By Lynn Stock
July 9, 2021
When your company has been layering meat and veggies on sandwiches for decades, what’s the next step? In typical Silicon Valley fashion, you pivot.
For San Jose-based Togo’s Eateries, celebrating its 50th anniversary this month, that means rolling out version 3.0, updating its operating system and introducing a new line of sandwiches.
Wait, what?
A sandwich shop has its own operating system? This one does, said CEO Glenn Lunde, and it’s been successful.
Togo’s, with its more than 160 locations in California and other western states, is part of the more-than-$26 billion franchise sandwich industry in the U.S. It’s a sector with one giant player — Subway, with its approximately 22,000 locations, accounting for more than $9 billion of those sales in 2020, according to Nation’s Restaurant News’ latest restaurant rankings — and plenty of both national and regional competitors.
In the Bay Area, Togo’s is the largest of the homegrown sandwich chains, but it’s not alone. Santa Clara-based Ike’s Love & Sandwiches, with its idiosyncratic sandwich names, has more than 70 locations, with only about a third of them in the Bay Area. And Specialty’s Cafe & Bakery, which started in San Francisco in 1987 and grew to have 50 cafes in three states before going bankrupt in 2020, is trying to make a comeback.
What Togo’s is attempting to do is get to the next level.
“We’re looking for sites that have a good blend of lunch and dinner and weekend business. Historically, I think our focus was more on the lunch business,” said John Dyer, Togo’s director of franchise sales and real estate. “We were trying to center around large office communities, but there wasn’t much nighttime and weekend business in those markets. We’re looking for a good blend of daytime population, but also residential in the area so that we can pull from those folks at night and on weekends.”
Togo’s by the numbers
161: Locations throughout the West. All but six are owned by franchisees.
110: Togo’s franchise owners
$216,100 to $443,700: Total initial investment to operate a Togo’s. The initial franchise fee ranges from $15,000 to $30,000. On average, it takes about six to nine months between the signing of a franchise agreement and opening of a new location.
2,500+: Total full- and part-time store employees
15: Number of restaurants converted to Togo’s 3.0
Source: Togo’s
Despite a history that has the birth of Togo’s taking place not in the Bay Area, but in Michigan (technically, Togo’s origins date back 57 years when a single shop opened near Northern Michigan University), the chain is firmly rooted in the West. Togo’s marks its official debut in its current form in 1971 when a San Jose State University student named Mike Cobler bought Togo’s from the transplanted Michiganer who moved the sandwich shop to San Jose.
Cobler is the one who started to franchise the brand, eventually selling the company in 1997. It’s gone through several ownership changes, most recently in 2019 when Southfield Mezzanine Capital, a Connecticut firm that invests in lower middle-market businesses, bought Togo’s.
It’s in the West where Togo’s plans to keep expanding. Last year, despite the Covid-19 pandemic, Togo’s signed franchise agreements for 14 new locations to open over the next several years. In 2021, the chain will open eight new locations in the West, including its first foray into Nevada with franchise operators opening in the Las Vegas area. Reno will also soon be home to Togo’s.
Over the next five years, Dyer said the company’s expansion will focus on California, where most of its restaurants are already located. But that’s not stopping the company from eyeing other territory.
“We get a lot of folks that grew up in the Bay Area or another area of California and they find themselves in Boise or Las Vegas or Phoenix and they’re shocked to find out that the Togo’s isn’t there because they grew up with it,” Dyer said.
Wherever Togo’s expands in a post-Covid world, the company’s site search strategy has shifted a bit, he said. “We’re finding that the real estate opportunities are far greater in this post-pandemic environment, unfortunately, because so many restaurants closed. But it has created a great opportunity for some great real estate that wasn’t previously available,” Dyer said.
Togo’s ranks No. 256 out of 500 of the top U.S. restaurant chains, ranked by 2020 annual U.S. sales, according to a June report by Nation’s Restaurant News. Togo’s brought in $98.3 million in sales, down 19.3% over 2019. It had an average of $585,000 annual sales volume in 2020, which was down 16.4% from 2019.
Analyst John Gordon sees growth potential for Togo’s in former Subway’s franchisees.
“As Subway continues to implode, they could very well try to pick up some franchises that aren’t ready to leave the sandwich space yet,” said Gordon, founder and founding principle of Pacific Management Consulting Group, a restaurant analysis and management consultancy. “There’s an estimate that 30% of the Subway franchisees’ contracts are coming up in the next two to three years.”
