cornering the bagel market

Lee Wallace begins his business day at Hot Jumbo Bagels when most people are getting intimate with their REM cycles, arriving at two in the morning to load his truck for deliveries to grocery stores and restaurants all over town. Long before it ceased being the only freestanding bagel deli in town, Hot Jumbo cultivated a solid wholesale trade, and came to depend on those revenues. From 1979 through 1988 (when the Bagel Manufactory opened at 2200 Guadalupe), if you ate a fresh bagel in Austin it was almost certainly baked at 307 W. Fifth St. Refugees from the large urban centers as well as natives appreciated Hot Jumbo as one of the luxuries that distinguished the capital from your basic Texas hellhole. Now airy and light, the old place gained distinction from a dark ambiance and strange two-tiered pricing structure -- if you bought a bagel "to go" and then sat down to eat it, one of the owners usually hurried over and told you to leave or pay up.

The inevitable segue to a more complicated situation greets Wallace every time he goes to work these days. There, inches away from his western wall, a sign on the building at 309 W. Sixth -- for over a decade the site of American Cleaners -- announces the imminent arrival of Bruegger's Bagel Bakery, a national franchise chain. Right next door, opening August 19 or soon after. That's not the way people do things here, he thought when the sign went up in April, and that's what he still thinks. Sure, you might see a couple of burger joints side by side on the highway, but bagel shops?

"A little astonished that somebody in Texas would behave that way" is how Wallace describes his feelings. "They're coming in with short knives." A former army officer who got out after he was passed over for duty in "the big sandbox" and realized promotion to colonel wasn't likely, Wallace bought Hot Jumbo from the Terrobas, a family of Cuban and Colombian immigrants, four years ago. He has a mild personality and doesn't get angry when he discusses his woes. He says he doesn't want to sound hostile, because he was raised to be a good neighbor.

His contemporaries at other mom-and-pop bagel stores are more forthright. "I think that's just awful," says Isabella Loiacono, who with her husband owns the five Bagelry shops in north Austin, a local-only chain that just opened a sixth site in West Lake Hills. Mary Flynn, co-owner with her husband of Texas Bagel Cafe on Research Boulevard, concurs. "I think it's rude. It's just wrong. They had the audacity to say in the newspaper that they didn't realize Hot Jumbo was in the bagel business. We're here from New York, and we didn't move next door to anyone." Her husband, Bob, who sounds like the original feisty New Yorker, is almost beside himself. "I've had a lot of people come in my store and say even if they were to buy their bagels downtown they wouldn't buy them from Bruegger's just because of that. Lee Wallace just about lives at that store. They're affecting the man's whole future."

"Outrageous" is the most commonly used adjective when the subject comes up, with "vicious" running a close second.

The Texas Bagel Cafe also depends on wholesale trade, selling to Whole Foods, among others. The Flynns may be the second biggest wholesaler of bagels in town after Hot Jumbo. And while Bruegger's is not in the wholesale business, The Bagelry is. And so is Chesapeake Bagels, yet another national franchise that opened a shop kitty-corner from Katz's on West Sixth Street last October, and another at William Cannon and Brodie two weeks ago. Both Bruegger's and Chesapeake hope to have six to eight stores in the Austin area within the next couple of years. Conversations with bagel shop owners indicate that the wholesale trade is where the short knives really come out, as Bagel Shop A attempts to take accounts away from Bagel Shop B and so on. "We're not trying to solicit anyone else's business," says Isabella Loiacono. "I know for a fact that other people have tried to solicit ours." Lee Wallace allows that a few of his accounts have been chipped away, but a few of those have come back. "I've heard of customers asking [restaurants and groceries] to bring back our bagels, and I want to hug them, whoever they are." There are even stories, unverifiable, in which an employee of one store applies for a job at another so as to check out the operation.

Now, account poaching and obnoxious locating strategies are hardly unusual in the rough-and-tumble world of entrepreneurship. If bagel shops are to the Nineties what yogurt shops were to the Eighties, which seems to be the case, then none of this is surprising. What is startling is the very idea of bagels as the occasion for cutthroat competition, even if nobody has had their throat cut just yet. Bagels! If there ever was a benign ethnic foodstuff that seemed resistant to industrialization, this would be it. For decade after decade, bagels were indelibly associated with East Coast folkways that arrived with the great Jewish migrations of the 19th and early 20th centuries. While other Americans preferred the sweatier pleasures of meat, grease, and sugar for their impromtu dining, the bagel occupied a beloved niche in the foodscape of New York, Chicago, and other major cities. The northeastern seaboard is carpeted with bagel delis, and until recently, most of them were mom-and-pop ventures in the classic vein.

That was then. Nowadays bagel chains are the fastest-growing segment of the fast food industry, and maybe the hottest piece of the food service business as a whole. Places with names like Irving's and Sol's have given way to proliferating Manhattans, Chesapeakes, and Bruegger's, the names all suggestive of East Coast pedigree while the shops are stamped from a dye like any other chain.

And it is a volatile business. According to Nation's Restaurant Business, a leading food service trade journal, 1995 saw a wave of consolidation in the bagel business, referred to under the term "morning daypart" in food service jargon, and a great deal of movement in the family and coffee-shop segment in general. Mergers and acquisitions were happening all over the place, with both Manhattan and Chesapeake gobbling up many smaller concerns. Boston Chicken, Inc., ironically based in Golden, Colorado, mounted an aggressive move on the bagel trade by purchasing the 90-unit Einstein Bros. Bagels chain, which is now slated for expansion to 1,000 units by the turn of the century. (At this writing, there are none in Austin, though their arrival is expected.)

