’s reputation of professionalism. Both franchisees, however, express disappointment that LaMastra might be appointed brand president of Moe’s. “That makes me feel uncomfortable,” says one.

Indeed, a franchisee named Charlie offers Romaniello a warm welcome to Moe’s in his unit near Focus Brands’ offices at the end of this visitor’s concept tour. The restaurant is an older model, and Romaniello seems reluctant to point out its flaws, maintaining criticism would not be fair because some of the problems here have been resolved in Moe’s new prototype.

Still, he can’t resist bringing up a few issues that trouble him. “Moe’s never had ladles that were properly sized so there was guessing going on, and there’s no one order-taking out on the line,” Romaniello explains. “There’s still a whole bunch of stuff that can be done.” .