Bruegger's Corporation

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Bruegger's Corporation

159 Bank Street
Burlington, Vermont 05402
U.S.A.
Telephone: (802) 660-4020
Toll Free: (888) 822-5379
Fax: (802) 652-9293
Web site: http://www.brueggers.com

Private Company
Incorporated: 1983
Employees: 1,600
Sales: $85 million (2002 est.)
NAIC: 311822 Flour Mixes and Dough Manufacturing from Purchased Flour; 722211 Limited-Service Restaurants

Bruegger's Corporation, the first major bagel chain in the United States, operates a chain of approximately 250 stores in 18 states. Bruegger's offers a selection of more than a dozen varieties of bagels and cream cheeses, as well as sandwiches, coffee products, salads, muffins, and scones. The company is owned by Sun Capital Partners Inc., an investment firm with a diverse portfolio of holdings.

Origins

Bruegger's played a leading role in what industry observers termed the "bagel wars," a reference to the heated competition among national chains who attempted to exploit the enormous popularity of bagels during the mid-1990s. Bruegger's founders, Nordahl Brue and Michael Dressell, were the first operators to field a national chain of bagel shops, and their early success touched off a wave of excitement. "Bagel fever" led to the bagel wars, as a host of national bagel chains staked their future on rapid expansion, endeavoring to achieve national dominance of what became a more than $2-billion-in-sales market. Bruegger's was the first company that could claim national dominance, but before it developed into an industry giant, the company's founders followed a measured and methodical approach to growth.

Brue and Dressell first met each other in 1980. Both men lived in Burlington, Vermont, where Brue worked as a lawyer and Dressell worked as a commercial builder, operating his own construction company. The pair met when Dressell's construction company employed Brue's law firm. Their introduction led to talks about starting a business together, with each expressing a desire to enter the fast-food segment of the restaurant industry with a low-cost item tailored for customers with busy lifestyles that would be largely resistant to the capriciousness of the economy. As the vehicle to drive their entrepreneurial careers, the partners selected the bagel, which was largely unavailable outside ethnic metropolitan enclaves until the 1970s. It was a propitious decision, one that positioned Brue and Dressell to capitalize on the burgeoning demand for bagels. According to a research firm that charted food trends, per capita consumption of bagels increased 169 percent between 1984 and 1993, the formative years of Bruegger's history.

Brue and Dressell used their own money to start Bruegger's, convinced that their focus on a single item would prove to be successful. With the help of a baking expert in New York City, Brue and Dressell developed an authentic production process, boiling their bagels and hearth-backing them on site, adopting a preparation method used by Eastern European immigrants who first brought bagels to the United States in the early 20th century. By 1983, the partners were ready to open their first store, selecting Troy, New York, as the first market to be introduced to their concept. A bigger market than Burlington, and only a short drive away from Burlington, Troy struck Brue and Dressell as an ideal starting point for their enterprise. Stephan Finn, Bruegger's chief executive officer for much of the 1990s, offered his own explanation for the reasoning behind Brue's and Dressell's decision to select Troy rather than their hometown of Burlington for the company's debut. "They didn't want to embarrass themselves," Finn remarked, in a May 22, 1995 interview with Nation's Restaurant News.

Brue and Dressell did not rush headlong into expansion. After the February 5, 1983, opening of the first Bruegger's, the partners wanted to make sure they had sufficiently honed the operational and design complexities of their concept before unveiling it to their neighbors in Burlington, much less before they took the bold step toward national expansion. Brue and Dressell risked failure to arrive at success, developing a plan to open six units in six markets over the course of six years—the pair's six-plus-six-plus-six business plan—to see what worked and what did not work. They experimented with different layouts of stores, and they selected some challenging markets. In the years following the opening of the Troy location, Brue and Dressell opened stores in markets such as Boston, but they also selected markets that tested the Bruegger's concept more fully, exposing it to the same sort of challenges that would be presented once they moved forward with national expansion. During the 1980s, they opened Bruegger's units in eastern Iowa, Minneapolis-St. Paul, Minnesota, and Raleigh-Durham, North Carolina, testing the acceptance of their bagel concept in markets not readily associated with an "ethnic" delicacy found almost exclusively in pockets of metropolitan areas.

