A Creative Solution for Surplus Productivity

At the Lehem Erez store on Ibn Gvirol St. in Tel Aviv, the bakery chain's CEO, Ilan Rom, can return to anonymity. Rom hastens to explain that he spends most of his time at the chain's Herzliya branch, where he is a much more familiar figure. Now, the chain's new expansion plans, which include the operation of branches via franchises, will really put Rom into the spotlight.

The decision to expand via franchises was actually made about six months ago, says Rom; but real progress on the move began only with the start of the new year, when an agreement was reached for the opening of the first franchise. The new branch will be set up in Jerusalem by a local franchisee who has received the right to open Lehem Erez branches throughout the Jerusalem region.

The cost of a franchise for each branch is $50,000; franchisees will also have to pay the chain 5 percent of their monthly revenues and commit to purchasing the chain's products. Rom estimates that it will cost $100-200,000 to set up a Lehem Erez outlet, depending on the size of the premises, which range from 60 to 400 square meters.

"We hope that our franchisees will invest wisely, such that they will be able to recoup their investment within two years," Rom says.

This goal may be one of the lessons Lehem Erez gleaned from its own big investment in a bakery plant at the Poleg Center in Netanya. In 2000, the chain invested NIS 3 million in a 2,000 square-meter plant, which included offices, bakeries for bread and pastries, and a coffee shop.

"Since we built the plant, we have had a lot of difficulties," Rom explains. "While we were in full swing, implementing the business plan we formulated in 2000, the intifada and the recession set in. It took us a while to respond and figure out what to do without hurting our brand."

As demand declined, Lehem Erez began suffering from a surplus production capability and had to learn how to recoup the investment in the plant. Rom explains that the strategy he and his partner, chain founder Erez Komarovsky, came up with was to cut administrative costs and streamline operations by "keeping a close eye on the details and focusing on the branches as a source for profits."

The strategy worked, and Lehem Erez is back in the black.

Over the past year, Lehem Erez considered several options for improving the chain's financial situation, including selling products at supermarkets. Rom is pleased with the chain's success in weathering the past three years without harming the Lehem Erez label and is now looking to the franchises to ensure the chain's continued expansion. In light of the surplus production capability, Rom cautiously admits that franchises are the only way to bring about rapid growth.

The new plans aim to take full advantage of the surplus production capability and increase revenues by 20 percent in 2004. By 2005, Lehem Erez is planning to double production at its plant.

Komarovsky and Rom established the first branch of Lehem Erez in Herzliya eight years ago. "We were in the army together," says Rom. "Back then, I was the cook. Erez didn't have a clue about food."

In the early years, the partners managed to build a leading bread label without any investment in advertising, as well as a reputation for baked goods and gourmet food on a national standard.

Lehem Erez now has 19 branches of various types - one restaurant, seven coffee shops, six stores and five stands. Rom figures the chain has the potential for 10 more branches via the franchise method. Some of the places where Lehem Erez hopes to open franchises are Be'er Sheva, Lehavim, Meitar, Omer and Eilat.

"We may have lost a few wealthy customers to the recession," admits Rom, "but there are still more than a few people who are willing to pay NIS 13 for gourmet bread, and are looking for quality products."

Lehem Erez is not the only chain to have discovered the secret of franchises. Over the past few years, many coffee shop chains, including Aroma, Arcaffe, and Cafe Joe, have expanded their operations via franchises. Rom says that Lehem Erez has an advantage over the others because the chain was born after the product, and not the opposite way around. Another advantage Rom notes is that Lehem Erez plans to expand via local franchisees, who will ensure that the local character of the branches is maintained.

Lehem Erez's problem of surplus production capability is not unique, and has troubled the entire baked goods industry. All the coffee shop chains that have their own bakery plants face the same problem, explains Rom, and all are competing with one another, with small manufacturers and with companies like Bonjour and Pillsbury, which market to the supermarkets.

Lehem Erez is also planning marketing activities aimed at other coffee shops and restaurants. Rom notes that the chain already has 30 clients in this sphere, including Cafe Joe and the Mul Hayam seafood restaurant in Jaffa. Supplying these clients does not harm Lehem Erez's own coffee shops, explains Rom, because people who frequent them are looking for more than just a croissant.

Another area of business that Lehem Erez is entering is the provision of prepared foods to offices and small events. Rom notes that this is not just a food service, but one that includes a waiter or serving person.

The service will be provided via the branches, and Rom says that the Herzliya branch is enjoying relative success from this activity, with revenues for the past three months approaching NIS 100,000.