Blimpie International, Inc. Business Information, Profile, and History

Company Perspectives:

Blimpie International, Inc. is dedicated to increasing stakeholder value through developing, franchising, and supporting a portfolio of world-class brands.

Stakeholders (franchisees, subfranchisers, master licensees, employees, suppliers, and shareholders) recognize that "increasing value" is dependent upon providing consumers with superior products and services.

History of Blimpie International, Inc.

Blimpie International, Inc. is the franchiser for Blimpie restaurants, the second largest submarine sandwich chain in the United States, trailing Subway. By mid-2002, there were about 2,000 Blimpie outlets in operation, located in 47 U.S. states and in 15 other countries. Unlike many restaurant chains, Blimpie does not generally operate "company stores." Virtually all of its income is derived from the various fees associated with franchise arrangements. In addition to freestanding outlets and locations in malls and store clusters, Blimpies can be found in a variety of nontraditional sites, such as inside convenience stores, gasoline station food marts, schools, office complexes, hospitals, and sports arenas. A key area of growth is in the development or acquisition of other brands. In 1999 the company launched Pasta Central, a franchised chain within the "home meal replacement" category featuring Italian-style pasta and pizza; the concept was exclusively a vehicle for cobranded Blimpie/Pasta Central outlets. Two years earlier, Blimpie International acquired majority control of Maui Tacos, a Mexican quick-service restaurant with a Hawaiian flavor. Maui Tacos in 1998 launched Smoothie Island, a chain offering blended fruit-based beverages.

Early History

The first Blimpie sub shop was opened in Hoboken, New Jersey, in 1964 by Tony Conza, Peter DeCarlo, and Angelo Bandassare, a trio of former high school buddies. Inspired by a successful Point Pleasant, New Jersey, operation called Mike's Submarines, Conza, DeCarlo, and Bandassare speculated that a similar restaurant would do well in Hoboken. They raised $2,500 in seed capital by borrowing from friends and began serving essentially the same sandwich for which people were lining up at Mike's. The original Blimpie was an instant hit, and, before long, customers began asking about starting up franchises. The first franchise was sold to a friend in western New York for $600 during the company's first year of operation.

In 1965 Bandassare left the company to start his own food service supply firm. Conza and DeCarlo decided to expand into New York City, beginning with a store on 55th Street in Manhattan, near Carnegie Hall. By 1967 there were ten Blimpies in the chain, four of which were owned by the company's two remaining founders. Unfortunately, Conza and DeCarlo were not experienced businessmen, and, in spite of the chain's rapid growth and good sales volume, profits were difficult to make. To keep the company afloat, the partners sold the four stores they owned and began to concentrate primarily on franchising.

By the mid-1970s, Conza felt the time was ripe to introduce Blimpie subs to the South. Partner DeCarlo, however, was against the move. This disagreement eventually led to a split between the two men. In 1976 Blimpie was divided into two separate entities, with both retaining rights to the Blimpie trademark. DeCarlo became head of a new, completely independent company, Metropolitan Blimpie (later renamed Blimpie's of New York, Inc.), which controlled franchising rights in New York, New Jersey, and other parts of the East Coast. Conza retained control of the original company, which was incorporated in 1977 as International Blimpie Corporation. Conza, a college dropout with no business credentials other than his experience with Blimpie, remained chairman and CEO of Blimpie through January 2002.

During the late 1970s, Conza was willing to sell franchises anywhere there was an interested franchisee. Blimpie began selling franchises both for individual stores and for whole territories. Unfortunately, many of these new franchises were rather isolated from the rest of the chain, and some of the benefits of franchise arrangements--chainwide advertising, for example--had little effect in those locations. Although the chain was growing rapidly, several of the newer stores failed. By 1983, International Blimpie's annual revenues were approaching $1 million, and Blimpie's franchises totaled 150. Conza took the company public that year, with a modest initial over-the-counter offering of 90 cents per share.

Mid-1980s: Ill-Fated Diversification Program

Over the next few years, Blimpie embarked on a diversification program that failed miserably. Conza began to feel that there was no future in submarine sandwiches. At the same time, he longed for the kind of respect that comes only to real restaurateurs, not fast-food moguls. In 1984 Conza opened the Border Café, a tablecloth restaurant serving southwestern cuisine on Manhattan's swanky Upper East Side. Although the Border Café did reasonably well at first, this shift in focus proved to be a major blunder. While Conza was turning his attention away from the subs that had gotten him where he was, competitor Subway--which was founded in 1965, just a year after the first Blimpie's was opened--was beginning an expansion drive that would push it far ahead of Blimpie as the world's foremost submarine sandwich chain.

