Einstein Bros 2002 Annual Report Download - page 6

http://www.sec.gov/Archives/edgar/data/949373/000104746903027186/a2116520z10-ka.htm[9/11/2014 10:14:22 AM]
strong results, we implemented television advertising programs in six additional Einstein Bros. markets in September 2002. These markets also
experienced sales increases, averaging approximately 7% to 8% during the advertising period. As a result of these successful tests, we intend to
shift a higher proportion of Einstein Bros.' marketing resources to television advertising in 2003.
Company-operated and franchised locations are generally required to purchase local advertising and to contribute to the respective brand's
marketing fund, which provides the locations with marketing support, including in-store point of purchase and promotional materials. Print and
other mass media advertising is utilized to increase consumer interest and build sales.
Franchise and Licensing Programs
We began our licensing program for our Einstein Bros. brand in April 2001. We have since entered into licensing agreements with Aramark
and Sodexho to develop university and college campus locations and other locations. As of December 31, 2002, we had 26 licensed locations open
and expect to add 25 to 30 licensed locations by the end of 2003. We have also entered into a license agreement with Concessions Intl., Inc. to
develop our brand at airport locations. Our first location under such agreement opened at Detroit Metro Airport in the first quarter of 2002. The
licensing program typically requires the payment of an upfront license fee of $12,500 and continuing royalties of 7.5% of sales from each location.
The licensees are required to buy all their proprietary products from sources approved by us.
We have a substantial franchise base primarily in our Manhattan and Chesapeake brands that generates a recurring revenue stream through fee
and royalty payments. Our franchise base provides us with the ability to grow our brands with a minimal commitment of capital by us, and creates
a built-in customer base for our manufacturing operations. We expect to launch our Einstein Bros. franchising effort in the second half of 2003.
Our strategy is to seek a limited number of experienced, well-capitalized franchise partners who would pay a non-refundable fee and commit to
developing a substantial number of locations on an agreed upon development schedule, which would allow for growth in a controlled and
disciplined manner. In the event the development schedule is not adhered to, the franchise partner will lose development exclusivity in the
territory. We may, from time to time, sell company-operated locations to franchisees to seed franchise territories.
Management Information Systems
Each company-operated location has computerized cash registers to collect point-of-sale transaction data, which is used to generate pertinent
marketing information, including product mix and average check. All product prices are programmed into the system from our corporate office.
Our in-store personal computer-based management support system is designed to assist in labor scheduling and food cost management, to
provide corporate and retail operations management quick access to retail data and to reduce store managers' administrative time. The system
supplies sales, bank deposit and variance data to our accounting department on a daily basis. We use this data to generate daily sales information
and weekly consolidated reports regarding sales and other key measures, as well as preliminary weekly detailed profit and loss statements for each
location with final reports following the end of each fiscal period.
Trademarks and Service Marks
Our rights in our trademarks and service marks ("Marks") are a significant part of our business. We are the owners of the federal registration
of the "Einstein Bros.," "Noah's New York Bagels," "Manhattan Bagel," "Chesapeake Bagel Bakery" and "New World Coffee" Marks. Some of our
Marks are also registered in several foreign countries. We are aware of a number of companies that use various combinations of words in our
Marks, some of which may have senior rights to ours for such
5
use, but none of which, either individually or in the aggregate, are considered to materially impair the use of our Marks. It is our policy to defend
our Marks and the associated goodwill from encroachment by others. The Marks listed above represent the brands of the retail outlets that we own.
We also own numerous other Marks related to our business.
Competition
The restaurant industry is intensely competitive, and there are many well-established competitors with substantially greater financial and other
resources. We currently compete in the quick casual segment with Panera Bread Company, and to a lesser extent with smaller regional chains such
as Corner Bakery, Cosi and Potbelly Sandwich Works. We also compete within each market with other national and regional chains as well as
locally-owned restaurants, not only for consumers, but also for management and hourly personnel, suitable real estate sites and qualified
franchisees. In addition to our current competitors, one or more new major competitors with substantially greater financial, marketing and
operating resources could enter the markets in which we currently operate or intend to expand at any time and compete directly against us. We