Briazz, Inc.

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Briazz, Inc.

3901 7th Avenue, Suite 200
Seattle, Washington 98108-5206
U.S.A.
Telephone: (206) 467-0994
Fax: (206) 467-1970
Web site: http://www.briazz.com

Public Company
Incorporated: 1995
Employees: 450
Sales: $32 million (2001)
Stock Exchanges: NASDAQ
Ticker Symbol: BRZZ
NAIC: 722211 Limited-Service Restaurant

Briazz, Inc., operates 45 cafés and kiosks selling high-end, pre-packaged sandwiches and salads in Seattle, San Francisco, Los Angeles, and Chicago. Clustered near heavy concentrations of office buildings, the company’s stores target white-collar workers pressed for time on lunch break. In addition to its retail business, which accounts for approximately 72 percent of its revenue, Briazz offers box lunches and corporate catering and sells its products through grocery chains. The company went public in 2001 but has yet to turn a profit. The economic downturn of 2001 and 2002—and the subsequent increase in vacancies in the office buildings Briazz aimed to serve—has eroded Briazz’s primary market.

A New Kind of Sandwich

Briazz was founded in 1995 by Victor Alhadeff. No novice at starting a business, Alhadeff, a former first lieutenant in the U.S. Army, had headed up three companies before Briazz. After a stint in the 1970s with an oil and gas partnerships venture, Equities Northwest Inc., Alhadeff founded Egghead Discount Software in 1983 and built the company into the nation’s largest computer software retailer. When Egghead began to struggle with rising competition and rapid growth, Alhadeff turned the company over to a friend and focused on Catapult Corp. (formerly part of Egghead), a national business that trained office workers to use personal computers. He sold Catapult to IBM in 1993.

Briazz represented another tactical step for Alhadeff. He astutely recognized that a segment of the fast-casual dining sector was ripe for a new addition. The sandwich has been around for nearly two hundred years, ostensibly since the Earl of Sandwich encased a hunk of meat with two slices of bread so that he need not leave a card game to eat dinner. For much of its history, however, the sandwich was viewed as little more than a quick and convenient meal choice, with little verve or cachet. But the success that Starbucks had in the 1990s converting coffee, another commodity food item, into big business had a huge impact on the restaurant industry. As the industry publication, Automatic Merchandiser explained, “Starbucks created the model for taking an everyday, mundane 50-cent beverage and turning it into a $3.00 emotional experience.” Restaurant operators soon recognized the potential of upgrading the sandwich’s place on their menus, or even of centering an entire menu on sandwiches.

It was more than a love of the formerly humble sandwich, though, that propelled Alhadeff to launch Briazz. Lunch is big business—Americans spend more than $1 billion a day on this middle meal alone. While industry insiders had long believed that fast food hamburger restaurants were the unassailable leaders in the lunch market, Alhadeff and a few other entrepreneurs recognized that Americans were suffering from what the Los Angeles Times termed “fast food fatigue.” According to Restaurants and Institutions, non-burger sandwich restaurants had compound annual sales growth between 1979 and 1999 of 12.4 percent, while burger chains had only 3.9 percent. The reason for this trend appeared to be the fact that consumers— especially the gigantic baby boomer generation—wanted lunch fare that they perceived to be healthier and fresher than fast food. At the same time, however, they were reluctant to sacrifice the speed and convenience fast food offered. As the San Francisco Examiner noted, “Briazz is based on research showing that 60 percent of office employees are doing something besides lunch during the noon hour. Most can only spare twenty minutes or so for lunch.”

The first Briazz—the name a combination of the Italian word for vivacity and the English word “jazz”—debuted in September 1995. The café featured fresh sandwiches and salads that were prepackaged and arranged supermarket-style in a floor-to-ceiling refrigerator case. Customers helped themselves to the sandwich of their choice and could be out of the store and back at their desks in a matter of minutes. Tables were available for those who were less pressed for time and wanted to eat in the café. Most sandwiches sold for about four dollars.

Briazz put a particular focus on its flavors. While it offered some standard sandwich fare such as pastrami and ham and cheese, the majority of the sandwiches had a more exotic pedigree. Recipe developers Sharon Kramis and Mary Alhadeff (the founder’s daughter-in-law) introduced gourmet offerings such as the Roast Beef Palouse (sliced rare beef with red-pepper rings, lettuce, and horseradish served on Palouse potato bread) and the Roasted Veggie (roasted zucchini, eggplant, and sun-dried tomatoes, a chevre cream-cheese pesto spread, balsamic vinaigrette, and mixed field greens). Briazz paid special attention to the bread used in its sandwiches. ‘ The basic premise is that the bread is the meat of the sandwich,” Nancy Lazara, vice-president of food for the company, told Restaurants and Institutions. To this end, Briazz relied on Seattle bakeries to provide high quality artisan breads.

