After years of bleeding cash and struggling with heavy debt, Einstein/Noah Bagel Corp. revealed this week that the company may not have enough money to continue operating after October.
The firm’s independent public accountant, Arthur Andersen LLP, said “substantial doubt” exists about the bagel chain’s ability to continue paying its expenses as they become due, according to its annual report filed late Monday with the Securities and Exchange Commission.
According to company records, the chain has more than a dozen bagel stores in the Chicago area.
Company officials could not be reached Wednesday to comment. Einstein announced in November, however, that it had hired the firm of Donaldson, Lufkin & Jenrette as financial advisers to help it restructure its finances. “It is becoming evident that restructuring our balance sheet is necessary … to ensure that we have adequate working capital to operate the business,” Chairman and Chief Executive Robert Hartnett said at the time.
According to this week’s SEC filing, Einstein is now trying to obtain new bank financing to replace a line of credit that becomes due in October. But because of its poor financial history, the company said there were no guarantees that it could restructure its finances or find additional capital.
In fiscal 1998, Einstein reported a net loss of $234.9 million, followed by another loss of $14.3 million in fiscal 1999. Shares of Einstein/Noah Bagel, which were delisted from the Nasdaq stock market on March 7, traded Wednesday at 34 cents a share on the over-the-counter bulletin board.
Einstein/Noah Corp. was majority owned by Boston Chicken Inc., parent of the Boston Market chain, which filed for Chapter 11 bankruptcy reorganization in late 1998. Last year, Oak Brook-based McDonald’s Corp. agreed to purchase most of the struggling chain, but decided against picking up the Einstein business.
Golden, Colo.-based Einstein has exploded into a national chain with more than 500 stores since its 1995 founding, mostly on the strength of consumer demand for fresh bagels during the mid-1990s.
But after retail outlets from grocery stores to Starbucks also began selling bagels, the competition became intense. Ultimately, Einstein failed to diversify enough beyond bagels and bagel sandwiches to withstand the glut of product, analysts said.
“Bagels used to be a specialty item, and now they’re as common as the doughnut, maybe even more so,” said food analyst David C. Nelson with Credit Suisse First Boston in New York.
Andy Jacobs, who co-founded the Jacobs Bros. bagel chain in Chicago with his brother 17 years ago, said Einstein’s troubles run much deeper than market competition.
Einstein’s fatal mistake, Jacobs said, was refusing to franchise its stores to individual owners. Instead, the company owned and operated virtually all of its stores. As a result, Einstein took on enormous debt trying to grow the business into a national chain.
The company also bought large locations with plenty of inside seating, hoping to recover overhead costs by increased sales.
“They simply had a flawed approach to this business,” said Jacobs, now director of marketing at BAB Holdings Inc., the Chicago-based operator of Big Apple Bagels, which acquired the Jacobs chain last year.
“The Einstein folks wanted to convince people that the bagel business was a license to print money. They wanted to create another Boston Market–and we know what happened to them.”
Einstein isn’t the first company to struggle with selling bagels. Bruegger’s Bagels, which once had more than 20 stores in the Chicago region, abandoned the market in 1998. Earlier this year, Kellogg Co. unloaded its Lender’s Bagels line, citing lackluster sales.
Nonetheless, Jacobs said bagels remain a “consumer staple” and continue to provide good returns for BAB Holdings, which has 35 bagel stores in the Chicago area.
The Dunkin’ Donuts chain began introducing bagels in late 1996 and is rolling out new egg bagel sandwiches this month. Bagels account for 8 to 14 percent of sales at a typical Dunkin’ Donuts outlet.
“We see our bagel business growing in the future,” said Jim Weidling, retail brand image manager at Dunkin’ Donuts parent Allied Domecq Retailing USA in Chicago. “Bagels are a natural fit to our stores.”
