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.

February 1997By Comments

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. What they finally came up with was not radical—“We wanted to put different stuff on the bread”—but it prompted both a name and a concept change. Don Dissman had invented the word “Schlotzsky” because he thought it sounded like a deli sandwich, but the connection was anything but obvious; one poll had found that the public at large guessed that Schlotzsky’s might be a Polish plumbing supply house. So to suggest a variety of offerings, including sandwiches, Wooley and his cohorts proposed a simple revision: adding the word “deli” to the name.

After the name change, in 1991, it was easier to do the unthinkable—offer something besides a few Schlotzsky-type sandwiches. That same year, they hired Austin restaurant consultant and chef Mike Dyer to work on perfecting recipes for additional sandwiches, as well as pizzas, salads, soups, and desserts. The new menu did well in taste tests, and in turn it spurred even further alterations. “After we did the name and menu changes,” says Wooley, “we realized that the old strip centers we were in just didn’t do the trick anymore. We said, ‘Let’s put the food in a better facility.’” They spiffed up the stores with unifying design elements: wood furniture, a deli case, and a pert red-white-and-green color scheme. Every time they moved a store to a better building, sales went up. Schlotzsky’s was leaving behind the hole-in-the-wall sandwich shops of old and carving out a niche somewhere between a fast-food outlet like Arby’s and a casual chain restaurant like Chili’s.

But whatever was lost in jettisoning the familiar image was more than gained in broader customer appeal. Even I, who regard fast food as an insidious plot to undermine America’s sense of taste, have eaten a Schlotzsky or two over the years. So to see what the expanded menu offered, one afternoon I engaged in a mammoth sampling. Like the majority of Schlotzsky’s customers, I liked the basic Original sandwich best. (Though the restaurant offers fifteen sandwiches, ten pizzas, six salads, and assorted extras, the four versions of the Original account for nearly 40 percent of its sales.) In essence the Original is an Italian muffuletta, served warm and based quite consciously on those sold to this day at New Orleans’ famous Central Grocery deli in the French Quarter. No one would confuse one of those gargantuan, gloriously sloppy wonders for a Schlotzsky, but the chain version is highly acceptable, especially when compared with competitors like Subway’s very ordinary cold deli sandwich. The multiple meats and cheeses give it a full body, and the rather harsh mustard adds an appealing bite. The only thing that doesn’t quite measure up—and I know this is heresy—is the unusual Schlotzsky sourdough bun. Appealing when warm, it grows coarse and oily when cold. That aside, the Original is still the best of Schlotzsky’s sandwiches, all of which are served on variations of the sourdough white bread (wheat, dark rye, and jalapeño-cheese). Except for the sauerkraut-spiked Reuben and the beefy, almost sweet Philly, the versions without mustard are bland. The sourdough-crust pizzas, however, are fine, especially the Southwestern, with its stylish strips of barbecued chicken breast.

Once Wooley and his partners had tweaked the menu and fiddled with the look of the restaurants, they decided they didn’t want to be in the business of operating their own franchises anymore. “Too many headaches,” Wooley says. They sometimes found themselves solving day-to-day problems such as broken equipment in stores hundreds of miles away. Over several years Schlotzsky’s sold off all but five of its company-owned stores. Then the business began slowly changing the way it related to its non-company stores to ensure uniformity in the food as well as the atmosphere. “It wasn’t easy,” says Wooley. “Early on, we had encountered a lot of resistance to change. It was like going into someone’s living room and telling them to rip up their carpet and install one that you liked. Their attitude was, ‘No! Now get out of my house.’”

One of the ways the company established control was with something new: operations manuals. The manuals started out as basic how-to’s and eventually grew into a series of nine fat loose-leaf notebooks. Wooley refers to them as the company’s bible, but they’re more like an encyclopedia. And they leave nothing to chance. Take, for instance, Volume 3, Chapter IV, section A, page 4, which dictates the proper procedure for preparing a “Bun, Cheesed.” Method: 1. Wearing a safety glove on hand holding bun, slice bun horizontally into two equal halves and position on work table with the top half of the bun directly above the bottom half for garlic dressing and cheese application. Do not overlap buns. 2. Using a squeeze bottle, apply the garlic dressing to each bun half using a 4 ring spiral pattern with a maximum bead of 1/8″. And on, and on, and on.

As the manuals grew to cover everything from sandwich making to accounting procedures, Schlotzsky’s found that consistency and quality control were firming up. The company also instituted its own line of products, including olive oil, jalapeños, chips, and mustard, which its franchisees could buy at a considerable savings over national brands. Put on prominent display, the products and their spiffy labels spruced up the sandwich shops. To further ensure uniform operations and prevent inexperienced new franchisees from crashing and burning, the chain came up with the idea of a central training center. When it opened, in 1995 at the location on South Lamar in Austin, it was like a specialized vocational college; owners and their key employees worked in the kitchen chopping lettuce and slicing salami and took classes in how to run a restaurant.

If you’re thinking at this point that you would like to operate a Schlotzsky’s, here’s what it will take: The initial franchise fee is $20,000. On top of that you’ll need $100,000 to $120,000 for equipment, and you can count on borrowing another $125,000 for supplies, payroll, and more. Rent will require a chunk of change every month, and you’ll pay royalties to Schlotzsky’s amounting to 6 percent of gross sales. For your investment, you can use the company’s name and reputation—and you get your very own set of operations manuals. If you play your chips right, though, chances are good that you will make money: Entrepreneur magazine has named Schlotzsky’s the number one specialty-sandwich franchise opportunity in the country for five years running.

The company’s recent meteoric growth has put John Wooley in a tough position. These days he is making every effort to sustain his status as a reformed workaholic while at the same time perversely looking for more ways to grow the business. “Bread is our point of difference,” he muses. “It makes us unique. But it struck me that we did not have baking expertise. We should know about bread.” So a little over a year ago he inked a deal with upstate New York bread guru Dan Leader, the owner of the tiny, well-regarded artisan bakery Bread Alone, to run independent but complementary operations out of the same building. In 1995 the first of these opened at the South Lamar location and has been successful beyond anyone’s expectations, with sales of $2.6 million in 1996, far in excess of the $1.5 million projected. As one customer said, “You ended our family’s Saturday fights over where to eat, because everybody can find something they like there.” Another one hundred to two hundred such Marketplace stores could open in the future.

There’s also Schlotzsky’s expansion into foreign markets—a phenomenon that is happening with almost no effort on the company’s part. “We haven’t sought this out,” Wooley says. “The phone rings and it will be someone from Nova Scotia or Portugal wanting information.” At the beginning of this year, Schlotzsky’s was in ten foreign countries, including Canada, Mexico, Germany, Japan, and South Korea.

And Wooley continues to groom the company’s image. “We’re concentrating on getting out of strip centers—or at least, we’re not putting any new Schlotzsky’s in strips,” he says. The model for the future is a medium-sized freestanding building covering 2,600 to 3,200 square feet, with a dark brick facade and green-and-white awnings. The first opened in January in the Central Texas town of Bastrop. As always, Schlotzsky’s is moving cautiously, being sure its resources are not overextended, carefully maintaining quality and control. Eventually, Wooley hopes to have four thousand stores around the world, $3 billion in U.S. sales, and a national advertising campaign that will give Schlotzsky’s the name recognition of a McDonald’s or a TGI Friday’s. Not bad for a hippie sandwich shop.

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