Einstein Bros 2011 Annual Report Download - page 6

Form 10-K
http://www.sec.gov/Archives/edgar/data/949373/000119312512092597/d260635d10k.htm[9/11/2014 10:08:30 AM]
• Product supply: We have proprietary recipes and production processes for our bagel dough, cream cheese and coffee. We believe these
recipes ensure product consistency and that our processes provide for the delivery of a variety of consistent, superior quality products at
competitive market prices to our company-owned, franchised and licensed restaurants.
Frozen, or partially baked and frozen, bagel dough is shipped to all of our company-owned, franchised and licensed restaurants where
the dough is then baked on-site. We believe that our significant know-how and technical expertise for manufacturing and freezing mass
quantities of raw dough produces a high-quality product more commonly associated with smaller bakeries.
We negotiate price agreements and contracts depending on supply and demand for our products and commodity trends. These
agreements can range in duration from six months to five years. Most of our commodity based food-costs increased in fiscal year
2011. We implemented a cross functional cost team to evaluate innovative ways to target $3.0 million in annualized incremental
savings on a go-forward basis without negatively impacting the customer experience.
Wheat represents the most significant raw ingredient we purchase. In an effort to mitigate the risk of increasing market prices, we
utilize a third party advisor to manage our wheat purchases. We will continue to work with our third party advisor to strategically
source our wheat purchases. As of January 3, 2012, we have secured price protection on approximately 88% of our wheat needs for
fiscal year 2012.
We also have developed proprietary coffee blends for sale at our company-owned, franchised and licensed restaurants. In an effort to
mitigate the risk of increasing market prices, we utilize a third party advisor to manage our coffee purchases. As of January 3, 2012, we
have secured price protection on approximately 93% of our coffee needs for fiscal year 2012.
Our cream cheese is manufactured to our specifications utilizing proprietary recipes. Our cream cheese and sliced cheese products are
purchased from one supplier under a contract that expires in 2013. As of January 3, 2012, our supplier has secured pricing on our behalf
for 94% of our butter needs and 98% of our Class III milk needs, which are the primary ingredients of our cream cheese and sliced
cheese products.
We purchase other ingredients used in our restaurants, such as meat, lettuce, tomatoes and condiments, from a select group of third
party suppliers. Our chicken products come from chickens that are cared for in strict accordance with established animal care
guidelines and without the use of growth accelerators such as steroids or hormones. Where available, we buy high quality fresh fruits,
vegetables and specialty produce from a nationally recognized group of third party suppliers and distributors.
• Government regulation: Our manufacturing and commissary facilities are licensed and subject to regulation by federal, state and local
health and fire codes. We are subject to the regulations of keeping our commissaries USDA compliant. Additionally, we are also subject
to federal and state environmental regulations.
• Competition: Our manufacturing and commissary operations are primarily ancillary and support our company-owned restaurant
operations, as well as our franchisees and licensees. Our competition is from several large bakeries and from local bakeries in the states
in which we operate.
6
Table of Contents
Franchise and Licensing
Approximately 2% of our 2011 total revenue was generated by our franchise and license operations. Revenue from our franchise and
licensing segments are derived from initial up-front fees, royalties on net sales and the purchases of our proprietary products from our
manufacturing plant and commissaries.
• Einstein Bros. franchising: We offer Einstein Bros. franchises to qualified area developers. As of January 3, 2012, we were registered
to offer Einstein Bros. franchises in 49 states and the District of Columbia.
We franchise rights to develop restaurants within a defined geographic region within a specified period of time. We are targeting
potential franchisees who have the existing infrastructure, operational experience and financial strength to develop several restaurants
in a designated market. The franchise agreement requires an up-front fee of $35,000 per restaurant and a 5% royalty based on net sales.
Our Einstein Bros. franchise restaurants that have been open for one year generally have average unit volumes of approximately
$882,000.
• Manhattan Bagel franchising: We also have a franchise base in our Manhattan Bagel brand. The typical Manhattan Bagel franchise
agreement requires an up-front fee of $25,000 per restaurant and a 5% royalty based on net sales. Our Manhattan Bagel franchise base
provides us with the ability to grow this brand with minimal commitment of capital by us, and creates a built-in customer base for our
manufacturing operations. Our Manhattan Bagel franchise restaurants that have been open for one year generally have average unit
volumes of approximately $572,000.
• Licensing: We have license relationships that include Aramark, Sodexo, AAFES, HMS Host and Compass. Our licensees are located