Cosi, Inc.

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Cosi, Inc.

242 West 36th Street, 11th Floor
New York, New York 10018
U.S.A.
Telephone: (212) 653-1600
Fax: (212) 653-1666
Web site: http://www.getcosi.com

Public Company
Incorporated: 1999 as Xando Cosi, Inc.
Employees: 1,902
Sales: $70.24 million
Stock Exchanges: NASDAQ
Ticker Symbol: COSI
NAIC: 722110 Full-Service Restaurants

Cosi, Inc. operates more than 80 casual restaurants under the “Cosi” and “Cosi Downtown” banners. Cosi’s restaurants are all-day cafes featuring coffee drinks, exotic sandwiches, and alcohol. The restaurants change menus, service, music, and lighting throughout the day, transforming at five points during the day: breakfast, lunch, afternoon coffee, dinner, and dessert. At 5:00 p.m., the chain begins offering alcohol and table service. The company’s restaurants are located in 11 states and the District of Columbia.

Origins

The 21st-century version of Cosi was created by the combination of two business concepts. In 1999, Cosi Sandwich Bar, Inc. and Xando Incorporated merged, uniting two companies that “served a similar customer, but focused on different parts of the day,” according to the Cosi corporate web site. Of the two companies, Xando Inc. was founded first, formed in October 1994 by three childhood friends. Cosi Sandwich Bar was founded roughly 18 months later, when two brothers opened their first store in February 1996. Xando Inc. began operating in Hartford, Connecticut. Cosi Sandwich Bar got its start in New York City. The corporate marriage of the two concerns created one of the most talked about concepts in the restaurant industry.

The inspiration for Xando came from a film. When Andy Stenzler was 25 years old, he and longtime friends Nick Marsh and David Kaufman went to see Reality Bites, a film featuring a cast in their 20s who spent much of their time hanging out in coffee bars and night clubs. In an October 2000 interview with Sales & Marketing Management, Stenzler explained the inspiration triggered by watching Reality Bites. “We were in the movie and it kind of snapped,” he said. “We realized it was right under our nose—that the same place that we might enjoy getting coffee at in the morning was not a place where we wanted to be in the evenings. And the original concept was born: to transform from day to night.” The three friends walked out of the movie with a business plan, aiming to create an establishment that catered to both daytime and nighttime crowds.

Stenzler, by his own admission, knew virtually nothing about the food business when the inspiration for Xando struck him, but he was pursuing his M.B.A. degree at New York University at the time. The day after he graduated from New York University, Stenzler quit his day job as a sales engineer and moved to Hartford, Connecticut, the location chosen for the first Xando unit. Hartford was chosen because the community had yet to be added to the ever-expanding network of stores operated by Starbuck’s, the national coffee shop chain. Hartford, according to Stenzler, also possessed the proper mix of day-and-night business, offering a viable proving ground for his coffeehouse/bar concept. Stenzler and his two friends borrowed money from friends and charged their credit cards to the limit to raise the $400,000 in start-up capital they needed to open the first unit. In October 1994, Stenzler and his friends unveiled their concept, which at first was called ZuZu. The name of the restaurant concept soon was changed to Xando Coffee & Bar, the name derived from the hugs-and-kisses symbol “X” and “O.” The concept proved to be an instant success, drawing a flood of customers and earning distinction as the Innovative Concept of the Year by the Connecticut Restaurant Association.

The first Xando, like the other stores that followed, morphed at selected periods during the day. The stores observed a daily schedule defined by what the company referred to as “dayparts.” There were five dayparts in each day, the segue from one period to another marked by a change in menu, a change in lighting, and a change in music. At 5:00 p.m., the stores began selling alcohol and began providing table service. The stores were open from 6:00 a.m. to 2:00 a.m., attracting customers 20 hours a day, a unique characteristic that turned Xando units into revenue-generating machines. The success of the first Hartford unit spurred Stenzler to open additional Xando units. A small chain was fashioned, offering an eclectic selection of coffee drinks, ranging from raspberry café au lait and caramel arctic mocha in the morning to alcoholic coffee beverages in the evening, when signature drinks such as Frangelicreamuccino and Chai Lullaby complemented the traditional offerings of a standard full bar.

As Stenzler was beginning to expand his novel Xando concept, brothers Jay and Shep Wainwright were making their debut in the restaurant industry to the south. The Wainwrights invested their futures in a concept reportedly popular in Paris, one that featured Pizza Romano—described as “crackly crust” flat bread—and exotic sandwiches. In February 1996, the brothers opened the first Cosi Sandwich Bar in New York City, establishing the unit on 52nd Street off Third Avenue. From the start, the Wainwrights focused on providing fast-service gourmet sandwiches, developing an in-store bakery that baked the store’s bread. Like Stenzler, the Wainwrights enjoyed success from the start, prompting them to open additional units. As the brothers expanded, equipping each Cosi Sandwich Bar with its own bakery, they focused on bustling business districts in major metropolitan areas such as Washington, D.C., Boston, and Philadelphia.

1999 Merger

In 1999, the two award-winning concepts merged. (In 1998, Cosi Sandwich Bar was selected as a “Hot Concepts!” winner by Nation’s Restaurant News). The merger resulted from a friendship formed among the principal partners of each concept. For several years before the merger, the Wainwrights had met with Stenzler and Marsh to discuss how they were dealing with particular business matters, sharing ideas related to training, operations, finance, and marketing. From these meetings, the idea of merging the two companies emerged. In an October 4, 1999 interview with Nation’s Restaurant News, Jay Wainwright explained: “How the merger came about is, basically, in the last two months Andy [Stenzler] and I started talking about what it would be like if we put these two companies together, and every step of the way, the companies fit perfectly.”

