The (positive) state of Cosi's world, per today's Chicago Tribune.
While I regularly frequent Cosi's restaurants and enjoy their food, I have never owned the stock. Based on this article, I intend to take a close look at the company.
Cosi's freshest idea, bar none
Convenience-dining restaurant chain focuses on food, leaving behind nighttime bar concept and adding more items to its dinner menu
By John Schmeltzer
Tribune staff reporter
December 23, 2006
You're not going to find the bar in the latest iteration of Cosi, the fast-casual Deerfield-based restaurant chain that has struggled to find its footing since its creation on the East Coast more than a dozen years ago.
The restaurant, which has gone by the name ZuZu's Coffee Bar, Xando Coffee and Bar, and Cosi Sandwich Bar, still offers coffee, beer and wine, but has chucked its founders' plans to operate a liquor bar on one side of the dining room while selling sandwiches on the other.
Now the chain, which operates 120 restaurants in 16 states and the District of Columbia, believes it has finally figured out what it needs to do and is poised for a major expansion during the next two years.
Operating in the premium convenience-dining niche, the company is targeting 18- to 34-year-old adults without children, upscale suburbanites and the thousands of higher-income singles and couples who have returned to the city after many years in the suburbs.
That focus hasn't changed much from its 1994 founding as ZuZu's in Hartford, Conn., by three 26-year-old friends who believed that by day it would be a coffee bar and would morph into an "upscale sophisticated place at night."
And even though the stock price has fallen by more than 50 percent from a record high of $11.21 in March, Wall Street, which had questioned just about every aspect of the chain's business since its initial public offering in 2002, has become enchanted with the chain.
Cosi stock lost 12 cents, to $5.01, on the Nasdaq stock market Friday.
In the past year, the average daily trading volume of the company's stock has nearly tripled, to an average 404,000 shares per day compared with 145,000 in 2004.
The stock dip speaks to one of the challenges Cosi faces: keeping customers happy enough to pay a premium for a quick meal. Sales at Cosi and other fast-casual restaurants plunged earlier this year, when gasoline prices surged to more than $3 a gallon. Many analysts suggested that diners downscaled to McDonald's to save money.
Despite the fact that the chain, which has not posted an annual net profit since going public in 2002, is unlikely to post a profit this year, Cosi has posted larger operating profits in each of the past three years. That's a sign of better things to come, executives say. Last year, it made $21.1 million in operating profits on sales of $117.2 million.
Some analysts now are optimistic about Cosi's prospects.
"The Cosi concept has evolved into a more proven premium-convenience chain, and is differentiated given its standards of excellence relative to the food and dining experience as well as the company's ability to adhere to value," said Nicole Miller Regan, a restaurant analyst with Minneapolis-based Piper Jaffrey, in a note this month to investors.
While many fast-casual restaurants are happy to record an average sale of $6.50 to $7.50 per customer, Regan estimates that a typical Cosi customer spends an average of $8.81.
Kevin Armstrong, Cosi's president and chief executive, attributes the chain's budding success to two factors: its near-fanatical focus on food and its plans for a massive expansion in both company-owned and franchise-owned stores after nearly three years of virtually no growth.
In addition, Armstrong, who was lured to Cosi more than three years ago from Yum Brands' Long John Silver's, has rounded out his management team with a chief operating officer who has more than 15 years at California Pizza Kitchen and the Patina Group. The chief development officer he selected had more than 20 years with PepsiCo Food Service.
However, "the biggest change has been the acceptance of the concept by potential franchisees," said Armstrong.
He said the chain has signed commitments from 27 franchisees during the past year to build more than 345 franchisee-owned units in the next few years.
In addition, the company will be joining in the building binge by increasing the number of company-owned units by 50 percent, from the current 110 restaurants.
More than 300 company-owned and franchise-owned restaurants are expected to be in operation by the end of 2008, he said.
In an effort to provide more of a dinnertime selection, Cosi is adding items such as grilled chicken in a three-cheese sauce topped with bacon and bread crumbs and served with a salad and a choice of flat bread.
Currently it offers a range of sandwiches such as a Cosi club, a tuna salad and cheddar cheese, and a roast turkey with brie and honey mustard. In addition, it offers three kinds of individual pizzas at lunchtime and five different kinds for dinner, along with four pasta offerings.
But gone will be the full bars that were at one end of the dining rooms. Stationing an employee there presented staffing complications. Instead, patrons wanting a drink will ask for a glass of wine or a beer at the time they place their order.
Diners will find the interiors have been redesigned to provide an "urbane and inviting atmosphere," with wood floors, wood furniture and couches.
R.J. Dourney, a new franchisee and former chief operating officer of Au Bon Pain, remembers telling Au Bon Pain associates about Cosi: "As a competitor, we had better be careful if they ever get their leadership right."
Even then, Dourney said there was something about Cosi that made it stand out from the pack.
"There is something crave-able about the brand," said Dourney. "That bread is awesome."
Now Dourney, who left Au Bon Pain to run his own restaurant franchising company two years ago, says Cosi has gotten its leadership fixed and has put his money on the line.
Late last year, he agreed to build and operate as many as 25 Cosi restaurants in the Boston area during the next few years; half will be located in the suburbs where dinner traffic will be key to the restaurants' success. Fellow franchisees picked him to lead the chain's fledgling franchisee organization.
Armstrong said the next-generation Cosi delivers some of the best economics per square foot in the casual-dining field. A Cosi outlet will produce sales of $500 per square foot, compared with $433 per square foot at Panera Bread Co., and $533 per square foot at Chipotle Mexican Grill Inc., he said.
Dourney says he thinks the Cosi brand is a winner.
"I can't wait to go head-to-head with Panera. The appeal we have is higher. We have a more comfortable environment. It's sexier.
Most important, he says, "the food is better."
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jschmeltzer@tribune.com
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