Marshall Loeb, the former managing editor of Money and Fortune, conducts a regular series of conversations with today’s leading chief executives on the Stern campus.

 

 

		Kenneth Cron is a CEO with a vast range of experience in both new and traditional media. He was the president of Publishing at CMP Media. In September 1999, he joined Uproar, a leading interactive entertainment company, as CEO and was appointed Chairman of its Board of Directors in December of that year. In March 2001, Flipside, the publishing arm of the global media and communication company Vivendi Universal, acquired Uproar, and Mr. Cron joined Vivendi as Chief Executive of the combined company, known as Flipside. The combined company operates a family of advertising supported, interactive entertainment web sites. With nearly 13 million unique users per month, Flipside ranks among the top 20 web properties and reaches 14.5 percent of the online audience in the U.S.

ML: Tell us about your interactive entertainment and games company, Uproar.

KC: I got involved in Uproar after we sold CMP Media in 1999. CMP published magazines, newspapers, produced trade shows, conferences, all about information technology. We built CMP into about a half a billion-dollar company. We sold it to United News and Media for about $920 million. Then I retired. After a couple of months of taking my family to Europe, I realized that sitting on boards and investing in companies wasn't going to be a full-time job. Operating companies is what I know how to do. So, I decided to jump back into something.

One of the investments I had made was in a company that was sold to Uproar which was a Hungarian bingo site. I flew over to Hungary to look at the company. At that point, in mid-1999, everyone thought that entertainment on the Internet was a great opportunity. The thinking was that when America and the world started getting online, the Internet, which was then an information medium, would give way to entertainment. So, we decided to do something with the company. We redomiciled it in Delaware and took it public. We took the company public in March of 2000, and basically acquired and kept building an entertainment venue. Bingo, trivia, “Family Feud,” “To Tell the Truth,” and a number of very easy, mass-market, leisure-type games that people could play for 10 minutes or for two hours, and be bombarded by pop-ups and interstitials and advertising.

ML: It was advertiser supported?

KC: Yes. When the market started to crash in the Internet area, we were unique in the sense that our genre of content is very horizontal. We actually have about 15 million unique users and 23 million registered users. We're somewhere between the 15th and the 20th largest site in the world. And we're very sticky. Our users average about 30 to 35 minutes per month on the site. So, our advertising base did not erode at the same level as many of the other dot-coms. Our revenues actually increased during the year. Unlike many dot-coms, our sales kept going up and our losses kept declining.
What we did see was our market cap drop from a high of $1.4 billion to a market cap of somewhere around $60 million. At that point, we knew that fulfilling the entertainment vision of the company would be very difficult on our own. Our ability to acquire was severely hampered. We felt that the right way to go was to find a very important strategic partner that could allow us to leverage the assets, leverage the content and the distribution to allow us to fulfill the entertainment vision for the company. So we found Vivendi Universal. We closed the transaction last week for three dollars a share, a significant premium over the trading range.

Now we're in the process of integrating the companies. They had a site called Flipside. The entire combined company is now called the Flipside Network. We anticipate that we will be profitable in Q3 this year.

ML: Tell us something about Vivendi Universal.

KC: Vivendi Universal is a $70 to $80 billion market cap company. It's the second largest media company in the world, behind AOL Time Warner. It owns a huge cable television business called Canal+ in Europe, telecommunications services, publishing, Universal Films, Universal Music, and theme parks. It's a huge, huge company in the entertainment field. Now our employees look at the company and see a great opportunity.

ML: What do you think this will enable Uproar to do that it otherwise could not do?

KC: Ultimately, what we want to do is have access to unique content and have access to unique distribution. Vivendi Universal has 900 million customer contacts every year. It's a great opportunity for us if we can get at that customer base, and now we are their largest Internet activity.

ML: You've announced substantial layoffs at both Uproar and Flipside. Why do you think they're necessary?

KC: It's really tough. But, the reality is that downsizing is an important component to making companies profitable.

ML: You are one-third of the size in terms of employees of what you were at your peak?

KC: Yes. We're literally half a dozen companies now, put together to create a profitable dynamic entity. With that comes duplication in all departments. You inevitably end up with a situation where you have to make those considerations and make those changes. And it's hard.

ML: What are some of your other challenges and how do you plan to manage them?

