New World Restaurant Group includes Einstein Bros Bagels, Noah’s Bagels, Chesapeake Bagel Bakery, Manhattan Bagel, and New World Coffee. It operates 432 company-owned stores, 117 franchises, and 72 licensed locations in 36 states.
In its most recent quarterly report, released in May, the company noted its sixth consecutive quarter of comparable store sales growth. New World brought in $389 million in revenue in 2005. It would seem that the company’s focus on moving into the fast-casual segment is paying off. But is it?
New World’s transformation into a fast-casual operation began with the introduction of non-bagel options in 1998. The chewiness that makes a bagel so popular at breakfast was a turnoff at lunch, a daypart New World desperately needed to conquer. At Einstein’s, hand-tossed salads and paninis began bringing in the lunch crowd in 2003. Next was a fresh-baked bread program at Noah’s—again designed to bring in lunch dollars.
How well has the transformation worked? New World estimates it’s largest brand, Einstein’s, has gone from 80 percent breakfast/20 lunch to 60 percent lunch/40 breakfast in just three years. Nonetheless, “Breakfast is still a major part of our business,’’ says New World COO Dan Dominguez.
Still, the successful transition to fast-casual lunch spot is critical to the company’s survival. New World’s roots are in coffee cafes. In 1998, it purchased Manhattan Bagel. In 2001, it purchased the assets of the Einstein/Noah’s brand out of bankruptcy. That purchase and integration didn’t go smoothly. In 2002, the company was delisted from the OTC Bulletin Board for failure to file its 10-K in a timely fashion. It had to re-audit its 2000 and 2001 books and went through management changes. In 2002, it reported a $40.5 million loss. More money was lost in 2003 before New World began turning the corner in 2004 thanks in part to a rollout of expanded menus.
Making the switch to quick casual was absolutely key for New World, say restaurant analysts. “It is hard to build unit economics when you are focused on one daypart,’’ explains Dennis Lombardi, executive vice president of food service strategies, with W.D. Partners. To do so is especially difficult when that daypart is breakfast. A breakfast check is typically $3, compared to a lunch check of $7, Lombardi estimates.
But making the change hasn’t been easy for New World. It takes time say analysts, for eaters to make the mental transition that a favored breakfast spot can also be a lunch option. “You need to get in that consumer’s mental phone book,’’ says Lombardi who notes the process can be time consuming. “Five years ago I wouldn’t have known that Einstein’s served sandwiches, now I do.’’
Dominguez acknowledges the transition hasn’t been simple. “There is a stigma attached to a concept with bagels. We’ve really survived the five-year transition.’’
However, segment watcher Darren Tristano of Technomic cautions that it might be too early to claim total victory. “They’ve had some success, but the challenge is to see if it can be more like Panera which is the leader in that bakery/café space,’’ Tristano says.
One way New World is trying to move in that direction is to give its Manhattan Bagel franchises the quick-casual makeover that Einstein’s has undergone—or at least the option. Manhattan Bagel is predominately an East Coast operation and almost exclusively franchised. Franchisees can now offer expanded lunch offering with options like sandwiches on Asiago and cheddar rolls and tortilla wraps. New World is also experimenting with a breakfast sandwich to enhance morning business. Meanwhile, a new Manhattan Bagel prototype featuring low lights and cushier seating opened in Red Bank, New Jersey, in 2006.
With a migration to better mix of lunch and breakfast, the average check size should increase at Manhattan if Einstein’s 2005 first quarter results are any indication. Check size went up 6.3 percent, partially offset by a .1 percent decrease in transactions.
Going forward, New World has two goals: Make sure it has 10–12 stores in every market to optimize advertising dollars and to emphasize hospitality. “We want to have speed of service, but we want to do it in a friendly, comfortable way,’’ Dominguez says.