To reflect his increasing concentration on non-Blimpie activities, Conza changed the name of the company to Astor Restaurant Group, Inc. in October 1986. Meanwhile, the Blimpie's chain was stagnating. The number of outlets was stalled at about 200. In Manhattan, the company's birthplace, the Blimpie name suffered severe image problems. In the early days, the company had not been particularly selective as to who could get a franchise. In addition, its early franchise contracts allowed operators quite a bit of latitude in how the restaurants were to be run. This led to a degree of uniformity among stores far below that of other national fast-food chains, not to mention a reputation for questionable sanitation standards.

After the Border Café's initial success, Conza opened two more of them in 1986, one in Woodstock, New York, and the other--with New York Yankee Dave Winfield as a partner--on the Upper West Side of Manhattan. Unfortunately, the Border Café idea turned out to be a big money loser. Although Astor brought in $4.5 million in revenues for 1987 (its largest total yet), the company showed a net loss of $347,800 for the year. That year, only 30 new Blimpie restaurants were opened, and company stock was in free fall, bottoming out as low as 15 cents per share. Gradually, Conza's interest in his core business began to return. Over the next couple of years, Atlanta became the company's biggest target for new Blimpie's franchises. In 1987, the company celebrated the opening of the 50th Blimpie's store in the Atlanta area by giving away 25,000 free sandwiches to customers there.

Late 1980s and Early 1990s: Revitalizing Blimpie

By 1988 Conza had realized the error of his ways, and he quickly got out of the Tex-Mex business. Seeing the tremendous success of Subway, Conza decided to redouble his efforts in the hoagie arena. He began to address the Blimpie problem with renewed vigor and a more systematic approach than he had used before. The first step in Conza's revitalization program was to identify four fundamental problems plaguing the business: a lack of goals, poor use of financial resources, low employee morale, and procrastination. He then got together with a group of managers and drew up a list of "101 Small Improvements." Delegating to his senior staff much of the day-to-day managing he had always done himself, Conza went on the road in an attempt to open up the long-closed channels of communication between Blimpie and its franchisees.

Next, Blimpie launched a quality-control program aimed at cleaning up its 140 New York restaurants, which had long been sources of embarrassment to the chain. At the same time, Conza continued in his efforts to improve relations with franchisees, many of whom had become disgruntled over the last decade. In addition to flying to dozens of cities to meet restaurant owners, Conza formed a franchisee advisory council to keep him apprised of important issues; he launched a newsletter called No Baloney News and a toll-free hotline to get important information out to franchisees; and he gave franchisees more control over advertising through the formation of regional advertising co-ops.

In 1989 Blimpie began testing a new low-calorie menu in the hope of attracting a bigger share of the increasingly fat-conscious American public. The new menu, called Blimpie Lite, included a variety of tuna-, crab-, chicken-, and turkey-based items, in both salad and pita-bread sandwich form. The following year, the company launched another test: gourmet salads sold under the name Blimpie Fresherie. Blimpie also began tinkering with its prototype restaurant design around this time, incorporating the company's signature lime-green and yellow colors into a sleeker look for new outlets. By 1990 the Blimpie turnaround was well underway, with systemwide sales reaching $120 million per year.

The Blimpie chain continued to grow steadily through the early 1990s. Much of this growth was fueled by the company's area developer program, in which franchise rights were sold for an entire area to a developer, who then subfranchised those rights to individual operators. The company continued testing new products throughout this period. In 1991 Blimpie unveiled its Quick Bite menu in response to the appearance of value menus in many fast-food establishments, including arch-rival Subway. Items on the Quick Bite menu included three-inch hero sandwiches for 99 cents, a six-inch bacon, lettuce, and tomato sandwich for $1.59, and a veggie pocket pita sandwich, also priced at $1.59. The company also began testing pizza at a handful of locations in an effort to breathe some life into its dinner business. Conza's attempts to improve franchisee relations continued as well. The company's first annual franchisee convention was held in 1991.

