BK vet steering struggling Cosi charts franchisee-focused course

Nation's Restaurant News,  Oct 29, 2007  by Carolyn Walkup

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DEERFIELD, ILL. -- Providing support to first-time franchisees who are opening six Cosi restaurants in November is one of James Hyatt's foremost objectives in his new role as the downsized fast-casual sandwich and salad chain's president and chief executive.

A 30-year foodservice veteran and former Burger King franchisee who was executive vice president and global chief operations officer overseeing that chain's franchise operations, Hyatt assumed his leadership post at Cosi in mid-September. Hyatt says he has dedicated himself to offering more support to Cosi franchisees, who currently operate about one-fourth of the chain's 133 restaurants.

"I want to make sure to get franchisees off to the right start," Hyatt said while explaining why Cosi recently cut back for the second time in two months earlier development targets for the opening of more franchised units. "Right trumps fast."

Some franchisees changed plans for opening new units while leadership of the eclectic-menu chain was in flux, Hyatt said. Robert Merritt, who serves on Cosi's board of directors, was interim president and chief executive for the previous six months. Most of the original management team and directors have moved on since Cosi went public five years ago and has since lost a total of $80 million, including a net loss for 2006 of $12.3 million on revenues of $126.9 million.

Lowering the development target from what had been 40 to 45 new outlets to only 30 units for the year was expected, said Jeff Farmer, a foodservice securities analyst with CIBC World Markets in Boston. In a research note concerning Cosi's recent disclosure of third-quarter results, Farmer wrote that the chain's leaders "still have much to prove, but they are moving in the right direction."

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Those results, including a same-store sales jump of 1.6 percent for the quarter ended Oct. 1 that was achieved without any menu price increases, were Cosi's best since the first quarter of 2006, when same-store sales rose 5.3 percent. Since then, quarterly same-store sales had fluctuated from a decrease of 4.2 percent to an increase of 0.1 percent.

"The business doesn't need to be retooled, just refined," Hyatt said. "It needs focus. We're not trying to be everything to all people."

In addition to offering more support than in the past to new franchisees, Hyatt has set priorities of developing more business at breakfast and dinner; improving the guest experience, mainly through speeding service; installing more business model controls, including for food and labor costs; and developing more catering as a lucrative sales opportunity, especially in urban office centers.

Cosi began reducing administrative costs, primarily payroll and staff size, in August, said Bill Koziel, the company's chief financial officer, who acknowledged that Cosi's original infrastructure was built to support faster growth.

"We recognized that we needed to bring our infrastructure costs more in line with where the business is today," he said.

In the last quarter, Cosi closed seven underperforming units, including the last six that operated in Macy's department stores. A few more closings are expected as Cosi prepares for future growth.

During the quarter, franchisees opened six stores and closed one. Another franchised unit opened after the close of the quarter.

Looking at Cosi's strengths, Hyatt said, "Lunch is the sweet spot." He noted that between 60 percent and 65 percent of sales occur during lunch hours and even more is generated in large urban markets.

"We have to work a little more in the dinner area," he said, especially as Cosi develops more units in suburban locations.

The chain's culinary endeavors, led by corporate chef David Utley, include development work on more one-dish, hearth-cooked dinners to be served after 5 p.m., such as salmon with creamy artichoke and spinach sauce and roasted red peppers on white-bean Alfredo. Such a dish uses the hearth oven that produces the chain's signature sandwich fiat bread.

Catering, especially in business districts in large cities, has made gains, but Hyatt believes there is much unrealized opportunity in that area. However, "we haven't yet figured out how to play that out," he said.

Marketing of everything from new openings to catering capability is done through local-store methods rather than media. Yet he indicated that media opportunities might arise if Cosi fills out its already strong markets of New York, Boston, Philadelphia and Washington, D.C., as planned.

The company has cut back on its original hybrid idea of having a full bar and more table service at night, although a few East Coast restaurants retain those features.

"It's not a strong part of our business," Koziel said.

The first international branch of the chain recently opened in Dubai, where four more are expected to debut in the next two months.

Domestic revenues for the third quarter were $35.6 million, an increase of 8.1 percent from the $33 million total for the same quarter in 2006. Franchise fees and royalty revenues showed strong growth to $611,204, compared with $194,894 in the 2006 quarter. The company is scheduled to report the full results of the quarter Nov. 8. In last year's third quarter, Cosi lost $2.9 million, after losing $2.4 million in the same quarter a year earlier.