After thoroughly testing the strengths and weaknesses of the Bruegger's format, Brue and Dressell became convinced of the viability of their business model. In the early 1990s, they began opening stores at an accelerated pace. Between 1990 and 1993, Brue and Dressell built Bruegger's into an 84-unit chain, enjoying enough confidence to bring the concept to their home-town, the site of the 38th Bruegger's opened. They also realized their own limitations and hired a veteran of the food industry, Stephan Finn, to help expand the company. Finn had spent years working for Burger King. By the end of this initial expansion spree, the partners were ready for the chain's next big leap. In late 1993, they began to franchise Bruegger's, a decision that was made only after the company-owned stores began to attract educated and affluent clientele. Through franchising, the Bruegger's chain achieved its greatest growth, quickly turning into the national behemoth that convinced other entrepreneurs to jump into the bagel business.

Franchising Beginning in the Early 1990s

With the help of Finn, Brue and Dressell developed a franchising program whose design promised growth and stability. They only recruited individuals with experience in foodservice and they required franchisees to become owners in Bruegger's by purchasing $350,000 worth of the company's preferred stock. Further, prospective franchisees were required to commit to developing a minimum of ten stores in each of the markets they operated.

As the Bruegger's franchising program made its debut, the retail bagel segment began to exhibit tremendous growth. Between 1994 and 1996, bagel sales increased 240 percent in the United States, developing into a $2.3 billion market. For Bruegger's, the surge in growth attracted a crowd of entrepreneurs more than willing to sign on to the company's franchising program. Within 18 months of franchising its concept, Bruegger's grew into a 155-unit chain with stores in 16 states. Systemwide, the company generated $81 million in sales in 1994, ranking as the largest bagel chain in the nation. The market's second largest competitor, New Jersey-based Manhattan Bagel Inc., trailed far behind, collecting $15 million in sales in 1994. Bruegger's widened its lead in 1995, recording an explosive rise in sales that lifted its annual revenue volume above the $220 million mark. The company expected to reach nearly 300 units by the beginning of 1996 and 1,000 stores by the end of 1998. By the following year, Bruegger's executives expected to reach $1 billion in sales. Clearly, the mood was optimistic at the company's Burlington headquarters. "We intend to dominate every market we enter," Finn remarked in a July 17, 1995 interview with Nation's Restaurant News.

The prognostications made in mid-1995 reflected the confidence of Bruegger's executives. The company had swept across the country and secured a commanding position in one of the fastest growing segments of the foodservice industry. Its lead over the second largest chain suggested that the company may have already won the race for national supremacy by achieving great strides at the start, but no one could have predicted how frenetic the chase would become from 1995 afterwards. As it turned out, Bruegger's main rival in the race ahead would not be Manhattan Bagel but a company that was gearing up for expansion in 1995. At a presentation given by Finn in mid-1995, a group of foodservice operators, investment analysts, and bankers gathered to listen to the wisdom of the bagel industry's leading operator. In attendance was Scott Beck, chairman and CEO of Boston Chicken Inc., who was preparing to enter the fast-growing retail bagel market with a new chain of stores that were expected to debut under the Einstein Bros. banner. Beck's entry into the market, along with the competition presented by a host of other nationally oriented chains, greatly intensified the race for national dominance, creating what pundits referred to as the bagel wars. "It's not there yet, but the bagel wars will come," the operator of Big Apple Bagels said in a July 17, 1995 interview with Nation's Restaurant News. "It will be like the yogurt wars of the late 1980s and early 1990s," he added.

Company Perspectives:

Bruegger's Bagels are genuine, New York-style, water bagels. No fakes. No phonies. We make them the way they were meant to be baked. We start with the purest, highest quality ingredients: high protein, unbleached, wheat flour, fresh (never powdered) yeast, malt syrup, water and salt. Some other bagels have preservatives or oils added. Not Bruegger's Bagels. Some other bagel joints steam their bagels. Some freeze theirs for ease in transportation. Not Bruegger's. We make only authentic, old-fashioned, kettle boiled bagels in each one of our bagel bakeries every day in small batches all day long.

1996 Acquisition by Quality Dining

As the need to expand at a rapidly accelerated pace gripped every competitor with national ambitions, initial public offerings (IPOs) served as the quickest way to obtain the resources to pay for expansion. Within an 11-month period beginning in November 1995, four bagel chains completed IPOs, giving investors a chance to place their bets on the bagel wars. As its competitors turned to the public marketplace for their capital, Bruegger's took an alternative route to filling its expansion coffers. In the spring of 1996, Bruegger's announced it was being acquired by Quality Dining Inc. in a stock deal valued at $145 million. Based in Indiana, Quality Dining was formed in 1982, beginning as a franchisee of Burger King restaurants. Quality Dining began operating Bruegger's stores as a franchiser in 1994 and acquired rights to Chili's Bar and Grill, Grady's American Grill, and Spageddies Italian Kitchen restaurants in the years immediately preceding its deal with Brue and Dressell. The acquisition was completed in June 1996, when Quality Dining gained control over the Bruegger's chain, which operated 332 units at the time the transaction was completed. Finn stayed on as president and chief executive officer, stewarding Bruegger's fortunes as an independent subsidiary of Quality Dining. Brue and Dressell became substantial minority shareholders in Quality Dining, holding a 26 percent interest in the company.

