Cornering the Market
Il Fornaio’s acquisition of Corner Bakery could mean the fast-casual concept is on the rise.

By David Farkas

Il Fornaio, which means “the baker” in Italian, is putting its CEO’s expertise to the test. But baking skills aren’t required. Instead Chairman and CEO Mike Hislop will have to find a way to uncork the growth potential of Corner Bakery Cafe, which 27-unit Il Fornaio and its largest shareholder, Bruckman, Rosser, Sherrill & Co., acquired from Brinker International in February for $72.5 million, according to documents filed with the Securities and Exchange Commission.

Since 2003, when the limited-service chain grew by 13 units, Corner Bakery has added just 11 units and will only open six to eight this year. By contrast, bakery-cafe leader Panera Bread Co. swelled by 139 units in ‘05 and expects to open 136 in ‘06.

Hislop, however, believes he has the answer: franchisees and an experienced management team that includes COO Jim Vinz, Vice President of Food and Beverage Ric Scicchitano and Vice President of Human Resources Denise Clemens. Vinz and Clemens have been with the concept since Dallas-based Brinker acquired it in 1996; Scicchitano, a culinary-school-trained chef and certified baker, was part of the founding team at Chicago-based Lettuce Entertain You Enterprises. “We’re just going to continue with the [sites] pipeline and the people,” Hislop says.

In February, Corner Bakery named P.J. Evans, an experienced franchise executive who once worked for Panera, as vice president of franchising. Hislop expects the first franchise units to open in ’07, but no agreements have been signed. Although the company hasn’t decided on franchise territories, it’s likely Corner Bakery’s smaller markets—Atlanta, Houston, Denver—could be offered to franchisees. For one thing, Crestone Group, the chain’s par-baked bread and pastry vendor, already services those areas. For another, the more units in a market, the better the sales because of brand awareness.

Panera, of course, has demonstrated the $2.4 billion bakery-cafe segment is eminently franchisable. For that matter, so have sandwich chains, which rang up $16.8 billion in sales in ’04, according to Chicago-based Technomic Inc. And while neither segment has shown explosive growth recently, certain players—Panera, Quiznos and McAlister’s Deli among them—are attracting battle-tested franchisees capable of opening multiple stores in single markets. In fact, Panera recently slowed franchise development because franchisees were growing too fast, outstripping the company’s infrastructure, officials announced.

Appealing to Franchisees
Part of the bakery-cafe segment’s appeal for franchisees is the ability to maintain rising same-store sales. Corner Bakery, the segment’s fourth largest chain, according to Technomic, has posted same-store gains for 13 consecutive quarters, Hislop says, adding the gains (as of last October) were “significantly above 2 percent.” There’s no way to verify the assertion because Brinker didn’t report Corner Bakery comps and Il Fornaio is private.

“Plenty of people are eager to invest [in a Corner Bakery franchise],” Hislop declares, without mentioning names.

Besides sales, he credits a 3,000- to 3,300-square-foot prototype that seats 100, introduced in late 2001. Prior to it, unit size often depended on available real estate; existing units range from 750 square feet to 8,000 square feet. Former Brinker CEO Ronald A. McDougall once described Corner Bakery as “our most versatile concept.”

Service also changed with the prototype that debuted in Skokie, Ill. The chain scrubbed its cafeteria line in favor of menu boards, multiple cash registers and semi-service. Customers lined up, placed an order, took a number and sat down. An employee brought the food to the table.

The shift, prompted by suburban dining habits, helped trim costs. Food no longer deteriorated on steam tables during the longer breakfast and lunch dayparts in the suburbs. “Having food on display was not cost-effective,” recalls David Wolfgram, Corner Bakery’s president from 1997 to 2003.

Last year, the chain completed installation of a kitchen display system to improve order accuracy. It also boosted manager training. Clemens says it is now “comparable to industry standards.” A new POS system rolls out this summer.

The biggest change still remains the service component, which Vinz acknowledges took a lot of soul searching. Lettuce, after all, founded Corner Bakery as an urban concept for hungry people in a hurry. The first unit was attached to Maggiano’s Little Italy, to which it supplied bread. But under Brinker, whose orientation is suburban, Corner Bakery quickly grew in malls and strip centers.

Vinz adds that much of the behind the scenes work has strengthened unit economics. “There’s always work to do, but we feel very good about the business model,” he says.

One area still in need of help: marketing. Corner Bakery has not yet replaced Nancy Hampton, the chain’s former vice president of marketing, who left for Macaroni Grill months prior to the acquisition. Hislop meanwhile questioned the effectiveness of advertising messages, delivered via freestanding inserts, direct mail and table tents. “[Mike] has a lot of ideas on marketing and how we measure programs,” Vinz explains. “So that is something we will need to work hard on.”