KC: For me, a challenge is creating a dynamic business that grows. It doesn't matter what business you’re in. Managing costs in a company is certainly a very valuable task and one that needs to be done. But the deciding factor in a business, the excitement that employees get, is not from cutting costs. What creates the excitement is when sales are growing significantly, when you're in areas and business models that are really hot. As a CEO, my job is to create that environment. If I don't create that environment, I've let everybody down.

ML: You mentioned that Uproar has experienced huge fluctuations in market capitalization. How have you managed to keep the company on a reasonably even keel throughout all those wild fluctuations?

KC: It's been very challenging and very difficult. When the stock starts at 35 dollars and ends up at three, you feel terrible because you know people didn't do well. On the other hand, given where the market went subsequent to our decision to merge into another company, we certainly made the right decision. We got about a 200 percent premium over trading range. From that standpoint, it was a great decision. Yahoo! saw its price go from 240 dollars to 15 dollars. The same thing with Priceline.com and all those other companies. So when I look at the relative value of where this stock has gone, I feel pretty proud of the job that we did.

That being said, it was very difficult. I think there's a tendency for management to do the wrong things when the stock price fluctuates wildly. The idea is to keep it going in the right direction. Don't over-manage it. Keep a steady hand. Stay the course. Always keep in mind that the company's survival is number one, because if it survives, it can thrive. And don't do anything ever to put the company in peril.

I think one of the things we did right at Uproar was we never lost our focus. We never lost our direction. And we worked through the problems. And we managed to get results. So, sales went up. Losses went down. We were disciplined about it.
I think a lot of the free flow of capital that came into the market was so irrational and there weren’t enough seasoned managers to handle it. There wasn't enough discipline in place. There was too much speed and it just cycled out of control. When things really started getting out of control, people didn't know what to do. They hadn't done it before. And I'll be frank, had I not done it before myself, I wouldn't have known what to do either.

ML: Let's take you back to your days before Uproar. Tell us about your experience with CMP Media.

KC: I went to the University of Colorado. While I was in Boulder, I worked at IBM. IBM had a large computer plant out there and they were doing some programming for Grumman and some of the aerospace defense companies. That's how I got into the business. I worked there for three years and during the time that I worked there, they were talking about the coming PC revolution. I got enough of a taste for that industry that I convinced myself that it was going to be the wave of the future.
I had always liked the media business so, when I moved back to New York, I got involved with a small start-up, which was CMP. They published some capacitor and resistor newspapers in the technology field. I came to the company and started some PC- based publications. I began publishing in the computer area for the company and took the company in that direction, which turned out to be where the company needed to go.

I founded a publication called Computer Retail News, which became Computer Reseller News, which turned out to be a $100 million publication. We went on to publish, Network Computing, Information Week, Communications Week, Internet Week, Windows Magazine, Home PC, and it just went on and on. We started developing trade shows, conferences, and lo and behold, we built the company into a worldwide, very, very profitable media company.
In 1997, we took that company public. We raised $100 million and about 18 months later, we decided to sell the company to United News and Media for $920 million.

When we sold the company, my background in technology and media was the perfect set up to get involved in the Internet. And publishing was very much a business I understood. And what was the Internet but just publishing on the screen. So for me it was not as foreign as it might have been for someone else. I understood advertising, organizing audiences, selling access to audiences, and organizing and delivering those advertising messages.

 

Q & A with students:

Q: How did you manage to maintain one integrated company in the face of so much M&A activity?

KC: I look at M&A activity as an event that is purposeful for a desired outcome. I can use it to expand my audience, to expand my content, to change the geographical distribution of my business, to get talent in that I don't have, or a combination of all those things. I look at it from the standpoint of a kind of holistic picture of what the company needs. And you kind of look at that picture and get a sense of what the value of a company is to you. A company doesn't have an intrinsic value. A company has an intrinsic value to a buyer.
The people who work for me in the product and technology area, their job is to actually take the game content and integrate it with the existing game content. We integrate our games with the user in mind. What the user wants is global registration, a common database. So when you are acquiring different companies it becomes a huge database issue.

Q: How are you going to be able to integrate yourselves into a company as large as Vivendi Universal?

KC: I would say over the next two to three months, my job is going to focus on getting our organizational structure right and moving us to profitability. Large companies tend to focus on two basic areas when they acquire: financial and human resources. If they control the money and they control the people, they control the company.
In other words, when we organize ourselves into Vivendi Universal, what they will take control over is human resources and the financial structures. I am the CEO of the combined company and, for the most part, we're an autonomous organization within Vivendi. They run it that way because what they bought was literally the management team, because the assets, especially in the media business, are the people. It's not as though you own a railroad or you own an office building. With the media business it's the management team you really want to keep in place.

