A Big Bite

A Big Bite

HOSPITALITY by Mark Gordon | Managing Editor

A Gulf Coast company wants its share of the subway sandwich feast. The plan: Open at least 1,000 new stores over the next decade.

The national sandwich shop market, from Subway to the local corner deli to even Publix is one of the most crowded in the restaurant industry. Throw some roast beef in between some bread, a side of chips and a pickle and off you go.

But the clutter has begun to foster a problem in the maturing market: In search for more customers and a bigger market share, many of the leading chains have gone the discount and coupon route, charging less just to get people in the door. It's a take on the now ultra-popular dollar menus many fast-food restaurants have been using.

Unsurprisingly, more people eating for less has led to thinner revenues and tighter margins. It's an industry wide issue, one that's led some chains to slow down or stop growing and others to try some innovation in menus and concepts. Subway is even selling pizza in some stores.

In Port Charlotte, in a corporate office not far from the banks of the Myakka River, another national chain has a different take on the squeezing market. Port Charlotte-based Obee's Franchise Systems, the company behind obee's soups, salads & subs restaurants, is undertaking an ambitious growth strategy, as it plans to open at least 1,000 new stores over the next 10 years, in states as geographically diverse as New Mexico, Minnesota and Pennsylvania, as well as Florida.

The growth plan is the life vest for the company's survival, as currently Obee's comes in on the small portion side of the industry when it comes to sales. Executives project the chain, which currently operates 42 restaurants in 12 states, will have companywide revenues of $6.4 million during the second half of 2007, from July to December. Crumbs when compared to the hundreds of millions taken in annually by competing chains such as Subway and Quiznos.

Besides more stores, Obee's - which considers its calling to be slicing meats and cheeses fresh for each sandwich - is expanding its lunchtime office delivery program, hoping to capitalize on the nationwide trend of more workers eating at their desks. The company ultimately hopes to have as much as 40% of its business come from deliveries.

The 10-year-old company, founded by Jim Patrick, a retiree who moved to the Sunshine State after running car dealership in Michigan, has had some problems in the past when it tried to grow too fast. Obee's president, Peter Brown, a restaurant industry veteran whose past stops include running Pizza Hut's international expansion and U.S. store development for Arby's, considers the growth plan a make or break mission for the chain. Says Brown: "We need to grow again in order to be viable."

'Extraordinarily aggressive'

Growth wasn't the plan when Patrick opened the first obee's in Port Charlotte in October 1996. Back then, Patrick wanted to go into the restaurant business after growing restless in retirement.

He settled on sandwiches, deciding that the sliced-fresh concept, combined with bigger portions, would be a hit in Port Charlotte, a town known for its high concentration of blue-collar, Midwestern retirees.

Patrick named the store obee's soups, salads & subs as a take on his son, who has red hair and whom the elder Patrick sometimes called Opie, after Opie Taylor, the famous redhead on The Andy Griffith Show. Patrick, who has since sold his stake in the chain and now lives in Lakewood Ranch, turned Opie into Obee because he liked the sound and feared copyright infringements if he used Opie.

In addition to being a hit with local residents, the first obee's became especially popular with Patrick's food and beverage suppliers, who thought the concept could be more than mom-and-pop. So Patrick partnered with the suppliers, and later brought on some other investors in order to open more stores.

The team took the Subway approach to expansion: Recruit a store developer for a certain part of the country, then sell him the rights to open a series of stores in the area.

It was a good news-bad news proposition for Patrick. Good in that expansion led to name recognition in new markets, bad in that the chain grew too fast and ran into several financial problems, including high start-up costs and loading up on debt. "All of a sudden," Obee's spokesman Randy Jacobs says, "they didn't have the capacity to keep up with things."

Indeed, Obee's had become a hodgepodge of stores lacking a viable growth plan, says Brown. By 2003, it had 22 employees working out of its corporate office, none with any significant chain restaurant management experience.

