Einstein Bros 2005 Annual Report Download - page 6

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pressures. These agreements can range in duration from two months to three years.
Commissaries
We believe that our commissary system that processes bulk raw ingredients used at our company-operated restaurants and licensed locations
provides a competitive advantage. Our commissaries assure consistent quality, supply fresh products and improve efficiencies by reducing labor
and inventory requirements. We focus our growth in areas that allow us to continue to gain efficiencies through leveraging the fixed cost of our
current commissary structure. We distribute commissary products primarily through our regional distribution partners and locally in certain
markets through a fleet of temperature-controlled trucks operated by our personnel.
Distribution
We currently utilize a network of independent distributors to distribute frozen dough and other materials to our locations. By contracting with
distributors, we are able to eliminate investment in distribution systems and to focus our managerial and financial resources on our retail
operations. We contract for virtually all food products and supplies for our company-owned restaurant operations, including frozen dough, cream
cheese, coffee, meats and paper goods and our vendors deliver the products to our distributors for delivery to each location. The individual
locations order directly from the distributors one to three times per week.
During late 2005, we negotiated contract terms with a new distribution partner. We have experienced some transition issues at certain
locations during 2006 but at this time, we do not believe this will have an adverse effect on our results of operations. We are currently working
with this distributor to resolve these issues.
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
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combinations of words in our marks, some of which may have senior rights to ours for such use, but we do not consider any of these uses, either
individually or in the aggregate, to materially impair the use of our marks. It is our policy to defend our marks and the associated value from
encroachment by others. The marks listed above represent the brands of the retail outlets that we own, license or franchise. We also own numerous
other marks related to our business.
General Economic Trends
We anticipate that our business will be affected by general economic trends that affect retailers in general. While we have not operated during
a period of high inflation, we believe based on industry experience that we would generally be able to pass on increased costs resulting from
inflation to our consumers. Our business may be affected by other factors, including increases in the commodity prices of flour, butter, cheese,
coffee, dairy and/or fresh produce, energy costs, existing and additional competition, marketing programs, weather and variations in the number of
company-owned or licensed location openings and closings.
Although few, if any, associates are paid at the minimum wage, an increase in the minimum wage may create pressure to increase the pay
scale for our associates, which would increase our labor costs and those of our franchisees and licensees.
Seasonality and Quarterly Results
Our business is subject to seasonal fluctuations. Significant portions of our net revenues and profits are realized during the fourth quarter of
the fiscal year, which includes the December holiday season. Because of the seasonality of the business and the industry, results for any quarter are
not necessarily indicative of the results that may be achieved for the full fiscal year.
Competition
The restaurant industry is intensely competitive. The industry is often affected by changes in demographics, consumers’ eating habits and
preferences, local and national economic conditions affecting consumer spending habits, population trends and local traffic patterns.
We experience competition from numerous sources in our trade areas. Our restaurants compete based on customers’ needs for breakfast,
lunch and afternoon “chill-out” (the period after lunch and before dinner). Our competitors are different for each day-part in which we offer our
products. The competitive factors include brand awareness, advertising effectiveness, location and attractiveness of facilities, environment, quality
and speed of customer service, price, quality and value of products offered. Certain of our competitors may have substantially greater financial,