Q: How can you manage to attract talent for a company that is so volatile in terms of its stock price?

KC: The assignment of the company is really to fulfill its mission. If you just keep moving ahead with that mission, there will be people that stay with it and people that don't. I don't think ultimately people come for the stock options. I actually don't even think, in the end, people come for the compensation. Ultimately, if the compensation isn't right, you're going to leave. And ultimately, if the stock options aren't right, you're going to leave. But it's not the deciding factor. The deciding factor is, do you like the business you're in? Is it exciting? Is it interesting? Is it where you want to be? Does it provide growth for you as an individual? If all those things are in place, you'll probably stay with the company for a good long time.
We have had very little trouble retaining our very best people. We did have trouble finding the new talent we needed because the market was so overheated at that time.

Q: Where do you see most of the growth from Flipside coming from?

KC: I would say advertising will always be a part of our business model, the vast majority of our revenue stream. I think there will probably be a bunch of different models in the future. There will be pay for play models. There will be subscription-based models. And I think there will be hybrid models and I don't think we know what all of those will look like yet. I think we have a unique situation at Flipside in that we have a large enough revenue base to be profitable. And that's unusual, because most companies have not been able to do that. I would say that right now we are in the midst of looking for new revenue streams. Because we are on our way to becoming a profitable company, we have the time to look around and figure it out. I do think that entertainment on the net is poised to grow significantly.

 

 

		J. Peterman is the co-founder and former CEO of J. Peterman Company, a classic American start-up success story. After receiving 100 rejections from venture capitalists, Peterman finally lined up financial backing after running advertisements for his off-beat apparel products in the New Yorker. Starting with $500, a $20,000 unsecured loan, and one unique product, Mr. Peterman built his start-up into a $75 million catalog company. A cash flow crisis in 1999 forced the company into bankruptcy. J. Peterman recently wrote and published the book Peterman Rides Again (Prentice Hall Press, 2000), and offered a professional and personal examination of his business in a Harvard Business Review case study. Peterman is an expert speaker on entrepreneurship, brand building, corporate culture and the painful but essential art of learning from mistakes. He is currently in the process of developing a second Peterman business, J.Peterman.com.

ML: You have created a company that achieved cult status. J. Peterman was absorbed into the culture. You were even played as a character on "Seinfeld." Tell us how you happened to create the J. Peterman Company, what it did, and how it achieved some of the status that it had.

JP: First of all, we had no plan. I found this coat that became our first product just on the spur of the moment. I'm basically a romantic and the coat – a duster – had romance attached to it. Romance isn't just hugs and kisses. Romance is hardship. It's adventure. It's all the things that you have read about in your life but that you never do. So I bought the coat. A duster is a long, canvas coat that cowboys used to wear in the 1800s to keep the dust off when they were riding horses. They were long so that they would cover your legs. Cowboys were romantic figures in my mind. They don't say a lot. They spend a lot of time by themselves. They always have an opinion on things. That's a romantic figure to me.

To me, the duster was a way to escape from the humdrum everyday world of information overload, of all of the things that go on in our lives that contain us. I could escape by just putting on this duster. I wore it around wherever I went. People everywhere would give me looks of approval. That was my market research. So I said, "Let's see if we can sell a few."
This copywriter friend of mine and I, we wrote an ad. We placed it in the newspaper in Lexington, Kentucky. And we didn't sell any coats. We ran another ad and we sold one coat. Finally, we ran an ad in The New Yorker and we sold 70 coats.

ML: How did you build from there?

JP: It wasn't until the fall of 1987 that we got a second product, which was the J.P. shirt. It's a colonial-period shirt. Again, it defined who we were. So, we had two products from the little space ad. Then we had the heirloom bag. Then a mail bag. We had a real fireman's coat. These were the products that we started out with, all in space ads. Then we started testing other magazines like GQ, Esquire, and Harpers.

Next, I borrowed $20,000 from the bank, unsecured. And then I got a $200,000 Small Business Administration loan. I went to my banker, and he said, "You need capital. You aren't going to get any more loans unless you get some capital." I knew nothing of what venture capital was or even what capital was. I was very naive. So, I educated myself quickly and developed a business plan.