Sandwich-making tech
The company’s plan to open more restaurants is only part of its “rebirth” story. The other is its revised approach to how it actually makes sandwiches.
The company’s new operating system revamps how sandwiches are ordered, in addition to how they are made. Even before the pandemic, Togo’s had embraced online ordering. The company has invested in technology behind a new point-of-sale system, and it added self-ordering kiosks in many stores.
CEO Lunde said that “off-site sales,” where customers order through a third-party app like DoorDash, weren’t the best fit for a delicatessen and its previous “one-on-one” approach where one Togo’s employee made a sandwich from start to finish.
“That didn’t have the same kind of speed that customers are looking for today,” Lunde said, explaining that the chain created a “speed line” that has one person taking an order, another cutting the bread, a third adding the meat, and a fourth adding vegetables before wrapping it.
“We needed to change with the times and have an operating model that still worked for dining guests and people that walk in, but also the people (ordering) online,” he said.
The pandemic accelerated off-site orders for Togo’s. Eighteen months ago, Lunde estimates 15% of sales were off-site. Today, that number is 35%.
“It exploded, of course, with Covid. We were already integrating all of those into our POS (point-of-sale systems). … We thought it’d go 15, 20, 25, right? Not 15 to 35 overnight,” he said.
The state of franchises
773,603: Number of franchise establishments in the U.S.
26,000: New franchise businesses expected to open in 2021
191,146: Quick-service restaurants
4.1%: Increase in the number of quick-service restaurants in the U.S. over 2020.
8.3M: Number of people employed by franchises in the U.S.
800,000: New jobs added in 2021
$787.5B: Total economic output of franchises in the U.S.
Source: Statista and International Franchise Association’s 2021 Economic Outlook for Franchising report
Franchise owner Letha Tran’s restaurant on Meridian Avenue in San Jose’s Willow Glen neighborhood went through the physical and technological transformation in 2019. Gone are the drab, 1970s-era wood paneling and high counter, which you can still see in the chain-owned store on Camden Avenue in San Jose (That corporate-owned entity, Lunde said, is slated to move across adjacent Union Avenue in the next year).
In 15 of the chain’s 167 stores, the 3.0 transition is in place. They have bright white and deep blue-tiled walls, new lighting and a lower ordering counter to make Togo’s more visually appealing.
Togo’s 3.0 “streamlined the process where it’s much more efficient and the employees love the atmosphere a lot more,” Tran said. “It has given the customer a better customer experience, and just adding things like the kiosk, more technology — that’s very helpful. You just get more through the line, less wait time. I think it’s a win-win situation.”
Tran has owned up to six Silicon Valley Togo’s franchises over the past 10 years. She even met her husband when he was a regular customer, and they have been married for two years. She now has three stores in San Jose and one in Morgan Hill.
Dan Pearson, a long-time Togo’s franchisee, has found 3.0 so refreshing he has put off retirement. The 68-year-old invested $150,000 in renovating his San Jose store and updating its technology to launch 3.0.
“My San Jose store has been converted for over a year,” said Pearson, who started with Togo’s as a sandwich maker in 1974 and opened his first store in Dublin in 1977. He currently has three Togo’s locations — two in San Leandro, and one at Capitol and McKee in San Jose. “Brands tend to get tired over the years, and to be around 40, 50 years is not the average anymore. 3.0 was really a revelation for us.”
Pearson’s San Leandro stores have about 20 to 25 employees each, while 15 or so work at his San Jose location. “Because the system is so much more efficient, we don’t need as many people on,” he said. “We can do with a crew of five what we used to do with six or seven.”
While some franchise owners — such as Pearson — have been with Togo’s for decades, many of the new franchisees are first-time restaurant owners, Lunde said. Those buying an existing store, or building a new one, “tend to be first-time entrepreneurs, maybe first-time restaurant people, maybe their first time into the entrepreneurial world,” the CEO said.
What’s next? More Togo’s locations will offer soft-serve ice cream cones and milkshakes, such as in Tran’s Meridian Avenue store. The chain also is testing a Korean-style bulgogi beef sandwich, Lunde said.
“You always have to keep innovating with the products and what are people looking for,” he said. “We’re going to continue to expand the appeal for Togo’s.”