Schlotzsky’s, Inc.

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Schlotzsky’s, Inc.

203 Colorado Street
Austin, Texas 78701-3922
U.S.A.
Telephone: (512) 236-3600
Toll Free: (800) 846-BUNS; (800) 846-2867
Fax: (512) 236-3601
Web site: http://www.schlotzskys.com

Public Company
Founded: 1971
Employees: 240
Sales: $47.9 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: BUNZ
NAIC: 722211 Limited-Service Restaurants; 311919 Other Snack Food Manufacturing

John C. Wooley, chairman and CEO of the Austin, Texas-based Schlotzsky’s, Inc., once stated, “If your name is Schlotzsky’s, you can’t take yourself too seriously.” The award-winning company’s trademarked slogan proclaims “Funny Name, Serious Sandwich,” yet systemwide sales (corporate plus franchisee sales) of over $400 million for 1999 are no joke. Schlotzsky’s is serving up serious competition for sandwich shops such as Subway, Blimpie, and Quizno’s by opening an average of 100 new stores for four years in a row. With over two dozen sandwiches and pizzas, salads, soups, and desserts, Schlotzsky’s has something for everyone—and to make sure potential new customers know their unusual name, the upscale deli ended the millennium by launching its first major network television ad campaign. With hundreds of restaurants in 38 states and 13 countries (including Argentina, Australia, Bahrain, Canada, China, Japan, Morocco, Turkey, and Venezuela), Schlotzsky’s is nibbling its way to the top of the food chain.

“Just One Sandwich … It’s That Good!”: 1970s

When bell bottoms were in (the first time) and not just hippies had long hair, a tiny sandwich shop in Austin, Texas, was opened by local entrepreneur Don Dissman. He sold only one kind of sandwich, and came up with a slogan touting just how delicious his creation was: “Just one sandwich … it’s that good.” Austin residents evidently agreed; Dissman’s eight-inch round sandwich, served warm, consisted of ham, two kinds of salami, and three cheeses (melted cheddar, mozzarella, and parmesan). Yet the finishing touches of shredded lettuce, tomato, onion, marinated black olives, garlic, and spices made a Schlotzsky’s sandwich the talk of the town. The foundation of the sandwich though was its lightly toasted sourdough bun, baked fresh daily from a “secret” recipe. The sandwich soon had a following in Austin and word spread throughout Texas.

Over the next few years, Schlotzsky’s grew modestly by about ten percent a year. Dissman began considering expansion plans, and looked into franchising. By 1977 Dissman sold his first franchise, and a new Schlotzsky’s opened in the college mecca of Bryan/College Station, home of Texas A & M University. Additional franchises soon popped up outside of Texas, in four neigh-boring states, and demand continued to grow. Nine years after opening the first Schlotzsky’s, as the decade came to a close, Dissman expanded his menu by introducing a six-inch sandwich for lighter appetites, in addition to the original eight-inch classic.

Food for Thought: 1980s

The dawn of the 1980s brought major change: not only did customers continue to rave about Schlotzsky’s both in and out of Texas, but by 1981 the chain had entered 13 states and garnered systemwide sales of almost $20 million annually. This year also saw the exit of Dissman, who sold the chain to a group that included John C. Wooley and Gary Bradley. When Wooley and Bradley parted ways the following year and divvied up their business assets, Wooley (along with his brother Jeff) kept the Schlotzsky’s interest. The Wooley brothers found the economy slipping and needed to make changes to not only keep Schlotzsky’s afloat, but to bolster their bottom line.

Throughout the remainder of the 1980s changes were slowly put into place, despite opposition from the franchisees who had been content to make the same six- and eight-inch sandwiches for over ten years. Yet the Wooley s (with John as CEO and Jeff as a senior vice-president) persevered and in collaboration with the Pillsbury Company came up with a standardized (though still secret) preservative-free bun mix. The brothers also addressed the element of time—Schlotzsky’s signature sandwiches were madeto-order, which took time and required patience from customers. Then a new sandwich heating system, called the Marshall Air Conveyor, cut cooking time in half. Increased speed in the kitchen meant faster turnaround and happier customers; happier customers became repeat customers.

