Big Firms Competing for Slice of the Bagel Action : Stores Selling the Doughy Circles Seem to Be Everywhere. The Newly Formed I & Joy Manhattan Bagel, Based in North Hills, Now Has 115 Outlets.
Having successfully navigated the same uncertain consumer market that swallowed the sticky bun, crumbled the English muffin and humbled the haughty croissant, the bagel has landed.
And, say baking experts and stock analysts, those boiled circles of chewy dough are coming into their own.
“Everywhere you go, you see bagels,” said Eric Cano, president of I & Joy Manhattan Bagel company, born two weeks ago in a merger between North Hills-based I & Joy Bagels and Manhattan Bagel Co. Inc. of New Jersey. The new company, with 115 stores, is the second largest bagel chain in the nation and is the only publicly traded bagel concern on the Nasdaq stock index.
“Our bagels have been on ‘L.A. Law.’ They’ve been on ‘Melrose Place.’ They’re in Philadelphia Cream Cheese commercials. They’re at UCLA and Cal State Northridge. It’s sort of a tidal wave,” said Cano, sitting at a table in front of an I & Joy store in Sherman Oaks, contemplating his bagel.
The I & Joy/Manhattan merger was closely followed by those in the fast-growing bagel industry, many of whom consider Los Angeles to be ground zero in the oncoming explosion of national bagel franchising and chain expansion.
The market for bagels in the last three years has been hot, says Allan Boren, chairman of the new company. A high school chum of the son of I & Joy founder Irving Marks, Boren bought the 16-store chain in 1992 and hired Cano, another pal from school. Boren estimates that the addition of Manhattan Bagel chain will push revenues to $20 million.
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“Manhattan can teach us franchising, and we can teach them about company-owned stores,” Boren said. “It’s a good marriage. We’re in a great position.”
Boren said 83 more stores are in development.
I & Joy Manhattan provides bagel dough and related products to its company stores and franchisees from four central manufacturing facilities. The company makes money from the sale of franchises, royalties and the sale of bagel dough and cream cheese to its stores, Boren said.
Individual store sales for Manhattan Bagel Co. reached a 17% growth rate, and overall retail sales grew from $665,000 in July, 1993, to more than $1.4 million for July, 1994, according to a report prepared by First Montauk Securities Corp. in New Jersey.
In June, 1994, Manhattan went public, raising $3.6 million in capital through an offering of 900,000 shares of common stock priced at $5 per share.
The stock, currently a strong gainer, closed at 13.625 Friday and was up 62.5 cents at $14.25 at noon Monday. Earnings-per-share have been as high as 16 cents, said Judith K. Rabinowitz, an analyst at First Montauk.
“In the short term, they’re experiencing some pressure on profit margins, as they head into expansion,” Rabinowitz said. “But in the long term, this could be a very exciting company. I’m sticking with my projections that, with the merger, the stock could be at 38 cents per share by the end of the year.”
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By the end of fiscal year 1996, the company’s profit margin is expected to improve even more, to about 18%, providing net profits of $2.2 million, or 59 cents per share, according to First Montauk stock reports.
“California is always the leader in new things,” said Lance Parrish, sales director for Western Bagel Baking Corp., a large wholesaler based in Van Nuys.
“Bagels will peak here faster than they will elsewhere,” Parrish said. “But there’s still a good five years of growth for the market here.
Western bakes 60,000 bagels an hour and supplies most of the area’s supermarket chains, including Vons, Ralphs, Gelson’s, Hughes and Alpha Beta, among other large wholesale accounts. With only eight retail outlets in the region, Parrish said Western is not looking to get into the scrappy retail bagel franchise contests beginning to break out.
“Our retail business is diminishing as these other, new stores open,” Parrish said. Still, Western has experienced healthy growth in recent years, with business jumping about 15% between 1993 and 1994, and increasing another 5% this year, Parrish said. For the fiscal year ending February, 1995, sales reached $23 million, up from about $16 million in 1993.
Western’s growth corresponds to rising bagel sales nationally.
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Countrywide, bagel sales at supermarkets have been rising 15% to 20% annually in recent years, according to Information Resources Inc., a Chicago-based market research firm. In 1994, supermarket sales of frozen, refrigerated and shelf-stable bagels were $499.4 million. Sales of frozen bagels were up 15.2% over 1993, sales of refrigerated bagels were up 55.4%, and shelf-stable bagels were up 64.3%, according to Information Resources.
Bagels now represent just over 59% of the frozen baked goods market, according to Frozen Food Age, a trade publication.
The retail bagel industry in Los Angeles alone is growing at nearly 400% per year, said Steve Metz, president and CEO of Pasadena-based Bonjour Bagel Cafe, which has its eye on Los Angeles as virgin bagel franchise territory. Metz predicted a $300-million bagel market for California this year.
