Editor's Note: A previous version of this story had been to updated to include the correct date of Blum's initial letter and to clarify that Demilio's response was issued to franchise owners and employees.
Of 95 Cosi Inc. shareholders who responded to an online survey from activist investor Blum Growth Fund LLC, all but two said they had lost confidence in the board of directors at Cosi, which operates and franchises 138-unit sandwich and salad chain.
Brad Blum, owner of Blum Growth Fund, said the survey is a nonbinding assessment of a portion of Cosi’s shareholders. He intended to increase “shareholder democracy” and bring about a meeting with the company’s board of directors so that shareholders might discuss Cosi’s performance and Blum’s proposal to turn around the brand’s performance with Blum as chairman and chief executive.
“My one request of the board is to listen to the shareholders,” said Blum, the former leader of Olive Garden, Burger King and Romano’s Macaroni Grill. “I didn’t know how many people would respond to this survey or what they would say, and depending on the feedback, it would have altered my direction. I’m suggesting the board do the same thing.”
At press time it could not be determined how representative a sample the 95 responses are relative to all holders of Cosi Inc. stock. The rate of response to the survey was incalculable because the questions were not sent directly to all shareholders, but hosted on the Blum Growth Fund website. The fund promoted the survey by advertising in the Wall Street Journal and Investor’s Business Daily, directing them to the survey on the website, where they could share their comments by name or anonymously.
Blum could not determine how many shares out of Cosi’s nearly 51.8 million shares outstanding were controlled by the 95 respondents. Blum Growth Fund owns about 3.5 million shares, or 6.8 percent of the company. He said several shareholders have contacted him personally to express support for his proposals and efforts to call a special shareholder meeting, including Chicago-based North Star Investment Management Corp., which owns about 1 million shares, or 1.9 percent of shares outstanding.
At press time, Cosi Inc. had not responded to phone calls or emails seeking an official response to the survey.
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Actively pursuing a new direction
Blum first began pushing for change at the operator or franchisor of the Così sandwich chain with a letter to the board of directors Sept. 5, in which he offered to be chairman and chief executive of the beleaguered brand for a $1 annual salary.
Cosi Inc. has retained executive search firm The Elliot Group to find a replacement for James Hyatt, who resigned as chief executive Aug. 31 and is now chief executive of Church’s Chicken.
Così, which operates 80 company-owned restaurants and franchises another 58 locations, has struggled during and since the recession. The company has received notice on more than one occasion that its stock could be delisted from the Nasdaq exchange for consistently closing below the minimum per-share price of $1.
For the Sept. 26-ended third quarter, Così reported same-store sales decreases of 3 percent at company and franchise stores. The company reported a full-year net loss of $3.1 million in fiscal 2010 and net losses of $2.1 million and $634,000 in the first and second quarters of 2011, respectively.
Among the changes Blum prescribed for Così included improvements to service and cleanliness, as well as a reduction in the size of the menu, which he said would allow for improved food quality.
However, claiming that Blum’s “strategic and operational suggestions represent no new ideas,” Cosi’s interim chief executive Mark Demilio dismissed Blum’s suggestions in his own letter to franchise owners and employees in early October.
“In fact,” Demilio’s letter said, “in the course of the company’s strategic planning over the years, we had previously considered the actions outlined by Mr. Blum and are already undertaking those that, in our business judgment, are reasonable to pursue.”
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In an interview with Nation’s Restaurant News, Blum responded: “In the restaurant business, it’s not like coming up with a new patent or invention [turns performance around].
“A well-thought-out strategy around food, service and décor is at the core of this. Another part of it is a crystal-clear brand vision that stakeholders understand and believe in.”
After holding the online survey and looking at results, Blum said he and like-minded shareholders will continue to ask for a special meeting. There they would call for a confidence vote in the board of directors and to vote on Blum Growth Fund’s proposals for Blum leading Cosi. Blum did not indicate any appetite for expanding the conflict to a proxy fight or a takeover.
“I’d be honored to serve as the next chief executive and chairman of Cosi, because I think I know how to make this work,” Blum said. “I’ve also said that if somebody on the level of a Steve Ells came along to do this and that’s who the board hired, I’d be thrilled. But short of something like that, this isn’t about me as much as it is about Cosi shareholders. It’s clear they want a special shareholder meeting.”
He added that it was one thing for Cosi Inc. to ignore one shareholder controlling nearly 7 percent of the company, “but the only way to silence the entire group of us [shareholders] is through results.”
“The board has to dramatically improve the business and increase the share price,” Blum said. “There has not been any communication about the plan to do so. Shareholder democracy is working … and the point is to get clarity on what shareholders are thinking.”
Deerfield, Ill.-based Cosi Inc. has 138 restaurants in 17 states, the District of Columbia and the United Arab Emirates.