If I were to show you the business plan that got me $1.2 million in backing, you would all die laughing. It was so rudimentary, and so weak in so many areas that it proved to me in retrospect one thing: venture capitalists want to invest in a good idea. Ultimately that business plan brought in about $20 million in venture capital.

ML: Do you need some record of success to get venture capital?

JP: I can only speak from my own experience. The fact that I failed was not a detriment. If you haven't failed, you probably haven't tried to do anything. And failing is just part of the process of learning. Venture capitalists look at that. They actually look or some blemishes on the record of entrepreneurs they invest in.

ML: What was the next step?

JP: I could see space ads tapping out. We had 23,000 customers from the space ads so we created a small catalog – seven items, black-and-white sketches – and we mailed them to the 23,000, and then we mailed to the same 23,000 again at Christmas time, and we were off and running.

ML: Can you base a mail-order business virtually anywhere, particularly now with the Internet and the kind of communications we've got?

JP: Absolutely. It has always been my contention that it doesn't matter where you start the mail-order business. You don't need a storefront. Today, I can have real-time input into the development of the page sitting in my office while the artists and the art director are working in New York and the merchants are sitting someplace else. We can all participate at one time.

ML: How did you determine what kinds of products to get?

JP: There are six things that conceptually identify a J. Peterman product. Romantic. Authentic. Unique. Wondrous. Journey. Excellence. Those six things define the product. We weren't selling products. We were selling romance. We were selling individualism. We were selling "Be Your Own Person." I want the customer to feel special, to feel smart, to be able to show people that they have good taste. Individualism. Romance. That's the definition of the concept.

The opportunities for products are fantastic. There's no shortage of new ideas. Now, there may be a shortage of people who can recognize them. But I'll guarantee you, there's no shortage of new ideas and of wonderful products.

ML: Take me to J. Peterman at its peak.

JP: At our peak, we mailed 18 million catalogs. That was six million catalogs too many. Anything done too much gets boring. If I mail you a catalog today, you think it's great, different, wonderful. I mail you another catalog next week. "Hey! that's good." I mail another one next week. "Oh!" And the week after that, you know, you get tired of it. There is an unsaid number of times that you can go to somebody.
We also at our peak were developing over 2,000 new items a year. That was about 1,000 too many. Any time you increase the quantity of something, you affect the quality. Those were some of the cancers that were creeping in at the peak.

ML: When did you fall off the cliff?

JP: In retrospect, the cliff appeared in 1995 with this additional proliferation of items. That was the cancer. We took in another round of financing. The company was at a plateau so we decided to expand into retail and we hired all these high-level people, got another $7 million, and we opened up 10 new stores in 1997. We increased the catalog circulation from 14 million to 18 million. We added several new catalog efforts. Peterman's Notebook was a brand-new effort. We had a holiday catalog. We were just doing too much too quickly. We ran into some bumps with the bank in the summer and completed another financing in the beginning of September 1998 of $10 million and got into a cash crisis. We were vitally aware of a cash crisis in October 1998 and identified it as a disaster in November.

ML: Right before Christmas?

JP: Right before Christmas. In my book I call it my voyage on the Titanic. It's a perfect analogy. The Titanic is going along. The band is playing. Everything is wonderful. Oops! What was that? The bump? But it is an unsinkable ship. We're going forward. Full speed ahead. Band is still playing. Oops! We're starting to list a little here. What's going on? Well, we have a problem, and it's a pretty serious problem. But this is an unsinkable ship. So, we go on, and we go on, and then the thing begins to really list. And then there's a great flurry of activity. And all of a sudden we have bankruptcy experts in there to keep us out of bankruptcy.

So, by mid-October, we’ve identified that we're going to have a $6 million hole. The bank was squeezing us. Then the ship started going down. And all the people who could jumped off. Some of us went down with the ship.

The inventory was already in. We had already paid for it, so it was just sitting there, using cash. The printer went down in a disaster in the printing factory in September so the second draft of our Fall catalog was three weeks late going out. Our Peterman's Notebook was an economic disaster. Nobody bought anything out of it. You put all of those things together and you get a cash-flow crisis. You know, not enough money.

We declared bankruptcy on January 25th,1999. It was sold at bankruptcy auction on March 7th.

ML: How much did the creditors collect on the dollar?

JP: Nothing yet. The bankruptcy is still going on.

ML: It's not easy to get up after that kind of failure. You had 40 million people out there watching you. Tell us how you worked through what must have been one of the most difficult periods in your life.