Briazz was not the only company stepping into this niche. Competitors such as Panera Bread Co. and Cosi developed sophisticated sandwiches as well. Briazz’s point of distinction, though, was its centralized distribution network. The company’s sandwiches were assembled elsewhere and brought, prepackaged, to the café. “There is an abundance of fast food, deli food, and, of course, sit-down restaurants,” Alhadeff explained to the Seattle Times. “What we felt was lacking was ready-made food that is truly exceptional.”

Early Success and Rapid Expansion

Alhadeff’s concept was appealing to consumers, industry analysts, and investors alike. Although Alhadeff initially owned the whole company, he soon drew in some big name investors, including Starbucks Chairman Howard Schultz, Costco Chairman Jeff Brotman, and musician Kenny G. Alhadeff welcomed this support because Briazz’s business plan had never involved staying small or local. “Our goal is for this to be another Seattle home-grown national success story,” Alhadeff told the Seattle Times in November 1995, less than two months after the first café opened. Throughout 1996, Briazz unveiled new cafés and kiosks in Seattle. These shops remained true to the original plan. Sandwiches and salads were prepared at a central kitchen and delivered to the cafés and kiosks every morning. And each facility was deliberately located in a high-density commercial area within an easy walk of at least two million square feet of office space.

By the close of 1996, Briazz had tallied a brisk $2.8 million in sales. In addition to opening new cafés and kiosks across Seattle, the company had entered the potentially lucrative corporate catering and business box lunch arena. Although Briazz failed to a turn a profit after its first full year of operations, Alhadeff was unfazed. On September 26, 1997, he told the Seattle Times that “Briazz was prepared to go though a period of early losses as it builds its infrastructure of stores, employees, and computerized equipment while seeking to establish a reputation as the premier ready-to eat sandwich café in cities across the country.”

In early 1997, Alhadeff moved toward his goal of national expansion when he took Briazz outside the Seattle market for the first time and opened two cafés in San Francisco. A few months later, Briazz launched a Chicago sandwich café as well. In each of these new markets, Briazz implcmented its original strategy, building a central kitchen to deliver ready-made sandwiches to all the local shops and positioning itself to appeal to on-the-go white collar workers. Briazz did not earn a profit again in 1997, which was unexceptional given the heavy capital investment required for its expansion. The company did achieve some other important milestones, however. By the close of 1997, Briazz had grown to 22 cafés, kiosks, and mini-cafés (seven of which were in Seattle). Briazz had also managed to raise $27 million in private capital to fuel its ongoing growth.

The year 1998 proved to be eventful for Briazz. In September, the company established its first sandwich café in Los Angeles and also continued to expand its presence in Seattle, San Francisco, and Chicago. In addition, Briazz turned its attention to wholesale business. The central kitchen design that Briazz faithfully followed in each of its four markets gave the company the opportunity to realize economies of scale unavailable to its competitors that maintained a small kitchen in each sandwich shop. Briazz was thus able to establish a partnership with Delta Airlines to provide sandwiches to the airline’s first-class cabins. Briazz also experimented with vending machines that dispensed its bread creations.

In 1999, Briazz accelerated its pace of expansion. Rather than enter new markets, though, the company sought to “build out” its existing four-city territory. After securing an additional $5 million in private financing, Briazz announced that it planned to field 40 sites in those markets by the end of 1999. Moreover, in an effort to lengthen the stores’ business days, it introduced a menu of hot breakfast items to complcment the popular lunchtime offerings.

Key Dates:

1995:: Victor Alhadeff opens the first Briazz Café in downtown Seattle.
1996:: Briazz launches cafés in San Francisco and Chicago.
1998:: Briazz opens its first café in Los Angeles; by year’s end, Briazz has 25 cafés in four major markets.
2001:: Briazz goes public and raises $16 million with initial public stock offering.
2002:: Briazz reports its seventh consecutive year of losses.

Even more significant was the series of partnerships Briazz founded that year to broaden its wholesale business. The company began selling its branded sandwiches in QFC, a Seattle grocery store chain, as well as in 25 Ralph’s Markets in southern California. Briazz also received the lucrative contract to provide ready-made sandwiches to select Seattle Starbucks stores. Starbucks wanted to expand its fare beyond coffee and muffins but did not want to involve itself directly in a lunch-making operation. Briazz’s centralized distribution network made it an ideal partner.