“It’s a pretty heady market in California right now. Everybody is coming here,” said Metz. “It’s basically untapped. Seventy-five percent of all your bagel stores are in the northeast corridor. Even there, the market is still a long way from the saturation point.”
With Bonjour stores open in La Mirada and Los Alamitos, Metz envisions opening another 40 stores in Southern California in the next few years. Locations are planned in Pasadena and Encino.
“Everybody’s getting into the game,” said Paul Escudero, a financial planner who owns the Bonjour Bagel franchise in La Mirada. “It will last for a while, then there will be a shuffling. Some of those who got in are not going to make it. When the dust settles, quality and service will determine who stays,” said Escudero, who compared Bonjour Bagel Cafe to the gourmet California Pizza Kitchen chain.
Other companies, including Vermont-based Bruegger’s Bagel Bakery and Virginia’s Chesapeake Bagel Bakery, have plans to open franchises in Los Angeles in the next year, too. And within the last few months, big businesses including Starbucks, Boston Chicken and Little Caesar have entered the market as well.
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“Bagels are highly profitable, that’s why so many companies are getting on the bandwagon,” said Ed Lee, editor of Modern Baking, a trade magazine in Des Plaines, Ill. “Each of the companies getting involved wants to become major franchisers. Each one is duking it out to become the McDonald’s of the bagel industry.”
Those competing for the market base are a wiser lot than their predecessors in specialty baked goods.
“These people have learned from the mistakes made by the cinnamon roll people and the muffin people,” said Lee. “Those guys spread themselves too thin and were not able to service their franchises well. Hence, you’ve got little bagel companies linking with larger companies offering other products, like Starbucks and Boston Chicken. It makes sense.”
Starbucks announced an $11 million deal with San Leandro-based Noah’s New York Bagel Co. in March, providing the 26-store bagel chain, which has a shop in Brentwood and two in Santa Monica, with important capital to finance the bagel chain’s expansion.
“We intend to be a major presence in Los Angeles,” said founder Noah Alper. “We are looking at sites in Sherman Oaks, Thousand Oaks, Beverly Hills and other places,” he added.
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In April, Boston Chicken, the successful fast-food chicken chain, made a $20-million investment in a new company called Progressive Bagel Concepts Inc., a trio of small bagel chains based in Florida, Utah and Kansas. The move gives Progressive needed capital for growth and gives Boston Chicken a bite of the morning breakfast market.
Cheseapeake Bagel Bakery, based in McLean, Va., also wants a piece of the bagel action in Los Angeles. In March, the company signed a development agreement with Bernard Karcher, whose family started the Carl’s Jr. hamburger chain, to open between 20 and 25 Chesapeake franchises in Orange and Riverside counties.
Although Karcher said he has no plans to expand into Los Angeles County, Chesapeake does.
“Once the Karchers got on board, the phones lit up like crazy,” said Dan Rowe, director of franchise development for the 85-store Chesapeake chain, which projects that earnings this year will come in around $63 million. “We had to alter our growth strategy. We are now looking very hard at Los Angeles, along the 101 corridor and east and west of the 405.”
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Boren of I & Joy Manhattan says he thinks the new company, which now has its West Coast headquarters at its North Hills factory, is strong enough to weather the onslaught.
“We’ve already got four production factories--North Carolina, two in Jersey, the one in North Hills, and one more in the works in San Francisco,” Boren said. “Carl’s Jr. doesn’t have that. Noah’s doesn’t.”
Like most bagel company owners, Boren claims his bagels taste best. The North Hills factory on Roscoe Boulevard, which includes a 24-hour retail cafe set to open Saturday, ships 2,500-dozen--that’s 30,000--unbaked frozen bagels a week to each of the 16 area stores in the chain. At the stores, dozens of bagels at a time are trundled into a large kettle of boiling water, where they boil for a couple of minutes.
The traditional boiling process, used by most bagel bakers, gives bagels their shiny outer crust. (Some bagel bakeries, like Noah’s, steam their bagels, because steamed bagels stay fresher longer.) After boiling, bagels are baked on rotating hearths in an oven for about 15 to 20 minutes and allowed to cool.
It’s a relatively simple process that requires few ingredients--corn meal, wheat and sugar--and little machinery--a mixer, a “hopper” to punch holes in the bagel dough, a kettle and ovens.
The simplicity and low cost is partly what attracts many to the business.
“Look, we’re not trying to compete with the big boys, the mega bagel bakers,” said Marshall Farb, a former garment industry executive who opened his own bagel store in West Hills in January. “We can’t. We only have one oven.”
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But Bagelicious, as Farb’s store is called, is nothing if not aggressive.
Just last Thursday, Farb’s father, Harry, was in the cafeteria of a big company’s Valley plant, selling his brand of bagels to the food service manager.
“You get your bagels from Western? Give ours a try.”
