Einstein Bros 2006 Annual Report Download - page 16

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increase the cost or force us to eliminate certain items from our menus. All of these factors could adversely affect our business, reputation and
financial results.
Our operations may be negatively impacted by adverse weather conditions.
Adverse weather conditions could seriously affect regions in which our company-owned, franchised and licensed restaurants are located or
regions that produce raw ingredients for our restaurants. If adverse weather conditions affect our restaurants, we could experience closures, repair
and restoration costs, food spoilage, and other significant reopening costs as well as increased food costs and delayed supply shipments, any of
which would adversely affect our business. Additionally, during periods of extreme temperatures, either hot or cold, many individuals choose to
stay inside. This negatively impacts transaction counts in our restaurants and over extended periods of time could adversely affect our business and
results of operations.
The effects of hurricanes, freezes and other adverse weather conditions are likely to affect supply of and costs for raw ingredients and natural
resources, near-term construction costs for our new restaurants as well as sales in our restaurants going forward. If we are not able to anticipate or
react to changing costs of food and other raw materials by adjusting our purchasing practices or menu prices, our operating margins would likely
deteriorate.
We have single suppliers for most of our key ingredients, and the failure of any of these suppliers to perform could harm our business.
We currently purchase our raw materials from various suppliers; however, we have only one supplier for each of our key ingredients. We
purchase a majority of our frozen bagel dough from a single supplier, who utilizes our proprietary processes and on whom we are dependent in the
short-term. All of our remaining frozen bagel dough is produced at our dough manufacturing facility in Whittier, CA. Additionally, we purchase
all of our cream cheese from a single source, and we have a single supplier for our coffee. Although to date we have not experienced significant
difficulties with our suppliers, our reliance on a single supplier for each of our key ingredients subjects us to a number of risks, including possible
delays or interruption in supplies, diminished control over quality and a potential lack of adequate raw material capacity. Any disruption in the
supply or degradation in the quality of the materials provided by our suppliers could have a material adverse effect on our business, operating
results and financial condition. In addition, any such disruptions in supply or degradations in quality could have a long-term detrimental impact on
our efforts to maintain a strong brand identity and a loyal consumer base.
Failure of our distributors to perform adequately or any disruption in our distributor relationships could adversely affect our business and
reputation.
We depend on our network of distributors to distribute frozen bagel dough and other products and materials to our company-owned,
franchised and licensed restaurants. Any failure by one or more of our distributors to perform as anticipated, or any disruption in any of our
distribution relationships for any reason, would subject us to a number of risks, including inadequate products delivered to our restaurants,
diminished control over quality of products delivered, and increased operating costs to prevent delays in deliveries. Any of these events could harm
our relationships with our franchisees or licensees, or diminish the reputation of our menu offerings or our brands in the marketplace. In addition, a
negative change in the volume of products ordered from our distributors by our company-owned, franchised and/or licensed restaurants could
increase our distribution costs. These risks could have a material adverse effect on our business, financial condition and results of operations.
In late 2006, we negotiated contract terms with two new distribution partners. In early 2007, these new partners began delivering products to
our company-owned, franchise and license restaurants in the respective geographic regions. We believe the new partners will provide a higher
level of performance at a
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lower cost. However, there is no assurance that the new distributors will perform as we expect, or that their cost structure will provide for the cost
savings that we anticipate.
Increasing labor costs could adversely affect our results of operations and cash flows.
We are dependent upon an available labor pool of associates, many of whom are hourly employees whose wages may be affected by increases
in the federal, state or municipal "living wage" rates. Numerous proposals have been made on federal, state and local levels to increase minimum
wage levels. We are aware of increases in state minimum hourly wage rates in most of the states in which we operate that became effective
January 1, 2007. 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.