Licensees sue Bruegger's Bagels Owners of 48 stores claim they were misled over business costs

Franchises

October 17, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

The owners of the Bruegger's Bagel Bakeries franchise in the Baltimore region has filed suit in U.S. District Court here in an attempt to block the company's founders from taking back control of the company.

Ken Wagnon and his son, Jay Wagnon, who own 48 Bruegger's stores in Baltimore, Oregon, Washington, New Mexico and the District of Columbia, contend that if the sale goes through Oct. 26, the value of their business will decline further.

"In terms of managing a nationwide chain, it is way beyond their capabilities. We think we need to find a buyer who has deep pockets and who can steer this brand into the future," Jay Wagnon said.

It isn't that the Wagnons like the current owners -- Quality Dining -- which they allege has also helped erode the $30 million they invested in their stores.

Nordahl L. Brue and Michael J. Dressel were the brains and entrepreneurial spirit behind the Bruegger's concept. But the Wagnons and other franchisees claim in suits that Brue and Dressel misrepresented what the cost of opening the franchises would be and what the average store sales would be after a year.

"There is substantial evidence that we were misled," said Jay Wagnon.

In the 13 years Brue and Dressel owned the company, the chain grew to more than 300 stores. But Bruegger's posted losses for the past two years.

Quality Dining, which operates franchises of several restaurant chains, including Burger King, bought the company from Brue and Dressel in 1996 for $142 million in stock.

Under its management, franchisee dissatisfaction has risen and four lawsuits have been filed against either Quality Dining, Brue and Dressel or both.

"We have not been happy with Quality Dining. They have deteriorated its value," said Jay Wagnon.

For instance, he said, Bruegger's failed to respond as more bagel shops opened across the country and competition became fierce. There were few new product introductions, and the franchisees begged the company to let them serve more than one flavor of coffee. "They are slow to respond to what the customer wants. We had to fight like hell to get Bruegger's to toast bagels," Jay Wagnon said.

Quality Dining has given the Wagnons no marketing assistance, even though the franchisees pay 2 percent of their profits to Quality Dining for marketing activities, the suit contends.

"I really think the concept has a lot of potential, but I have never seen a company screw up a concept as much as Brue and then Quality Dining," said Jay Wagnon.

In the past year, Quality Dining's stock has lost 71 percent of its value -- going from a high of $28.125 in October last year to its current price of $5.0625.

What happened to Quality Dining was in part a result of what was going on in the industry. The stocks of bagel chains dropped significantly in the past year, and bagel chains have not been able to finance their rapid growth through the public markets, said Mark Hamstra, associate editor of Nation's Restaurant News.

"There are several fast-moving chains that have targeted the same markets," he said. Bruegger's "never had a secure financing mechanism in place, and they weren't able to assist the franchises in growing."

Recently, Quality Dining agreed to shed Bruegger's Bagels, essentially selling it back to Brue and Dressel in a deal reported to be worth $50 million.

The franchisee lawsuits, filed in courts across the country, vary, according to Michael Garner, an attorney who represents three of the four franchisee groups, but most of the suits ask for financial compensation.

The Wagnons are seeking an injunction to block Brue from taking control, in addition to seeking a $30 million judgment.

A hearing on the injunction is expected to take place soon, according to attorneys representing the Wagnons.

David Findlay, a senior vice president of Quality Dining, said the company has no comment on the Wagnons' lawsuit, first filed in July. "We do expect the divestiture to close prior to the end of our fiscal year, Oct. 26," he said.

Brue and Dressel deny all of the allegations against them, said their attorney Christine Lanzon, adding that they will fight any attempt to block the acquisition.

"We are going to vigorously oppose it," she said. "We don't think there are any grounds whatsoever."

Pub Date: 10/17/97

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