Further changes came in 1982 with the debut of the wheat bun, a redesigned logo, and overhauling the restaurant chain’s sign. This same year, the first annual Bun Run Race was started in Austin to benefit local charities and improve the community. The idea was welcomed and spread to cities nationwide. Later the Coca-Cola Corporation joined up as co-sponsor of the event, which was rechristened “Run Your Buns Off.” The next year, 1983, brought two new Schlotzsky’s sandwich selections (roast beef and turkey), followed by the steam-injected baking oven which led to a “two-pass” cheese-melting system in 1986. An-other new sandwich, the Philly Cheesesteak, was added in 1987, and the first international restaurant opened in Canada in 1988.

From Sandwich Shop to Upscale Deli: 1990–98

In the early 1990s CEO John Wooley broke the age-old adage “If it ain’t broke, don’t fix it,” by tinkering with Schlotzsky’s modestly thriving empire. Both Wooley brothers believed Schlotzsky’s had far greater potential than they or their franchisees had tapped, and were convinced the chain could be an international powerhouse. First, Austin restaurant consultant and chef Mike Dyer was hired to spice up Schlotzsky’s menu from its six core sandwiches. He added new bread and sandwich varieties, then brought pizzas, soups, salads, and desserts to the menu. John Wooley had decided to offer the latest menu items only at new stores, letting existing franchises determine if and when to adopt the expanded menu (within a year all had come on board). Next came a plan to revise the chain’s made-up name (Dissman had liked the old-world charm of the imaginary moniker) since most people did not know what a “Schlotzsky’s” was—a Nevada man had once guessed it was a Polish plumbing supply business. The problem was solved by simply adding “Deli” to the name, which took away the guesswork and potential confusion. Then the Schlotzsky’s name was parlayed into proprietary brands, beginning with deli-style potato chips, which were soon available in all of the chain’s 234 stores by 1992.

By 1994 Schlotzsky’s systemwide sales approached $100 million with 353 restaurants in North America, and the following year the first international deli stores opened in Japan and Argentina, bringing the total to 463 locations worldwide. At this time the new 2,100-square-foot prototype debuted, as Wooley moved away from strip malls and into stand-alone locations. The newer stores were an immediate hit with weekly sales climbing to $15,000, nearly double those of the existing stores. In mid-December 1995 Schlotzsky’s went public, offering shares at $11 each on the NASDAQ under the ticker symbol BUNZ (a second offering raised $29 million two years later). Year-end systemwide sales reached $143 million in 1995, then catapulted to $202 million by the following year with 573 restaurants in North America and beyond.

Within a few years Wooley took his new vision further, by redesigning even larger freestanding locations from 2,700 to 3,200 square feet, with a seating capacity of 70 to 85 patrons. The outside and interiors of all Schlotzsky’s outlets were redone, so both old and new stores had a brick facade with green and white awnings on the outside, and warm, inviting wooden furniture and deli cases on the inside. The new decor was hip, fresh, and casual; Schlotzsky’s Deli had become a delicious departure from traditional fast food with a menu suitable for the whole family.

The company helped new franchisees build the updated prototypes (with a price tag of more than $1 million each) with interim financing until the concept had proven itself. New stores were, indeed, wildly successful, with weekly sales averaging double that of their existing counterparts. The new design, along with drive-throughs at some units, brought Schlotzsky’s increased exposure and skyrocketing sales: while most older outlets had weekly sales in the $10,000 range, newer Schlotzsky’s Deli restaurants had brought in weekly sales from $25,000 to $61,000 a week. Technomic, a Chicago-based restaurant industry research firm, named Schlotzsky’s as the fastest growing sandwich chain in the United States, with an average of 100 new units yearly between 1995 and 1998. Additionally in 1998, Schlotzsky’s became the 37th restaurant chain in U.S. history to have surpassed the 700-unit mark (750 total) with year-end systemwide sales topping $349 million.

Company Perspectives

We are dedicated to serving our customers great-tasting food, freshly prepared from the finest ingredients and at reasonable prices. We strive to give quick friendly service in a pleasant and inviting atmosphere. Our world famous sourdough buns are baked from scratch, fresh every day in every restaurant.

Schlotzsky’s Kind of “Counter Culture”: 1999 and Beyond

In early 1999 Schlotzsky’s line of proprietary products had grown from potato chips to more than 100 items (called Schlotzsky’s Premium Provisions) and the company inked several agreements with grocery chains. The first retail deal, with Wal-Mart, sold Schlotzsky’s potato chips in 480 stores in the central United States. Wal-Mart eventually expanded its agreement to 2,500 of its stores nationwide, and soon other grocers including Brookshire’s and Costco signed up as well. While brand sale royalties were not a major priority in Schlotzsky’s expansion plans, with four million bags of chips sold in a matter of months, the sales did add up. “We might stand to make a little bit of money off this, but it mostly works as a form of advertising,” John Wooley told Andy Battaglia of Nation’s Restaurant News in October 1999. Further, Wooley explained, “If we make a sliver of profit, that’s great. But if we can get stores to stock our products all over the Northeast … people will know our name.”

