Schlotzsky's Deli was once bankrupt. Now, under new ownership and a new marketing plan, it is poised for its most ambitious expansion effort to date.
It’s been nearly 40 years—many successful, but more recently it’s been a struggle—since Schlotzsky’s Deli opened in Austin, Texas. Now, having grown into an international franchise chain with 350 stores in 35 states and six foreign countries, it’s poised for its largest expansion since emerging from bankruptcy.
Company officials said the company has turned the corner from the woes of the last decade, when the company filed for bankruptcy protection amid embattled leadership and slumping sales. Schlotzsky’s is undergoing a dramatic rejuvenation, which includes making over its stores and continuing a partnership with Cinnabon and Carvel Ice Cream to sell their wares. Along with that, the company is working to rebrand its image through advertising and, most importantly, to double its size to 700 stores in five years.
“About the only thing that hasn’t changed about the brand is our food. That won’t ever change,” Schlotzsky’s president Kelly Roddy said. “Our entire team has worked extremely hard to get us here.”
The catalyst? Company officials and independent food-industry experts point to the acquisition of Schlotzsky’s in late 2006 by Focus Brands Inc., the franchisor and operator of more than 2,200 locations in the United States and 34 foreign countries under the brand names Carvel, Cinnabon, Moe’s Southwest Grill, and Seattle’s Best Coffee. It was the second time that Schlotzsky’s had been sold recently, resulting in a shaky public image that Focus Brands has worked a few years to improve.
“It’s a brand to watch and keep an eye out for,” said Melissa Wilson, a principal at Technomic Inc., a Chicago-based food-research firm. “Schlotzsky’s has been able to keep sales up during the recession, so that says a lot about its potential as the economy starts improving.”
Founded in 1971 by Don and Dolores Dissman, Schlotzsky’s initial menu consisted of one sandwich of mixed meats, cheeses, and black olives, toasted on a freshly made sourdough bun, called “The Original” and based on the muffuletta.
Ten years later, real estate investors John and Jeff Wooley and Gary Bradley bought the company for less than $3 million. In 1982, Bradley split with the Wooleys, who kept Schlotzsky’s. The Wooleys expanded Schlotzsky’s menu, took the company public, and saw the chain peak in 2001 with 759 stores and more than $400 million in sales. But after the company posted losses, Schlotzsky’s board of directors pressured the Wooleys to step down and resign from the board in July 2004.
Schlotzsky’s filed for Chapter 11 bankruptcy protection in August 2004, and its stock was delisted from the Nasdaq. The number of locations fell to 445 when the assets of the company were sold for $28.5 million at auction in December 2004 to Bobby Cox Cos. Inc., which two years later sold the company to Focus Brands. A year after the acquisition, Focus Brands picked Roddy as brand president for Schlotzsky’s, who most recently was director of retail operations for another successful Texas-based chain, H.E. Butt Grocery Co.
Roddy has helped orchestrate a makeover for the restaurant—alluding to the round shape of its famous sandwich, with circular tables, lighting structures, and general decor—that’s under way across the country, with plans to have all existing restaurants renovated by 2011.
Meanwhile, the brand has launched a campaign with a new slogan, “All 'Round Lotz Better.” Before now, the company has had two major marketing slogans in its history: “Just One Sandwich, It’s That Good” and later, “Funny Name, Serious Sandwich.”
Focus Brands last year also started rolling out Cinnabon Express and Carvel Ice Cream kiosks at 50 Schlotzsky’s stores, and all 50 new franchisees that will open Schlotzsky’s stores in 2010 have requested the co-branded model, Roddy said.
Co-branding is seen as efficient in the industry because it enables cohabiting chains to save on construction and overhead costs by sharing a location. It’s nothing new in the restaurant industry. Yum! Brands Inc. has married KFC, Taco Bell, and Pizza Hut—and separately, A&W Restaurants with Long John Silvers’—for years. But Wilson points out that Cinnabon and Carvel’s dessert items complement Schlotzsky’s menu, while Pizza Hut and Taco Bell are competing for the same customer’s main meal.
Roddy said Schlotzsky’s is targeting markets in Texas and untapped markets such as Atlanta; St. Louis and Kansas City, Missouri; Raleigh and Charlotte, North Carolina; and Florida; as well as markets in Asia.
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