New World Order
Ramin Kamfar sets sights for No. 1 spot in bagels.

By Deborah Silver, Senior Editor

New World Coffee-Manhattan Bagel Inc. makes no small plans. The company’s goal is nothing less than to establish a coast-to-coast empire of bagel-and-coffee shops.

“We expect to be the industry leader,” says Ramin Kamfar, New World’s chairman and chief executive officer. “We envision 1,000-plus stores and people lined up across the United States for bagels—an entire country seeking to satisfy their bagel craving.”

Ambitious, definitely. Attainable, possibly. The 35-year-old Kamfar prides himself on achieving his objectives and in this case he has a clear and simple plan: acquire existing bagel chains, no matter the region or size, and ultimately consolidate those various and sorted operations under one name, most likely Manhattan Bagel.

Eatontown, N.J.-based New World is doing more than paying lip service to this aggressive agenda. It is already well into its campaign to dominate the bagel-chain restaurant segment.

New World, which started in 1993 as a Manhattan-based coffee chain, acquired its bean supplier, Willoughby’s Coffee & Tea of New Haven, Conn., three years later. That was followed by the purchase of Manhattan Bagel Co. of Eatontown, N.J., in 1998 (and a corporate name change) and Chesapeake Bagel Bakery, then based in Atlanta, in 1999. New World has an agreement to purchase New York Bagel Enterprises Inc. of Stillwater, Okla., and its subsidiary Lots A’ Bagels. More acquisitions in the bagel-and-coffee restaurant segment are being considered.

By industry standards, the company’s growth has been impressive. Revenues for the 12-month period ending in December more than doubled to $39 million from $17.3 million in 1998, and industry analysts predict a 26% jump in revenues this year. After the acquisition of Chesapeake, New World vaulted to the No. 2 spot in total bagel sales, behind industry leader, Einstein/Noah Bagel Corp. of Golden, Colo. New World boasts 375 stores in 26 states and Washington, D.C., all but 13 of them franchise shops.

“This clearly is an operation with a no-holds-barred agenda,” says Andrew Barish, senior restaurant analyst with Robertson Stephens in San Francisco. Whether that agenda will put New World in the No. 1 spot it aspires to is still in question, but the company has a number of factors in its favor.

New World units are primarily franchise operations, a low-risk approach to the chain-restaurant business that requires relatively minor outlays of corporate capital. In addition, it manufactures its bagels and cream cheese in two company-owned facilities—one in New Jersey, the other in California—and produces coffee in its Connecticut plant. It also runs the distribution operation, which supplies products to all New World brands except Chesapeake. Bagels are made on the premises of each Chesapeake location.

However, Michael Ryan, New World’s vice president of franchise services, says that “over time we expect those franchisees to convert to our manufacturing facilities.” In the event that New World needs to increase manufacturing capacity, it owns a third bagel and cream cheese plant, now mothballed in South Carolina.

The advantages of manufacturing its products are twofold. It allows New World to leverage these manufacturing operations as it adds bagel chains. It also gives the company the capability to produce and sell its products through institutional, wholesale and retail channels.

New World franchisees also benefit, since the need to hire staff to make bagels and run a combination retail-manufacturing operation is eliminated. And because New World flash freezes its dough before sending it to stores, where it is thawed and baked, franchises are still able to advertise a fresh-baked product.

By contrast, Einstein/Noah Bagel owns its stores, creating a capital- intensive infrastructure, and has little manufacturing capability, eliminating opportunities for vertical integration and limiting economies of scale. It also must contract out the majority of dough manufacturing. Franchisees of Big Apple Bagels of Chicago, on the other hand, make their bagels in house; while Bruegger’s Corp. of Burlington, Vt., requires franchisees to operate their own dough-manufacturing commissaries, one for every 10 stores.

OUT TO LUNCH

But those other bagel operations offer something New World only recently introduced in its Manhattan Bagel stores: lunch. In the bagel-chain business, lunch makes all the difference.

“One of the difficulties of the bagel is getting people to see it as a lunchtime item, but that’s an absolute necessity today,” says analyst Barish. “There’s just not enough breakfast business and there’s too much competition for the morning meal from other quick-service operations.”

New World is putting most of its energy into playing catch-up to capture the lunch crowd. It recently entered an agreement with a food company to jointly develop the Bagel, Wrap & Roll sandwich program.

Other new sandwich programs have been introduced, including Big City Meals (sandwich, chips and beverage) and Freedom from Boring Lunches! specialty sandwiches. “”We view our competition as the entire QSR industry,” says Sanford Nacht, president and chief operating officer of New World. The company also recently developed a prototype for the Manhattan Bagel store, dividing space into departments that clearly indicate to customers the restaurant serves more than bagels. There will, of course, be a large bagel display, as well as a sandwich station, a more prominent coffee display, a soup station during cold weather and a freezer area.

New World is also attempting to increase revenue through cross selling and wholesale distribution. Only 8% of revenues from Manhattan Bagel stores historically have come from coffee sales, compared to as much as 25% for its competitors. To increase coffee revenues, all Manhattan Bagel units now sell a special New World Coffee blend at a premium price. That product alone is expected to add $2 million in revenue this year. The company also is looking into transferring its coffee and Manhattan Bagel brand into other retail stores, as Starbucks Coffee has done.

In addition, the company will put more emphasis on its wholesale business. Last year New World began an ambitious marketing effort to sell its bagel dough, partially and fully baked bagels, and specialty breakfast bagels to convenience-store chains, groceries, colleges, hospitals and airports. Sales to supermarkets alone are expected to comprise more than 5% of revenues this year and 10% in 2001.

While Kamfar has no intention of competing head-on with coffee-specialty chains, he says he would not be averse to acquiring a coffee operation. But even such an acquisition would be in the service of establishing a national bagel chain.

BEYOND CAFE SOCIETY

Not bad for a company that started out in Manhattan’s Greenwich Village as a one-shop operation, designed to replicate the European cafes Kamfar remembered from his youth. The restaurant featured coffees from Africa, South America and Indonesia, pastries for breakfast and panini sandwiches for lunch. By 1996, there were 27 company-owned New World stores in the city’s metropolitan area. But Kamfar saw more nationwide appeal in bagels and set his sights on repositioning the business.

The acquisition of Willoughby’s gave the company the roasting plant needed to produce coffee, but it wasn’t until the purchase of Manhattan Bagel, which had filed for bankruptcy in 1997, that New World gained the foothold it needed to compete with the big bagel chains. Along with Manhattan Bagel’s stores, New World acquired the company’s manufacturing facilities and “Bagel University” school for managers.

Many industry analysts, however, are skeptical of just how significant those opportunities are and how lucrative any bagel chain can ultimately expect to be. “The problem is no one is clear if it’s a product or a concept, which leads to the question, can the bagel survive on its own?” says Barish. “I’m just not sure there’s a real need for a national brand.”

But there is agreement on one issue: The bagel chain segment is ripe for a swift and massive consolidation, and New World may be just the operator to do it. It is consistently profitable, has the manufacturing capacity and focuses on the positive cash-flow business of franchising. “Purchase of the stores owned by any of the three other largest chains [Einstein/Noah Bagel, Bruegger’s and Big Apple Bagels] would catapult New World into the lead position,” says Allan Hickok, senior research analyst with US Bancorp Piper Jaffray in Minneapolis.

“And from that position they could definitely build a good, solid business if they focus on high-margin, high-frequency items. And that doesn’t mean bagels.”