JP: Well, I got depressed. I had a home office and I had my computer. I sat there during the night and I walked around with nothing to do. So I said, okay, I'll start writing a book. I started writing a book, six, seven hours a day, for three months. At the end of June, 2000 I took a look at it. It was the worst piece of trash that had ever been written. I threw it away.

But it was a cathartic experience. It was the beginning. It was a step. And then I did the Harvard Business Review article. When I re-read that, I noticed there was still a little tint of bitterness in it, so I knew that I wasn't better yet.

Then I started in on the business plan. I thought I had the most wonderful dot-com scheme in the world and I had some venture guys interested in it. Then I stood back and I looked at that, and I said, "What are you, stupid?" It was the same thing on a bigger scale. It had no soul. So, I threw that away.

Then, when the Harvard Business Review article came out, some financial guys started talking and some things started happening. All of a sudden, things began to come into focus. Now I own my J. Peterman name again. So we're off and running.

It just takes time. It's like death or divorce. It just took a certain period of time before I began to get a passion for living, a passion for life.

ML: Tell us about the new business.

JP: It's the same kind of merchandise. Romance. Unique. Authentic. I don't want another 500-person company. I don't want millions of dollars of inventory. I do want a focused, strong, exciting brand. So, I've created a licensing company. And I'm going to control the merchandising, and I'm going to control the creative. And then, I will license the catalog. I will license the website. I'm presented with another opportunity in life. I have a new opportunity to develop the brand further, the way it originally was conceived. I don't have venture capital in this time, I have private capital. One of the investors happens to be John O'Hurley, the guy who played me on "Seinfeld!"

ML: Do you think that your name and your reputation helped you to raise capital for this new venture?

JP: Yes. I think because of the J. Peterman brand name, because of my personal reputation, because I have a million customers, and because I have name recognition with over 40 million people in the US, I haven’t had any trouble raising money. In fact, I’m oversubscribed. There is a waiting list!

Also, the business model is good for this venture. The licensing company generates cash. In the old business, if you made $5 million, you probably didn't have any money. Just go look in your warehouse and there's your $5 million. In this business, if you make $5 million, there's $5 million in cash. The company's set up as a limited liability corporation, so the profits will pull through. Will it work? Yes, I think it can work. I think we have a great leg up. I think that we've retained a very good licensing agency. It's still shepherding the brand, but now I don’t have to focus on a lot of the mechanics of the business.

Q & A with students:

Q: How do you know, when choosing merchandise, what is good for your eye versus what's going to sell to the public?

JP: It is tough. And that's the trick. What I look for is, what is romantic about that? What is unique about that? What is authentic about that? It takes the process to another level. It still comes down to your eye. It comes down to whether or not you can pick the good stuff.

Q: Would you say that one of the problems was that you lost the mission of your company, and you actually became a bit unromantic, focused perhaps on the profits more?

JP: You’ve got the right idea. Because there were so many products, they weren't very romantic.

Q: When you were starting the business, how did you know how much of your own money to put into it? How much did you risk?

JP: All the way. I mortgaged my house up to the hilt. I was married with four kids, three in college. But you know what? I made it. Either you believe in what you're doing, or you don't. You've got to commit.

 

 

		After receiving his MBA from Stern in 1994, Andrew Stenzler founded Xando, Inc., a leading chain of cafés, which combine the traditional coffee house with a full liquor bar. In October 1999, Xando acquired Cosí Sandwich Bar, creating Xando Cosí Incorporated, which had 55 outlets as of April 2001. Mr. Stenzler is currently the Chairman and CEO of this successful chain of cafés.

ML: Did you work on the idea for Xando while you were at Stern?

AS: I got the idea for Xando in my second to last semester at Stern. The day after I graduated, I headed up to Hartford, which was where the first location was. I was on the cell phone in the middle of graduation, closing the real estate deal for that location.

ML: What was the idea behind Xando?

AS: Xando was the first concept to combine coffee by day with drinks at night. We were a quick service, over -the-counter coffee bar by day, much like Starbucks. The unique thing that we do is table service in the evening. We are the neighborhood gathering place that Starbucks tried to be.

Most restaurants get three usages out of their real estate, i.e. breakfast, lunch, and dinner. We get five full day parts: breakfast, lunch, afternoon, evening, and late night. When we acquired Cosí, we took the Cosí product and we put it inside the Xando format. Now lunch and dinner are our two best parts of the day, because we have Cosí sandwiches.