Before committing themselves to a merger, the two companies experimented with the idea. In Manhattan, they opened a Xando and a Cosi next to each other, providing a shared eating space for the two concepts. The test marriage convinced all involved to push ahead with the corporate union. By September 1999, the two companies had agreed to merge, a proposal that promised to unite the 22-unit Xando concept with the 18-unit Cosi concept. At this point, Xando’s units were located in Connecticut, Pennsylvania, New York, Virginia, Maryland, Washington, D.C., and Florida. Cosi’s 18 upscale sandwich venues were located in Manhattan, Boston, Philadelphia, and Washington, D.C. The merger, completed in October 1999, created Xando Cosi, Inc., a company based in New York with Stenzler and Jay Wainwright serving as co-chief executive officers and co-chairmen. Shep Wainwright was appointed chief development officer, and Marsh and Kaufman were selected as president and chief operating officer, respectively.

Looking ahead to their new future together, the partners were optimistic about future growth. In addition to revamping the existing 40 units to the co-branded format, Stenzler and Wainwright announced that they would open 20 new units in 2000. The new stores were expected to range between 3,000 square feet and 5,000 square feet, slightly larger than the 2,500 square feet averaged by Xando and Cosi units. Revenues for 2000 were expected to reach $50 million. The company’s marketing manager, Rammy Harwood, typified the buoyant mood prevalent at the time of the merger, expressing his feelings in a November 19, 1999 interview with the Washington Business Journal. “We’re going to dazzle you,” he said. “It’s going to be like the universal living room.”

One year after the merger was completed, executives at Xando Cosi had numerous reasons to celebrate. In September 2000, the company entered the Midwest market for the first time, establishing a restaurant in Chicago. Stenzler had received more than $60 million in funding to expand the chain, building on the 18 units opened in 2000. Penetration into Minneapolis and Detroit was expected soon, part of the company’s plan to open 26 units in 2001 and reach a total of 198 units by 2003. Based on his expansion plans for 2001, Stenzler expected to generate $100 million in revenue in 2001, double the total collected in 2000. Once the company reached such stature, according to Stenzler, Xando Cosi would be ready to complete its initial public offering (IPO) of stock.

By the beginning of 2001, Xando Cosi operated a chain of 52 stores, with 20 of the units located in New York. Expansion plans were becoming increasingly ambitious. Stenzler was looking to transform the business into a national chain. As part of his plan to go national, Stenzler announced in February 2001 that the company would drop the word Xando from its corporate title and from the name of its stores. In the future, the company’s stores would operate as Cosi, but retain the sun-and-moon logo formerly used by Xando. In a February 27, 2001 interview with the New York Post, Stenzler explained the company’s new unified approach. “Here it is, a year and a half later, we’ve emerged as one company with one brand name, with one concept, with really one goal: To build a national brand known for excellence in bread and coffee throughout the day.” In the months ahead, company units that enjoyed less traffic were to be sub-branded as “Cosi Downtown,” restaurants that would not offer evening table service or alcohol.

Company Perspectives:

Cosi. There’s a lot of symbolism and a lot of meaning in this name. Cosi—for comfortable, friendly, & cozy! Funny how perfectly it all fits. But Cosi isn’t just a name or place. It’s an experience. We’re not simply a coffee house. Nor are we just a sandwich bar. To call us a bar would be to overlook our warm and inclusive atmosphere. We’re all of these things and much, much more. We’re as comfortable opening your eyes in the morning with a double espresso as we are sealing a great night with a Mocha Kiss.

When Stenzler announced his plan to expand nationally, he also revealed more specific plans regarding the company’s IPO. The IPO was scheduled for either March or April 2002, at which point the company would gain a sizable amount of capital to fuel its ambitious expansion plans. Stenzler perceived great benefits to be gained from Cosi’s IPO, as the company elevated itself from the realm of private placements to the world of public financing. “Our investors believe we’re building a national lifestyle, a major national brand like Starbucks, McDonalds, or The Gap,” he explained in a February 27, 2001 interview with the New York Post.

Red Ink and a 2002 IPO

The company failed to reach its goal of $100 million in sales in 2001, but the shortfall was far from its most pernicious weakness. The company generated $70 million in 2001, representing a nearly ninefold increase from the total recorded five years earlier. The company’s operating costs, however, had increased at a more profligate rate, increasing at a 10 percent faster pace. Behind the accolades for innovation and behind the impressive physical expansion stood crippling financial losses, which was part of the reason April 2002 passed without the debut of Cosi on the stock market. In 1999, the company posted a net loss of $34.5 million. In 2000, the company posted a net loss of $23.2 million. In 2001, the company posted a net loss of $35.4 million. Stenzler’s plans for an IPO stalled as the losses mounted, causing substantial alarm among management and potential investors alike.

Cosi’s ability to reverse the trend of massive financial losses remained in doubt as it prepared for the future. The company was able to complete its IPO, however, making its debut on the NASDAQ Exchange in November 2002. The company raised $38.9 million from the offering, pricing its offering at $7 per share, below initial estimates that ranged between $8 per share and $10 per share. On the heels of its IPO, the company announced that it would strengthen its presence in Chicago and Columbus, Ohio. The company’s hopes of becoming a national chain had yet to materialize, however. As it prepared for 2003 and the years beyond, the company’s financial losses represented a serious concern.