IN THE HOLE; EXPANSION BITES INTO BAGEL BUSINESSES.

Byline: Stacy Roth Bloomberg News

Call it the Great Bagel Bust.

Manhattan Bagel Co. filed for bankruptcy in November. Einstein/Noah Bagel Corp.'s chief executive quit last month after the company's stock fell 84 percent in the past year. And in October, 11 months after paying $176 million for bagel chain Bruegger's Corp., Quality Dining Inc. sold it back to its founders for $59 million.

It's a story as old as the bagel itself: After rapid expansion an industry with fragile finances faces a shakeout. Bagel shops, it turns out, are cheap to open, but making a profit isn't easy - and almost every publicly traded bagel outfit has paid the price.

``This isn't the first time restaurant companies tried to grow too fast and failed,'' said Stephen Rockwell, an analyst at BT Alex Brown Inc.

Blame the promoters who hyped the doughnut-shape hunk of bread and staple of Jewish cuisine. Once common in only a few big U.S. cities, bagels in the early 1990s went nationwide as a half dozen chains blanketed the country with stores.

Consumers responded by chowing down, and bagel sales soared more than 240 percent from 1994 to 1996 to $2.3 billion, according to Restaurants and Institutions magazine.

Bakeries, supermarkets, doughnut shops and convenience stores couldn't ignore this, and they too started stocking bagels. Dunkin' Donuts Inc. in 1996 added bagels, which contributed much of last year's 6 percent sales gain at stores open a year or more.

With all the competition, making a buck on a bagel got harder.

``The bagel companies have grown so rapidly that costs to open new stores are offsetting cash flow, resulting in losses,'' said Lehman Brothers analyst Mitchell Speiser. ``There's a black cloud on the industry.''

Consider Bruegger's, once the nation's biggest bagel chain with some 470 stores when it belonged to Quality Dining. Indiana-based Quality Dining quickly found that operating bagel stores at a profit was harder than it looked.

``Bruegger's sold itself to the wrong home,'' said Piper Jaffray analyst Allan Hickok.

Now Bruegger's is back in private hands, smaller at 426 stores, conservative in outlook, and concentrating on markets in the Midwest, Northeast and Carolinas, where it has enough stores to be the top chain, said Chief Operating Officer Chuck Chapman.

Bruegger's shut 49 stores after co-founders, Nordahl Brue and Michael Dressell, repurchased the chain for $117 million less than Quality Dining paid.

The company says it will open stores only in markets where it's proved competitive.

``If you are going to be in the market you need to own the market,'' Chapman said. ``There's no in between.''

If Bruegger's stumbled, Manhattan Bagel Co. fell flat on its face. The New Jersey-based company hasn't made money since the fourth quarter of 1996 and reported a loss of $14 million in the first nine months of 1997. In the year-earlier period it lost $1.5 million.

In November, Manhattan Bagel defaulted on $42.5 million in loans and credit lines. Its main lender, First Union Corp., forced it into Chapter 11 bankruptcy, which gives a company a chance to devise a plan to repay its debts.

Manhattan Bagel's problems started in 1996 when it decided to step up expansion with company-owned stores that it hoped to sell to franchisees. Originally, it was a dough-producer that supplied some 320 franchised stores on the East Coast.

Over the next year it opened 15 stores, costing it $2 million to $3 million. When franchisees didn't buy, the company was stuck with the bill.

``Manhattan found that it was not capable of operating stores,'' said Sandy Nacht, a turnaround consultant at Sterling Management Group in Princeton, N.J., who was hired to help the company regroup. ``It's a manufacturer and franchise-services company.''

While Manhattan Bagel backs away from owning stores, Einstein/Noah Bagel Corp. is embracing them.

The Colorado-based company now is the country's largest bagel chain with more than 550 company-controlled stores in 29 states and Washington, D.C.

In late December, the company finished converting $359.9 million in loans to franchisees into equity, taking 77 percent ownership in the stores. It also secured a $70 million loan package to help finance 150 to 200 new stores a year.

The conversions have a price: The company said it expects to lose money this year.

Einstein's trouble is that it made money from franchise fees and interest on loans to franchisees, not bagel sales. Although the company was profitable in the third quarter of 1997, it reported no revenue from bagel sales. Meanwhile, revenue from royalties, fees and interest was $13.88 million - and that will diminish now that the franchisee conversion is complete.

CAPTION(S):

2 Photos, Chart

PHOTO (1--Color) The CEO of Noah's Bagles' parent company, Einstein/Noah Bagel Corp., quit after its stock plunged 84 percent over the last year.

(2--Color) Manhattan Bagel, with a branch in Woodland Hills, filed for Chapter 11 in October.

David R. Crane/Daily News

CHART: (Color) BAGELS FLATTENED 

Shares of three bagel chains have lost most of their value in the last 20 months.

SOURCE: Bloomberg News

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