What Happened at Cosi?


From a high stock price of $43 in 2006 to bankrupt and delisted, Cosi is a tough lesson in high rents and disorganized management for fast-casual restaurants.

When Cosi first emerged in the U.S. in 1996, it was among a handful of fast-casual pioneers that relied on three day parts, but unlike other pioneers the company never made much money.

It peaked at 151 units in 2008, but had been struggling to reach AUVs high enough to cover the high cost of rent through the Great Recession. According to a 10-K, rent occupancy costs (which do include paper goods and packaging) sat at 30.1% of sales in 2008. And even as the company closed locations that number continued to rise, reaching a staggering 37% at company locations in 2014 as rents rose and sales slowed.

Unlike fast-casual peer Panera, Cosi over-extended in markets with expensive rent. And the strategy of favoring business centers meant a busy coffee and lunch rush, but a dismally slow dinner hour when business crowds went home. And even the breakfast rush slowed as so many concepts jumped on the day part with high-quality coffee and breakfast fare.  

“They were really outclassed at breakfast by everything that has happened in the space,” said restaurant analyst and consultant John Gordon, with Pacific Management Consulting Group.

He said without money to fund strong marketing behind the concept, things only got worse.

“If you’re not promoting with an organized marketing program with some kind of LTO base, maybe at a discount, that is what happens,” said Gordon. “You can’t really do 7% marketing when your rent is 25% of sales.”

According to an analyst report from Anton Brenner at Roth Capital Partners in January of 2016, rent alone averaged out to 21.1% of that occupancy cost. Franchisees faired better as Brenner said the 16 restaurants acquired from then-CEO R.J. Dourney had an occupancy cost between 13% and 14%.

“We estimate that on average the rest of Cosi's portfolio has rents of around 15% of sales,” said Brenner. “But for the worst performing stores with bad leases and too low sales, rents in some instances are greater than 25% of sales, making it virtually impossible for those stores to be profitable.”

The revolving door for management also kept the concept disorganized from top down.  The August addition of Patrick Bennett as CEO meant five people at the helm since just 2011.

All that change kept the concept from getting any meaningful work done to right the company as it burned through cash; it saw just one quarterly profit during its entire time as a public company. The company reported a loss of $15.5 million in 2015, $15.8 million in 2014 and $11.5 million in 2013 as the revolving door spun. The company saw another $2 million loss in Q1 and expects a loss of between $700,000 and $1.2 million in Q2 of 2016. According to the latest 10-K, cumulative losses were $332 million.   

As that was happening at the top of the company, the locations suffered. Unit economics got further out of control.  In a recent report from R.J. Hottovy, a CFA and stock strategist at investment research firm Morningstar, a $1.6 million AUV is the threshold for success. According to the latest Cosi FDD, the 61 company-owned stores averaged $1.1 million. And as time went on without a solid marketing plan or a fresh look to compete with the many concepts that launched or innovated through the years, that relatively low AUV translated to deeper cuts and a lot of time wasted.

“You can’t get some of these years back, once the zebra’s spots are there, it’s hard to restripe it,” said Gordon.

With sour unit economics, hours were cut and quality suffered. One just needs to look at some of the shuttered restaurants’ Yelp reviews to see the outcome: dirty stores and poorly trained staff that weren’t enticing any return visits.  

And now, the lenders are stalking horse bidders on the bankrupt company with listed assets of $31.2 million and debts of $19.8 million. AB Value Partners, AB Opportunity Fund and Milfam are providing a $4 million bankruptcy loan. But the cash burn continues, the company has engaged consulting firm The O’Connor Group to fill the CFO role for $21,000 a week and is paying Patrick Bennett $15,000 in consulting fees and expenses each month to stay on as interim president and CEO. Cosi will be de-listed from Nasdaq when trading opens on Monday, October 10.

Franchisees are in an especially bad spot, even those with decent rent metrics. During Quizno’s public implosion, franchisees reported a 10% traffic decline due to the media attention of the bankruptcy as that company collapsed.

Still, despite all the bad news, the bankruptcy could be just what the company needs to retreat and reinvigorate its high performing stores—the top 10 company restaurants still average $1.9 million. The food is still good and unique, and with a bit of capital, innovation could mean the next chapter of Cosi could be a profitable one.

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