By the beginning of 1992, there were Blimpie restaurants in 27 states. That year, the chain passed the 500-unit mark and the company changed its name to Blimpie International, Inc., reflecting the renewed focus on the sub brand. In the spring of 1993, Blimpie began trading its stock on the up-and-coming NASDAQ exchange. Around this time, the company began to sink more resources into advertising than it had in the past, doubling its marketing budget to about $2 million per year. A new advertising campaign was launched, encompassing just about every medium available, including television, radio, print, and point-of-purchase. This campaign marked the introduction of the chain's new tag line: "Simply Blimpie for fresh-sliced subs." Some of the television spots featured people on the street struggling to repeat the tongue-twisting phrase, "Simply Blimpie."

Sales throughout the Blimpie system reached $132 million by 1993, and Blimpie International earned $1 million on $12 million in revenue. By autumn of that year, the chain had grown to 670 outlets. Improved marketing support from the parent company helped reduce the rate of franchise failures from 10 percent to 3 percent. In some cases, such as in the brutally competitive Chicago market, Conza allowed franchisees to divert their 6 percent annual franchise fee to advertising.

As the 1990s continued, Blimpie came up with a new concept that accelerated the chain's growth even further. Blimpie's franchises began appearing in a variety of nontraditional locations. First it was convenience stores. As convenience store proprietors began to seek out new ways to compensate for declining cigarette sales, they started turning to fast food. Blimpie's was the natural choice for many, for two main reasons: a real kitchen was not required, and startup costs were relatively low (as little as $35,000) compared with other fast-food operations. Among the early nontraditional sites for Blimpie's outlets were the Des Moines, Iowa-based Kum & Go convenience store chain; Texaco Food Marts in Mississippi; and the food court at the University of Texas. Blimpie's also became part of the first Home Depot superstore restaurant section, located in Atlanta.

In 1994, the 800th Blimpie, in Iron City, Michigan, was opened. That year, the company launched several new concepts to further its drive for nontraditional venues. The Blimpie kiosk was a movable, condensed restaurant that could fit into a 100-square-foot area. The kiosk, which could serve four types of sandwiches, drinks, and side orders, was designed for use at stadiums, fairs, and other special events. Another new idea was the movable display cart, suitable for high-traffic areas such as airports, college campuses, and concerts. Other new wrinkles included a special refrigerated case for convenience stores (Blimpie's fastest-growing market), and the Blimpie Bakery, offering a variety of baked goods aimed at boosting early morning business.

Blimpie reached two major milestones in 1995. Largely on the strength of its nontraditional location push, the chain passed the 1,000-outlet mark that year. Blimpie International also lived up to the second word in its name for the first time in company history, with the opening of a location in Stockholm, Sweden. As the 1990s continued, the company looked for more new ways to sell Blimpie sandwiches, including vending machines, outlets in supermarkets, and new types of carts and other mobile product delivery systems.

Late 1990s and Beyond: Seeking Growth Through New Concepts

With the opening of new outlets in the United States slowing and with overseas growth occurring only at a very slow pace (there were only 61 overseas locations in 15 countries by 2001), Blimpie launched a new diversification effort in the late 1990s. The first such initiative came late in 1997 when the company acquired a 75 percent stake in Maui Tacos, a fast-food chain with six units in Hawaii. This concept featured traditional quick-service Mexican food, such as burritos, tacos, and quesadillas, but with a Hawaiian twist, such as meat marinated in pineapple, lime, and other Hawaiian flavorings. Under Blimpie's majority ownership, Maui Tacos was soon introduced to the mainland, and by 2001 there were 15 such units in nine states and the District of Columbia.

After almost two years of in-house development, Blimpie launched Pasta Central in 1999. Unlike Maui Tacos, Pasta Central was not a standalone concept but was created as a cobranding vehicle that would be coupled with Blimpie Subs & Salads. Cobranding emerged as a hot growth vehicle in the late 1990s and involved the placement of two (or more) restaurant brands within a single unit. There were a number of rationales behind cobranded units, including the idea that the additional choices that they offered customers made them more attractive to groups of people, but for Blimpie International it was the desire to increase dinner revenues that propelled the creation of Pasta Central. Because sandwiches were largely considered lunch fare, Blimpie Subs outlets made the bulk of their sales from 11 a.m. to 2 p.m. Pasta Central, by contrast, with its Italian-style pasta dishes and its pizza offerings, was designed to generate a lot of traffic during dinner, thereby making it complementary to Blimpie. In addition, Pasta Central was also created with a home meal replacement component built in--a selection of prepared refrigerated and frozen entrees and prepacked foods for preparation at home. By mid-2001 there were eight units cobranded with Blimpie and Pasta Central, with the units located in Puerto Rico, Georgia, South Carolina, Texas, and Wyoming.