The corporate marriage between Quality Dining and Bruegger's was an unmitigated disaster. Quality Dining expanded the chain rapidly, often paying too much for poorly located sites. Bruegger's franchisees began to revolt. Less than a year after the acquisition was completed, Brue and Dressell had had enough, announcing in March 1997 that they planned to pursue an auction of Quality Dining's various restaurant holdings. Quality Dining's stock, which traded at $34.35 per share when it acquired Bruegger's, plummeted following the acquisition, dropping to $7.25 per share by the spring of 1997, which meant Brue and Dressell's 26 percent stake in Quality Dining was worth far less than when they sold Bruegger's to the company.

As the Bruegger's chain's vitality wilted under the steward-ship of Quality Dining, the other competitors in the bagel segment advanced across the country, expanding at a rapid pace. By mid-1997, Boston Chicken's bagel chain, which earlier had acquired Noah's Bagels to become Einstein/Noah Bagel Corp., had passed Bruegger's to become the largest operator in the country. In the fall of 1997, the situation with Quality Dining was resolved, with Brue and Dressell emerging as the successful high bidders for the bagel business they had created. The founders acquired Bruegger's in a deal valued at $45 million. Finn resigned shortly before Quality Dining announced the divestiture, leaving to join a Minnesota-based, quick-service Chinese food chain named Leeann Chin.

In the wake of the Quality Dining debacle, Brue and Dressell attempted to salvage what they could of the chain's former success and begin anew. The late 1990s were years of retrenchment for the founders, as they exited unprofitable markets and shuttered ailing stores. When Bruegger's was acquired from Quality Dining in the fall of 1997, there were more than 475 stores scattered throughout nearly 30 states. Before Brue and Dressell could entertain the idea of embarking on any expansion drive of significance, they needed to give Bruegger's a strong foundation again.

Recovery in the 21st Century

As Bruegger's entered the 21st century, its escape from the wild excitement of the 1990s was cause for some celebration. The company had suffered from the fast-paced expansion that pervaded the retail bagel segment, to be sure, but it had escaped. Some of its competitors had not escaped, such as Einstein/Noah Bagel Corp., which filed for bankruptcy in April 2000. By the beginning of the 21st century, Bruegger's was ready to grow again, having trimmed its store count to 275 units, primarily by shuttering franchised units. Geographically, the company narrowed its scope as well, pulling out of many unprofitable markets across the country and abandoning cities in Texas, Colorado, and the Pacific Northwest.

Despite hopes for expansion, the Bruegger's chain contracted during the early years of its third decade in operation. The company's store count dropped to 250 units as it contested with recessive economic conditions and its hangover from the bagel wars. Renewed hope for growth arrived in early 2004, however, when the company gained a benefactor. In January 2004, Boca Raton, Florida-based Sun Capital Partners Inc. bought Bruegger's from Brue and Dressell for an undisclosed price. Sun Capital specialized in leveraged buyouts of leading, yet struggling companies of all types. Under Sun Capital's management team, led by Jim Greco, the promise of expansion returned. "We think it was a business that needed some attention," Greco said in an April 1, 2004 interview with the Burlington Free Press. "For a number of years," he added, "it was constrained because of its access to capital."

As Bruegger's prepared for its future, the intervention of Sun Capital appeared to be a positive development for the chain. Greco and his team planned to open 100 units by 2006. New menu items were added to the chain's offering, including salads, muffins, and scones—additions meant to position Bruegger's in the fast-casual segment of the dining industry. Typically, once Sun Capital was able to restore luster to an acquired business, it sold the company or spun it off in an IPO within three to five years. Accordingly, there was a good chance Bruegger's would be on its own again by the end of the decade. In the interim, company executives were looking forward to reaping the rewards of the chain's affiliation with Sun Capital. "We're very excited about the prospect of the months and years ahead," Bruegger's vice-president of marketing said in an April 1, 2004 interview with Burlington Free Press. "What happened [with the changes enacted by Sun Capital] is really the starting point of the rebirth of Bruegger's in many ways."