The case highlights the difficult decisions faced by a growing business with the urge to grow rapidly in a competitive market. The decision faced by the management of Bagelz will determine its growth rate and viability over the next few years. Additionally, the dichotomy of exigencies relating to the management team’s decision in terms of future growth, forces them to look closely at their company and decide ultimately what method to use for future expansion in a market where the winners take all.
Bagelz, is a Connecticut –based Bagel chain with seven established locations within a three-year span. The company has a four-member management team and has the potential for tremendous growth, albeit within the bagel industry with large competitors. The company is now faced with a decision to remain as a fully company-owned operation and grow rapidly through Connecticut as a chain or to sell franchises as suggested by Fred Deluca, the founder of Subway: the multi-million dollar sandwich franchise. Fred had offered financing for the new franchising operation.
This option would open up many opportunities for Bagelz as the alliance with Subway would lead to availability of large amounts of capital, access to many locations across the country, and availability of great resources such as advertising and legal support. The downside of accepting financing from Fred includes: The concern of the four-member management team that Bagelz would become an extension of Fred’s empire and perhaps, losing control of their whole operation. The offer was also time sensitive and would not remain on the table indefinitely.
Franchising also would open up large geographical territories and lead to potential significant growth. However, the management team also had concerns about franchising. They worry about finding appropriate franchisees with adequate finances, motivation, ability to successfully run the business, retain quality standards and maintain a good franchisor-franchisee relationship. Bagelz might also be locked out of certain geographical areas by competitors and face a restriction in growth rate if the franchising option was not taken.
The management team’s decision was to develop a superior growth Strategy in a heated “bagel war” without losing control of the company. Franchising would also force Bagelz to comply with the Federal Trade Commission (FTC) rules concerning disclosure to potential franchisees. The creation of the disclosure documentation was expensive, time consuming and had to follow strict guidelines. Subway had also been receiving negative publicity recently and the team feared that Bagelz would be adversely affected if an alliance is formed.
Based on the available data, the management team needs to exercise the option for franchising as this provides a better and faster way to realize Bagelz’s value proposition and profitability. The team needs to accept Fred’s proposal, albeit, they should discuss their reservations and have written terms for any future agreements. Despite, the recent negative publicity concerning subway, the company is poised for growth and the issues can be rectified so as to remove such hindrance of growth and restore a positive outlook for the company.
Subway is still listed as one of the 50 fastest growing restaurant (cited in Restaurant Business, 1994). Subway has the capacity to launch Bagelz’s bagels successfully to a wider market. There is also wider brand recognition for Subway and so the alliance could prove to be immeasurably useful. Six months of negotiation have already taken place between Fred and the Bagelz’s management team and this should lead to a faster launch if all concerns are addressed and all details are successfully agreed on by all the parties.
Further delay may cause Fred to lose interest and the Bagelz’s team may then be forced to deal with other less desirable offers. Competitors such as Bruegger and Manhattan Bagel would soon be jostling for customers in the same state and growth rate for Bagelz would be seriously restricted. Brueggers, a major competitor, had been listed as one of the 50 fastest growing restaurant and so Bagelz needs to position itself urgently to meet this threat to its existence and ultimate succe.
References
Alyse, Andrea, Dan D’Heilly & Spinelli, Stephen (1996). Financing Entrepreneurial Ventures. Babson College, MA: The McGann-Hill Companies, inc