A third new concept was Smoothie Island, which was launched through Maui Tacos in 1998. Smoothie Island's menu featured beverages blended with frozen yogurt and fruit. In addition to opening standalone units, including such nontraditional locations as airports, health clubs, and grocery stores, Blimpie also planned to cobrand Smoothie Island with both the Maui Tacos and Blimpie concepts--both in dual-branding and tribranding formats. By mid-2001 there were 80 Smoothie Island units located in the United States, Puerto Rico, and four other countries.

By the turn of the millennium, Blimpie International was struggling. Net income had fallen steadily throughout the second half of the 1990s--dropping from the high of $4 million in fiscal 1995 to just $1.1 million in fiscal 2000. A main factor in this decline was that the subfranchiser rights to the Blimpie Subs chain had largely been sold by the mid-1990s, thus bringing a halt to what had been a steady stream of income. Another factor was that the drive to open nontraditional outlets was far from a winning strategy. Many of these units proved unprofitable, and a number of them were subsequently closed. During one 12-month period from mid-2000 to mid-2001 the company closed 155 underperforming Blimpie outlets, 70 percent of which were in nontraditional locations. The company also announced plans to close seven unprofitable company-owned Maui Tacos and Smoothie Island outlets, a move that would leave the firm with just five company-owned stores out of its nearly 2,000 sites. Also during 2001, the Blimpie chain began receiving a revamping that involved menu upgrades, more extensive point-of-sale merchandising, and an overhaul of the decor. One of the key changes to the menu was the addition of a line of hot grilled sandwiches that proved quite popular in market testing.

As Blimpie's struggles continued--net income having fallen below $100,000 for the fiscal year ending in June 2001--investors showed little interest in the company, and the price of the company's stock sagged. Seeing little benefit in being a publicly traded firm, Blimpie joined the growing ranks of restaurant companies fleeing the public market. In October 2001 a private investor group led by Jeffrey K. Endervelt, owner of the 44-unit Blimpie of California subfranchise, agreed to buy Blimpie International for $25.7 million. The transaction was completed in January 2002, whereupon Endervelt took over as chairman, president, and CEO, and Conza, who was a partner in the investor group, remained involved at the company but in an advisory capacity. Although Blimpie remained far behind Subway in the battle for hoagie supremacy, the new ownership and leadership perhaps signaled the beginning of a brighter era for Blimpie.

Principal Subsidiaries: B I Concept Systems, Inc.; Maui Tacos International, Inc. (73%).

Principal Operating Units: Blimpie Subs & Salads; Pasta Central; Smoothie Island.

Principal Competitors: Doctor's Associates Inc. (Subway); The Quizno's Corporation; Schlotzsky's, Inc.; Triarc Companies, Inc.; Panera Bread Company.

Chronology

• Key Dates:
• 1964: First Blimpie sub shop is opened in Hoboken, New Jersey, by Tony Conza, Peter DeCarlo, and Angelo Bandassare.
• 1965: Bandassare leaves the company.
• 1976: Conza and DeCarlo divide Blimpie into two separate entities, with DeCarlo keeping the locations in the Northeast and forming a new company called Metropolitan Blimpie (later Blimpie's of New York, Inc.) and Conza retaining control of the original company and the rights to the Blimpie name everywhere else.
• 1977: Conza incorporates the original company as International Blimpie Corporation.
• 1983: Company goes public.
• 1984: Blimpie diversifies by launching Border Café, a sit-down restaurant chain.
• 1986: Company name is changed to Astor Restaurant Group, Inc.
• 1992: Following the divestment of Border Café, company changes its name to Blimpie International, Inc.
• 1995: The 1,000th Blimpie outlet opens; first overseas unit opens in Stockholm, Sweden.
• 1997: Blimpie acquires a 75 percent stake in Maui Tacos.
• 1998: Smoothie Island chain is launched through Maui Tacos.
• 1999: Pasta Central is launched as a concept to be cobranded with the Blimpie sub shops.
• 2002: A private investor group led by Jeffrey K. Endervelt, a Blimpie subfranchisee, agrees to take Blimpie International private in a $25.7 million transaction; Endervelt replaces Conza as chairman and CEO of the firm.