Fueled by its growing chain of retail venues and its strategic wholesale partnerships, Briazz saw its sales for 1999 rise to $25.6 million. However, the capital-intensive investments required to build new cafés and kiosks meant that Briazz’s losses continued to mount as well. Although Alhadeff confidently informed Nation’s Restaurant News that “over the next five years the opportunity exists to add 150 cafés in our existing geographic markets,” the reality was that the company’s costs were increasing exponentially, and Briazz’s financial backers were tiring of writing the company large checks.

Economic Downturn and Financial Challenges

Briazz’s sales jumped more than 30 percent in 2000, reaching $33.7 million. In a major coup, the company also landed a major wholesale account with supermarket giant Safeway, which accounted for 20 percent of its accounts receivable for the year. In addition, it formed a partnership to sell sandwiches at Tully’s Coffee and continued to add new retail outlets in its four markets. Nevertheless, expenses continued to outpace income, and Briazz reported a net loss of $6.3 million for the year. It was obvious that to proceed with its expansion, the company would need an infusion of cash.

Alhadeff decided that the best solution to this problem was to take the company public. Making an initial public offering in 2001, however, was a risky move. The American economy was weakening as the stock market plummeted and workers were laid off. A souring economy is never good news for the restaurant industry. While peoplc always need to eat, they do not have to eat out. Typlcally, when peoplc are under financial pressure, they cook at home and brown bag their lunch to conserve money. Moreover, Briazz had only a string of losses to show potential investors. To make matters worse, Briazz’s auditor issued a going-concern statement prior to the initial public offering (IPO). The statement said that Briazz’s operating losses and need for capital “raise substantial doubt about its ability to continue as a going concern.” These facts notwithstanding, Alhadeff went ahead with the IPO and managed to raise $16 million of the $17.7 million that had originally been anticipated. The company said that it planned to use $2 million of this to repay a loan, $8 million to open new cafés, $2.5 million to upgrade computer systems, and the rest for general business purposes.

Unfortunately, Briazz’s financial woes were not solved by the IPO. The company was especially hard hit by the economic downturn, which only worsened in the wake of the September 11, 2001 terrorist attacks on New York and Washington, D.C. Briazz’s raison d’être was to serve lunch to busy office workers, but as companies laid off workers there were fewer customers to whom Briazz could sell its gourmet sandwiches. Moreover, as Briazz had deliberately located its stores in densely packed business districts, it was particularly affected by the depopulation of those areas. Between 2000 and 2001, the vacancy rates in downtown Seattle and San Francisco, for instance, shot up from less than 2 percent to 10 percent, mainly because of the crash of dot-com companies. Largely as a result of this trend, the company’s sales in 2001 fell back to $32 million. Briazz also lost its accounts with Starbucks and Safeway.

Briazz was also facing stiffer competition in its own sector. As the Wall Street Journal explained, “Take out sandwich shops are quite common.” In addition to high-end sandwich rivals, such as Cosi and Panera Bread Co., fast food chains had entered the gourmet sandwich fray. Subway rolled out a line of “Subway Selects” in 2001. These high-end sandwiches featured the same bold flavors promoted by Briazz and cost about twice as much as Subway’s standard fare. Even Arby’s launched a new line of gourmet-style sandwiches that year. This increasingly crowded field faced an additional problem: despite analysts’ predictions, customers were not wholeheartedly embracing the ready-made sandwich concept. It turned out that American sandwich eaters liked to watch their sandwiches being made, rather than grabbing a pre-packaged product. And they liked the option of getting a hot sandwich.

Recognizing these realities, Briazz was forced to reassess its strategy. As Alhadeff told Restaurant Business in April of 2002, “Our cafés have undergone a total redesign so that hot food is the merchandise focus in the store.” As part of this process, Briazz introduced a hot, made-to-order sandwich called the Piadina. Hot food sales quickly came to account for a stunning 45 percent of total sales. Alhadeff also recognized that the company’s cash shortage and the slumping economy necessitated backing off expansion plans. But Alhadeff did not intend for the company simply to stand still. Instead, he hoped to use wholesale partnerships to leverage the Briazz brand. Briazz reached an agreement to sell its sandwiches at freestanding kiosks in select Target department stores. In May 2002, Briazz landed a major contract to start selling its products in 20 Albertson’s supermarkets in southern California. If the pilot program proved successful, Briazz would have the opportunity to sell its products in 630 Albertson’s stores.

But the sandwich-maker faced an uncertain future. A year after its initial stock offering, Briazz’s share price had fallen 80 percent. Many industry insiders were pessimistic about Briazz’s prospects. A financial editor at the Nation’s Restaurant News told the Seattle Times, “Basically, they either generate some real interest by performing or they get bought out.” For Alhadeff, though, the goal is clear: “When peoplc think of sandwiches five years from now, we want them to think of Briazz as the dominant national brand,” he said to the Seattle Times.