We had two great brand names, Xando, which came from "X" and "O", hugs and kisses. And we had Cosí. Cosí was a better name for us. It was well known here in New York. And so, slowly but surely, the Xando name is going away.

ML: Tell me about these five aspects of the day.

AS: We change our product line throughout the day. We change our atmosphere throughout the day. It might be classical music in the morning, and more upbeat music at night. We might serve Squagels, square bagels made from Cosí bread, in the morning, but pizza at night. It's a more complicated idea, harder to operate. But as hard as it is to operate, it has made us special, and it has also been a good barrier to entry for competitors.

ML: How can you cook a full meal in this environment?

AS: Another secret to the Cosí concept is we don't do a lot of cooking. We do one thing great. And that's make bread. We make the best damn bread in New York City. And we use that bread in many different ways throughout the day. So there's no kitchen at Cosí – it is all right in front of you.

ML: Tell us how you got the idea for the very first café that opened in 1994.

AS: The first idea for Xando came from going around to various coffee bars to discuss what business we wanted to go into. It was under my nose. I thought there should be someplace better for us to meet. We came up with the coffee and bar idea, wrote the business plan in two weeks, and raised $400,000. I founded the company with my best friend from childhood. We've been lucky enough that our match worked.

ML: How many units do you have today?

AS: There are 55 stores today. There are another 20 going up this year. We own them all, and lease the real estate for them. We're in seven states, from Massachusetts to Virginia. We recently entered Illinois, and we'll be opening near my other alma mater, in Ann Arbor, Michigan, in May.

ML: What are your revenues?

AS: Well, it's a private company, but we'll do north of $100 million in revenues this year.

ML: Isn't coffee a low-profit business? How can you make money in your enterprise?

AS: God bless Starbucks. They set the prices for coffee and we followed them. They're the price leader. We set the sandwich price, because we think we're the sandwich leader. Our average ticket is eight dollars. With the combination of products that we serve, everything is high-margin. Liquor is high-margin. We bake, and make ourselves the high-margin piece of the sandwich and our pizza and coffee. So you really have three very high-margin products. Our cafés typically do three times what a coffee café would do.

ML: How do you maintain quality control?

AS: Very carefully. We started standardizing everything we did with store one. We thought this was going to be a big business the day we started it. We created training manuals. We had to make it so that it felt like the owner was at every store. We've been lucky that we've had the capital to invest in the training programs necessary to create consistency for both the product and the service. It took a lot of time. We give everybody stock options. We want our employees to talk like owners and act like owners. A typical manager at our restaurant might go through an eight-to-10-week training program. And an hourly partner might go through seven to 10 days before he ever hits the floor of the restaurant.

One of the goals in the retail business is to become the employer of choice. We're lucky, because we've got a great concept, and people want to work for us. So as much time as we spend trying to make Cosí a better concept, we spend more time trying to make our people better.

ML: Yours is a private company. How do you have a marketplace for the stock for people who want to cash in their options?

AS: People know we are going to be a public entity soon. When we go public, that will create the liquidity that will enable us to continue to incentivize employees through stock options. You want to be a manager at Starbucks? You can have freely tradable stock options. You want to be a manager for us, you can make many more stock options, but it might be longer before you can liquefy them.

ML: How do you create the best, for example the Cosí bread, and how do you maintain it over time and from location to location?

AS: Reinventing the business every year is something we do. If you rest on your laurels, you just can't compete. So we spend as much time thinking about what's the next phase, or what are the next products, or what's the next thing that has to change. What we did when we first started was coffee and liquor together. We got lucky, nobody was doing it. Six months later there were knock-offs. We realized if you're going to be good, you have to continually reinvent the business. As tastes change and society changes, you have to change.

ML: Let's talk a bit about how you differ from Starbucks.

AS: How do we differ? We're a bread place and a food place. Starbucks doesn't cook anything on site. And they never will. We like to go to areas where they are, because they've gotten people to pay $3.50 for a latté already. That’s very good for us. They've trained the consumer. They have a company-owned store model. We like company-owned, as opposed to franchising, because we can control it.

ML: What other lessons are there to be learned from your experience that would apply to virtually any other enterprise?