"You can be extraordinarily aggressive in opening stores," says Brown, "but you can get yourself in trouble if you don't provide the right management structure."

Patrick hired Brown in 2004, originally as a consultant. But Brown came on full-time soon after, saying the idea of working for an entrepreneurial company like Obee's was a new challenge after spending his career with big corporations such as Arby's and Pepsi Co. Brown is a Florida transplant by way of Canada, where he played college hockey.

Pink sheets

Around the same time Brown began to run the company, Patrick and his investors sold it to Ultimate Franchise Systems, an Orlando-based venture capital firm focusing on the restaurant business, mostly small- to medium sized subway sandwich shops. Ultimate Franchise bought Obee's for its debt, which was just over $1 million at the time.

Brown and Ultimate executives noticed and fixed some problems immediately. For instance, overhead was well over what it should have been. The company was paying $16,000 a month to rent office space in Port Charlotte for all of its employees, says Brown, when it would have been more economical and productive to open smaller offices in a variety of markets.

The company had other financial issues too, including owing money to banks and suppliers. Says Brown: "The business needed to be reengineered and rewired."

Step one in the rewiring process was to go public. The company is taking baby steps in that area though, deciding to raise funds by trading its shares over the counter, on the Pink Sheets exchange. The listing doesn't come with the same reporting standards companies on the Nasdaq or NYSE face, such as quarterly earnings or yearly revenues, but it normally also doesn't come with as much access to cash, either.

In Obee's case, the company has raised about $500,000 through the stock market over the past few months says Brown, partially through a forward stock split held earlier this summer on the shares, traded under the symbol OBFM.

That's enough capital to get going on parts of the company's growth strategy, which includes placing regional newspaper ads, setting up a 2008 franchising trade show calendar and redoing portions of its Web site, www.obees.com.

Then there's the actual store expansion plan. In the past month, Obee's has made announcements for store openings in five areas, including at least one store in Irving, Texas; six new stores in St. Lucie County, on the east coast of Florida to go with the one store it already operates there; up to 40 restaurants in New Mexico operated by a husband-wife partnership getting out of the homebuilding business; more than 20 stores in a 12-county area surrounding Minneapolis-St. Paul; and up to 20 locations in three counties south and east of Pittsburgh.

The expansion efforts also include the Gulf Coast, Brown says.

Including a store in North Fort Myers and another one in Sarasota, the company has eight restaurants in west and Southwest Florida, numbers it plans to increase by working its way up north from Naples.

Opening an Obee's

A hungry entrepreneur can figure on putting out close to $200,000 to open an Obee's salads, soups and sandwiches store.

Obee's initial opening costs - from $172,000 to $195,000 - are on the middle to lower end of the sub sandwich spectrum. Jacksonville-based Firehouse Subs, for example, lists the cost of opening a restaurant as a wide range of $191,200 to $355,475, with variables including location and other franchise factors.

The Obee's investment, which varies mostly based on location, too, includes franchising fees, lease improvements, equipment, initial inventory, deposits and working capital. The Port Charlotte-based franchise company charges a royalty fee of 6% of gross sales and an advertising fee of 2% of gross sales.

AT A GLANCE

Obee's

Franchise Systems

Headquarters: Port Charlotte

President: Peter Brown

Employees: 300 franchise; five corporate

Stock symbol: OBFM.PK

Recent stock price: $0.16

52-week high: $1.35

Price-earnings ratio: N/A

Dividend: N/A

Market capitalization: N/A

Shares issued: 2 billion

Shares outstanding: 1.5 billion

Assets: $2 million

Long-term debit: $500,000

Cash on hand: $200,000 (estimate)

Source: Yahoo! Finance, Obee's Franchise Systems

REVIEW SUMMARY

Industry. Restaurants, sandwiches

Business. Obee's Franchise Systems, Port Charlotte

Key. Company seeks additional market share by expanding in geographically diverse states, including Minnesota, New Mexico, and Pennsylvania.