By spring came another expansion push, and Schlotzsky’s became one of less than 15 restaurant chains to appear in nation-wide prime-time television advertising. The company debuted its first national advertising campaign during top-rated favorites such as Dateline, ER, Frasier, Law & Order, West Wing, Will & Grace, Who Wants to Be A Millionaire?, and the Today Show. The $14 million media blitz was funded by franchisees and company-owned stores and was credited with raising brand awareness and propelling weekly sales by as much as 37 percent in noncore markets such as Washington, D.C., and 20 percent in Fresno, California. Systemwide sales had risen 17 percent to $400 million for the year, and Schlotzsky’s was booming. The chain was named, for the sixth time, to Entrepreneur magazine’s annual “Franchise 500” as one of the top franchising opportuni-ties in the sandwich, soup, and salad category.

By 2000 the annual Austin Bun Run race, in its 18th year, had become one of the largest five-kilometer races in the South-west, attracting 4,000 runners. The other Bun Runs, sprinkled throughout the country, were also thriving and information about upcoming races, finishing times, and running health and fitness in general were available at several Internet sites. Local and national advertising, proprietary brands, giving back to the community, and old-fashioned goodness had brought Schlotzsky’s Deli to the upper tiers of its industry. Ranked as the number four sandwich chain in the country (behind Subway, Arby’s, and Blimpie), Schlotzsky’s was unique among its competitors. Though they were all lumped into the “sandwich” category, (as in no burgers or fried chicken), Schlotzsky’s was completely different from Arby’s mostly roast beef fare, and its sandwiches were not like the submarines sold by Subway and Blimpie. In a nearly $7 billion market that continued to grow from year to year, there seemed to be ample room for Schlotzsky’s unique victuals.

John Wooley believed Schlotzsky’s annual sales would be in the $500 million range by 2001 and up to $1 billion by 2006. An estimated 50 new restaurants were slated to open during each of the next two years, then climb to more than 100 units annually again. The only major hurdle in Schlotzsky’s future was its stock performance, which had fluctuated from a high of $23 in the first quarter of 1998 to a low of $6 per share in the fourth quarter of 1999. Many investors had sold off Schlotzsky’s and other restaurant stocks in favor of hot technology companies. In addition, accounting problems forced the company to restate 1997 earnings and, in 1999, Securities and Exchange Commission accounting charges nearly wiped out profits. Yet some analysts regarded Schlotzsky’s stock as an excellent bargain, feeling the company was poised for a upswing. With steadily climbing sales and brand recognition, despite accounting peccadillos, Schlotzsky’s was in good shape to lead the sandwich industry’s bun race in the coming years.

Principal Subsidiaries

Schlotzsky’s Real Estate, Inc.; Schlotzsky’s Restaurants, Inc.; Schlotzsky’s Brand Product, L.P.; Schlotzsky’s Brands I, L.L.C.; Schlotzsky’s Brands, Inc.; Schlotzsky’s Equipment Corporation; DFW Restaurant Transfer Corp.; 56th and 6th, Inc.; N.A.M.F., Inc., RAD Acquisition Corp.; SREI Turnkey Development, L.L.C.

Principal Competitors

Arby’s Inc.; Blimpie International, Inc.; Subway.

Key Dates

1971:: Don Dissman opens first Schlotzsky’s restaurant in Austin, Texas.
1977:: First franchised Schlotzsky’s opens in Bryan/College Station, Texas.
1981:: Brothers John and Jeff Wooley acquire Schlotzsky’s.
1988:: First Schlotzsky’s outside the United States opens in Canada.
1991:: Deli concept is introduced; store name changes to Schlotzsky’s Deli.
1992:: Deli Style Potato Chips are launched as first privately branded product.
1995:: Company completes its IPO on the NASDAQ, under ticker symbol BUNZ.
1996:: Company celebrates its 25th anniversary with 573 restaurants.
1999:: Systemwide sales (including franchisee sales) hit $400 million and 759th store is opened.