AS: There are two things. One is, you never have enough money. Whatever you started with is the wrong budget. The other one is, it’s not true that you should never sign personally for anything. If you don’t, you never start. You need to take risk.
I also think we set a good example with the merger. Communication was the key. People fear for their jobs. You can’t give guarantees, but you can let people know what you are going to need in each department and let people know what they need to do if they want to stay in the organization. We also did a lot of research on the company we bought so that we wouldn't have a clash of cultures. I think the digging and the due diligence that we did was one of the reasons that we were successful. And the two concepts worked well together.

ML: What are some of the secrets of finding just the right location for a Cosí outlet?

AS: The secret is information. The concept was working well at our first location up in Hartford. When we went to our second location in New Haven, it was kind of a dud. What it taught us is you can't be on the wrong side of the street. And you can't be the 11th coffee bar in the neighborhood. Now, when we go to a new market, we've already mapped out every single trade area. We match them up to how our existing stores are doing. And, based on that, we make assumptions about how we're going to do in the new market. You have to have patience and wait for the locations that you've already pre-selected. With each new store you're able to put into your model how you did. So it becomes less and less theory and more and more actual statistics on how well you're going to do.

ML: What are some of the other ingredients in creating customer satisfaction?

AS: It starts with the sourcing and selection of the people that work at the company. You have to orient them. Then you have to train them. Then you've got to give them more education. You've got to promote them. It's the people each step of the way.

ML: How do you create new products?

AS: When we first started it was in the living room sitting around going, "What do you think will work?" These days you've got to be on trend and on consumer taste. We have to start with the consumer, understand what market trends are, and then create products that we can be best at. Then we test them. We get feedback from our focus groups. And we roll out the products. One of our new products, the Squagel, was an idea just five months ago. And it's already in two stores and about to go nationwide because we can move really fast. If you're at Starbucks these days, it's three years from the time the product is conceived to the day it hits the stores.

Q & A with students:

Q: How did the CEOs of other companies become your mentors?

AS: Fred DeLuca of Subway one day went to the New Haven location. Even though we weren't making any money there, it was always crowded. So Fred came into that store and he wanted to meet the owner. I happened to have been there that day. So that's where I met Fred DeLuca, when I had two stores. Then Subway tried to buy us. They thought they could franchise the hell out of us. Fred invited me to Subway. He started on one side of a blackboard and he outlined Subway's way of doing business to me so that a third grader could understand it. I walked out of there and I was floored because I had learned so much. So I just became friends with Fred and bounced ideas off of him. Starbucks tried to buy Xando in 1998. That's how I met Howard Schultz. Howard was my idol. Now he too is a friend. It was very tough when we decided not to sell to Starbucks, because here I was with my idol and we didn't do the deal. It strained our relationship during that period of time. But today, he's a person that I still emulate and certainly aspire to be like.

Q: Why did you decide not to sell, to go it alone?

AS: The reason we didn't sell is we really felt that we could create a greater return for investors than they were going to get inside Subway, or inside Starbucks. And we had the support of investors. We are backed by Henry Kravis and Invesco, among others. We had investors who allowed us to take the high road. We were able to always do what we thought was best for the long-term life of the company. And that is a big luxury. When we didn't sell to Starbucks, they knocked it off with two concepts, both of which really don't exist today. We feel pretty good that our concept might not be around today if we had sold it to someone who wasn't 100 percent focused on it.

Will this be part of another company one day? It may be, if we had the right strategic partnership with someone who could create more value. It's certainly not an ego thing or me wanting to be in charge. I want to do what's best for the investors.

Q: At what stage of your business were you able to gain access to investors such as Henry Kravis and Invesco?

AS: Our original investors were just anybody, family, anybody like that, 10 grand a pop. We had to bootstrap capital together for the first three or four years. We started to meet some high net worth individuals or "angel investors." In our third or fourth year, we ran our first real private placement memorandum. You've got to go meet every venture capitalist because 99 percent turn you down. We had to find the investors who understood retail, who thought maybe we were building a big brand. We ran that first round and raised $5 million. And then we ran a $14 million round that was headed by Invesco, the large mutual fund company.

Q: Is there a limit to the expansion of Cosí stores?

AS: What we've already started to do is plot all of the United States for those stores that can hit our economic models. We've already plotted out 1,500 stores that we think we can do here in the United States. As you learn more, you can continue to up the amount. We serve a need that's unfulfilled in America today, which is the all-day café, a place to congregate with great products. We truly believe that every neighborhood can handle a Cosí. And if that's the case, hopefully there will be many thousands.