Booming is an inadequate term for what is happening to the business; Bruegger's Bagel Bakery, for instance, netted total sales of $125 million and change in 1995, a 55% increase over 1994. The average store earned $841,000 last year. Chesapeake went from $35 million in 1994 to $58 million in '95, an increase of 65%. Not to be caught napping, Dunkin' Donuts recently announced plans to retrofit thousands of doughnut bakeries for bagel production as well.

Why this is happening is easy enough to guess. A convulsing economy scattered denizens of the big northern cities all over the lower forty-eight, and years of doctors hammering on the dangers of pouring axle grease down the throat finally had an effect. A standard bagel -- prior to application of cream cheese anyway -- has a fat content of 3% or less. They're filling, they can easily be converted into sandwiches, and if made well they have a subtle flavor that makes hamburgers and doughnuts seem almost crass by comparison.

For the entrepreneur, success in bagels is earned to an extent not true of other fast foods. "Making a bagel is difficult because you have to have strong enough flour to form it into a circle, and it has to stick together," says baking consultant Thomas Hudson of Kansas City. "Most places have special mixers with bigger motors and oversized pulleys. The first three weeks at my shop, we blew a motor. The dough is really strong and thick. Doing a 200, 300-pound batch, you have to have a mixer that can withstand the pressure." Doughnut batter, by contrast, is squirted out through a tube. "You couldn't force bagel dough through anything," Hudson says.

The mixers cost upwards of $25,000, a major factor in a start-up cost that can easily exceed a quarter of a million dollars. Satisfying the froufrou tastes of sugar-addled America adds to the expense. Cinnamon raisin bagels are especially difficult to make, as the cinnamon dries out the batter if it sits around even a few minutes too long. Adding fruit is troublesome, and quick-frozen fruits more vexing still. They contain so much water that they get mashed into a soup if the mixing time is exceeded by as little as five minutes.

Nor is it a quick process. After mixing, bagels are proofed -- exposed to warm air for about 15 minutes and allowed to rise a bit -- then refrigerated for 5-12 hours to retard yeast expansion. What happens next is the source of ongoing controversy. Advocates of a traditional bagel, rather hard on the outside and compact inside, prefer boiling them before they go into the oven; this gelatinizes the surface so the bagel cannot expand any further. The modern, less labor-intensive method involves steaming them for about 90 seconds at 500 degrees, then baking. The result, depending in part on how long the bagel was proofed, is somewhat softer and fluffier. Preferences vary regardless of business type. Chesapeake steams, Bruegger's and Hot Jumbo boil. Blisters on the surface mean you're eating a bagel that is more than 12 hours old, probably frozen and shipped some distance. Oven baking at the point of sale is mandatory if the vendor wishes to offer a fresh, warm bagel, and the aroma that is considered essential to any bakery's ambience.

About a dime goes into the typical bagel, plus overhead, employee's wages, and a lot of little costs, and they sell in this market for about $1.30 plus tax if you want cream cheese, which most people do. For independent and franchisee alike, bagel shops are not a level road to fortune. Franchisees, of course, have to hand over part of their profits to the parent company and follow strict rules of operation, but they enjoy the advantage of national advertising and marketing tie-ins.

"If it hadn't been us, dollars to doughnuts it would have been someone else," contends Bruegger's' area manager Bill Nichols in defense of the territorial aggression on Fifth Street so many find offensive. "And not a Burger King, either. How much real estate is available from the capitol on in? Not a lot. We're not a destination, we're a convenience, so any old location won't do. [At Fifth Street] you've got eastbound traffic in the morning, in the evening we're situated for the southbound traffic going home, and it's got a parking lot. If you picked a similar site on Congress Avenue, for example, you wouldn't get near as much business."

Nichols is another affable ex-military man, and he looks like he could have left the Marines the same time Lee Wallace left the Army, rather than in the early Seventies after a hitch in Vietnam. His entry into the bagel business a couple of years ago followed almost two decades with the Hardee's hamburger chain, which he left when it was clear that both the company and the hamburger business in general had hit a plateau. He moved from St. Louis to Austin in 1994. Together with some other Hardee's veterans, he assembled the Texas Bagel Group to operate Bruegger's franchises in Austin, Houston and College Station. The company is based in Round Rock, where workers at its commissary mix and proof bagels for shipment by refrigerated trucks -- not freezers, he emphasizes -- to the various locations.

Sporting the enthusiasm typical of businessmen in a rapidly expanding field, Nichols looks like he's having fun. He insists that he doesn't want to drive Hot Jumbo under. "They have a much more varied menu line," he says, referring to Hot Jumbo's full lunch buffet, "and we're not going head-to-head with that. We're not going after [wholesale trade with] stores and restaurants. I think it's going to be more symbiotic than competitive."

While he's inarguably laying it on a bit thick with that last comment, it is impossible to glean much from Nichols' manner. He is always friendly and sincere, and he has a tough row to hoe on Fifth Street. Nobody will give out figures, but downtown rent is hovering around a dollar a foot. Bruegger's has less space and pays higher rent than Hot Jumbo, at least for the time being. Of course, Hot Jumbo has a different landlord (people assume the site has a common wall, but it doesn't), and Wallace's rent could go up precipitously in the near future. That would force him onto the tender mercies of a market where, as Nichols points out, good space is at a premium. If that happens, Bruegger's critics will have been vindicated, and the city will have lost another hunk of local character.

Assuming nobody assembles the kind of capital he did without reading stacks of market analyses, I ask Nichols how many bagel shops he thinks Austin can handle. He won't give me a figure, but he does offer a prediction.

"As bagels become more widely known, you get into a broader demographic," he says, citing the educated, aflluent populace that made the city attractive to him in the first place. "I think they'll grow in popularity and become like hamburgers in the Sixties. The Austin market is nowhere near tapped out."