One of Its Own
Hislop also has ideas about baking, to which Il Fornaio is no stranger. The 19-year-old company traces its roots to a retail bakery in Milan, Italy, brought to California in 1981 and expanded. Foodservice veteran Larry Mindel acquired the four Il Fornaio bakeries six years later, opening an Il Fornaio dinner house with a bakery in Corte Madera, Calif. The concept, known for its breads, now operates 27 restaurants in four Western states and three wholesale bakeries. Hislop signed on in 1995.

He had already put in some hard work researching bakery cafes for Il Fornaio and came up with a concept two years ago. The restaurants already sold pastries and coffee in the morning in some locations but more as a sideline to its busy lunch and dinner periods. To test what someday might become a branded concept, Hislop spent $80,000 to remodel a 750-square-foot space inside the Il Fornaio in Irvine, Calif. It quickly added $10,000 a week to existing bakery sales. “Our [bakery] sales doubled,” Hislop says. He later remodeled units in Beverly Hills and Seattle with similar results.

Then the Corner Bakery deal came along. Hislop dropped his own cafe concept with the blessing of BRS, majority owner since 2001.

“This is a great segment. We think we have a good concept and economic model,” asserts BRS Managing Director Hal Rosser, who had previously invested in Au Bon Pain, the urban sandwich chain co-founded by Panera Chairman and CEO Ronald Shaich. “I feel this is a great opportunity for us and for [Mike].”

Although Corner Bakery generates respectable sales, particularly in booming Southern California, Hislop still has to pick which markets to franchise, decide whether to franchise stores in smaller, less lucrative markets like Atlanta and Denver, and determine the proper blend of franchise to company units. Not surprisingly he is spending most of his time on Corner Bakery, having turned over Il Fornaio operations to Michael Beatrice, that chain’s president and chief operating officer.

Il Fornaio CFO Sean Maloney, meanwhile, has been immersed in the intricacies of the transition agreements he hammered out with Brinker. One of the touchiest involved exposing the casual-dining giant’s proprietary software to a financial services company called Servista, to which Il Fornaio is outsourcing Corner Bakery’s reporting functions as well as payroll and benefits administration. “They have a very good system,” Maloney explains, “and it’s not something they want everyone to see.”

Rumored ROI
Then there’s Corner Bakery’s allegedly low returns, rumors of which have circulated for years. Some industry observers suggest it was the reason Brinker desired to get rid of Corner Bakery. Publicly, the casual-dining giant announced it wanted to concentrate on its core brands of Chili’s, Macaroni Grill and On the Border.

Some have charged the Corner Bakery units are too expensive to build and maintain and often too large. In its fiscal ’05 10-K, Brinker reported the cost to open a unit on a fully capitalized basis in fiscal ‘05 (ended July) was $1.7 million.

Although neither Hislop nor Vinz will reveal specific unit economics (understandable given that management is currently filing a United Franchise Offering Circular), both insist the investment costs throughout the country are less than a $1 million on a noncapitalized basis (Corner Bakery leases all its sites). That makes for a sales-to-investment ratio better than 1-to-1, according to Hislop.

Still, he admits it’s a challenge to achieve it, particularly in California. “We have to be able to do above $2 million [in sales] and try to keep that investment around $1 million. That’s not a no-brainer,” he admits.

As Brinker may have discovered. The casual-dining giant picked up the then-eight-unit chain in the 1996 Maggiano’s stock deal with Lettuce and grew it quickly. Brinker liked freestanding units, expanding the bakery-cafe concept into multiple markets. It also built “fresh bake” facilities in these markets to produce bread and pastries.

“Back in those days, we had a hub-and-spoke system and a 150-mile delivery radius. It wasn’t a cost-effective model for franchisees,” recalls Wolfgram, now on the board of 14-unit Boudin Sourdough in San Francisco. Brinker sold all but one of the baking plants, in Chicago, to Crestone last July.

Just Around the Corner
Now Hislop wants to expand Corner Bakery rapidly. After opening six to eight restaurants this year, he plans to open about 20 units a year. He says Southern California could hold as many as 40 to 50.

It’s an ambitious goal, to be sure. “If that’s the plan, Mike will get it done. He is one of the best operators out there,” declares Flat Rock Grille CEO Fred LeFranc, Hislop’s colleague at El Torito in the early ’90s.

Also it the future, Hislop and Rosser believe there may be synergies on the wholesale-baking side. Il Fornaio operates a thriving bakery division that will rack up sales of $20 million this year supplying bread and pastries to third parties and its own restaurants. The bakeries —two in California, one in Denver—could one day ship par-baked products to at least part of the Corner Bakery system, including franchisees.

There may be culinary connections, too, but they’re also a long way off. Says Hislop: “With what Ric is doing, we have enough products coming out that I don’t think they need to meet with our people.”