New Deli

After twenty years as a small chain of hole-in-the-wall sandwich shops, Austin-based Schlotzsky’s remade itself. Now it’s slicing up the competition.

WITHIN EASY BICYCLING DISTANCE of each other in Central Austin are two Schlotzsky’s sandwich shops. One is a tidy, low-ceilinged space in a venerable cluster of stores on South Congress. It is so small—six hundred square feet—that the word “cozy” seems a wild exaggeration. Customers order Schlotzsky’s eponymous muffuletta-type sandwiches and other foods at the counter, pivot, walk four steps to the soft-drink dispenser, pivot again, and walk five steps to a few vinyl-topped tables. This location is, in fact, the original Schlotzsky’s, founded in 1971. A little more than a mile away, on South Lamar, is another Schlotzsky’s, this one so large that the word “spacious” seems a gross understatement. Ten thousand square feet in size, it has soaring ceilings and solid wood furniture. A classy bakery shares the space. Customers order, then cross the room to a window table or sit on the breezy bricked terrace. Built in 1995, it is one of the prototypes that will take the Austin-based sandwich chain into the twenty-first century.

The contrast between the two neatly sums up the past and future of Schlotzsky’s, which is now the fastest-growing nonburger sandwich franchise in the country, according to the Chicago food-service research firm Technomic. For its first twenty years, the company was puttering along as a chain of hole-in-the-wall, hippie sandwich shops. Then, about five years ago, it began gradually reinventing itself—broadening its menu, yuppiefying and standardizing its image, and instituting stricter control over its stores—and the results were strikingly profitable. In the past two years Schlotzsky’s has opened some 245 new domestic and international franchises, or one about every three days. And in 1995 it racked up $142.5 million in sales. Giant rivals like Subway and Blimpie might be bigger (Subway has more than 1,100 stores versus Schlotzsky’s more than 575), but none is expanding more quickly.

In a way, Schlotzsky’s success is counterintuitive, because the company took an idea that wasn’t broken, and fixed it. For the first ten years the chain had sold only one kind of sandwich, the Schlotzsky. (In case you’ve never sampled one, here are the ingredients: ham, cotto salami, Genoa salami, grated cheddar, mozzarella, Parmesan, marinated black olives, shredded lettuce, tomato, sliced onion, sharp mustard, and seasoned garlic dressing on a distinctive toasted sourdough bun—the last of which is made from a recipe as secret as the formula for Coke.) The sandwich inspired fanatical customer loyalty, but even so, the company was growing only modestly, at about 10 percent a year.

So around the end of 1991, Schlotzsky’s initiated an aggressive expansion pro-gram. First, it transformed itself from a sandwich shop into a modified delicatessen. Second, it switched its focus from running franchises to selling them. The resulting changes didn’t necessarily occur in strict one-two order but happened gradually over a period of months, even years. Once the main ideas were in place, however, more modifications followed. The company started its own line of foods to sell to its franchisees and customers. It engaged local sales representatives to prospect for good locations. It went public in 1995, raising $18 million through the sale of stock. And it struck a deal with the tony Bread Alone Bakery to create a series of Marketplace stores, with a Schlotzsky’s on one side and a Bread Alone on the other. Today Schlotz-sky’s is no longer an also-ran—it is a sit-up-and-take-notice contender.

Given its present success, Schlotzsky’s origins could hardly have been more humble. Austin entrepreneur Don Dissman opened the first shop 26 years ago at 1301 South Congress. Over the next few years, the chain expanded into four other states, and in 1981 Dissman sold it to a group that included Austin real estate partners John C. Wooley (the current president of the company) and Gary Bradley. Bradley and the affably restrained, somewhat owlish Wooley, who’s now 48, divided their business the next year, Bradley taking the real estate interests and Wooley (along with his brother Jeff J. Wooley) keeping Schlotzsky’s. But the Texas economy was beginning to slide into the doldrums by that time, and Wooley shortly found himself staring at $20 million in real estate loans, unrelated to Schlotzsky’s, that were owed to troubled banks and S&L’s. Looking back on that dismal period, he says, only half joking, “One of the good things about attending out-of-town trade shows was that the sheriff couldn’t find you to serve papers.”

Wooley realized that if he was going to retire the debt, Schlotzsky’s would have to grow, but it took several years to work up the strategy and the courage to make the necessary modifications. “We had all these no-no’s like, ‘You can’t change that,’” he says. But eventually financial pressures forced Wooley and his partners to take some risks.

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