Volume 3 | Issue 3 | Year 2007

With his Penn Station East Coast Subs restaurant chain, company founder and Chief Executive Officer Jeff Osterfeld successfully transplanted the so-called “taste of Philadelphia” to parts of the American South and Midwest. That “taste” concept denotes food items and consumer preferences distinctive to the city and its surrounding area, some of which defy rational explanation. Take scrapple, for instance. There’s nothing that says brotherly love in that mushy mixture of butcher scraps typically served as a breakfast meat. Even some Philadelphians pass on it in favor of another “Philadelphia breakfast” option: Frank’s Orange Soda and a Tastykake (indigenous surrogates for orange juice and a pastry, presumably).
Understandably, such food choices don’t transcend regional lines. However, the Philadelphia cheese steak, or the Philly cheesesteak, as it’s more often called, is another story. Osterfeld proved that.

Back in 1985, when Osterfeld wanted to add cheese steak to his menu of deli sandwiches, he conducted research that involved traveling to Philadelphia, the Mecca of the cheesesteak. Specifically, he sampled the fare at Pat’s King of Steaks and Geno’s Steaks, two legendary south Philly neighborhood sandwich shops that reputedly make the best cheesesteaks in the world, to see how a real cheesesteak should be made. “He was looking for something that could travel across geographical boundaries,” says Craig Dunaway, president of the Cincinnati-headquartered Penn Station.

Mission accomplished. The Philly cheesesteak was an immediate hit in Ohio, and it became Penn Station’s signature menu offering (the company’s name is homage to Philadelphia), helping the restaurant grow into an upscale, quick-casual chain with 173 locations in 12 states.

Entrepreneurial Pluck

Penn Station’s roots go back to “Jeffrey’s Delicatessen,” a small sandwich shop that Osterfeld opened at the Dayton Mall in Dayton, Ohio, after he graduated from Miami University in Oxford, Ohio, in 1983.

“Jeff didn’t have any restaurant experience, but he grew up in a family of entrepreneurs and he inherited their spirit. He knew he didn’t want to work for someone else,” says Dunaway.

He may not have had the experience, but he certainly possessed the requisite entrepreneurial intuition. When a competitor opened a sandwich shop on the other side of the Dayton Mall food court and sold cheesesteaks, which then were new to Ohio, the light bulb went on over Osterfeld’s head. “He bought one for himself and thought, ‘I could do this,’” recalls Dunaway. “He wasn’t even sure exactly what a cheesesteak was, but he new he wanted to do it differently.”

That prompted Osterfeld’s 1985 trek to the East Coast, where he also researched the region’s style of submarine sandwiches. When he came back, he added his own version of the Philly cheesesteak to his menu. “That’s essentially how Penn Station East Coast Subs got its start,” comments Dunaway.

That same year, in Cincinnati, Osterfeld opened the first Penn Station restaurant, offering only four sandwiches: the cheesesteak, an Italian, chicken teriyaki and a pizza sub. In addition, Penn Station began offering fresh-cut French fries (cooked in cholesterol-free peanut oil) and freshly squeezed lemonade, two items that would also become restaurant trademarks.

In 1988, after opening several restaurants in the Cincinnati area, Osterfeld began selling franchises. Today, Penn Station has become a large chain across the South and Midwest with multiple locations in various cities. For instance, in St. Louis it has 19 restaurants. Other restaurants are located in Ohio (Cincinnati, Columbus, Dayton, Canton, Cleveland and Toledo), Indiana (Indianapolis, Lafayette, Bloomington, Anderson, Muncie and Richmond), Illinois (Danville, Fairview Heights and Champaign-Urbana), Kentucky (Lexington, Louisville, Richmond, Elizabethtown, Ashland and Frankfort), Michigan (Detroit), North Carolina (Charlotte and Raleigh), South Carolina (Rock Hill), Tennessee (Murfreesboro and Nashville), and West Virginia (Charleston and Huntington).

Inviting Atmosphere

Unlike those of competitors such as Subway and Quizno’s, Penn Station restaurants were designed to have a softer, more upscale ambience. The interiors feature artwork, background music and exposed ceilings. “The look is not fast-food by any means,” says Dunaway. “Our restaurants are designed with more earth-tone colors. We have copper inside and copper awnings on the outside. The overall ambiance is much more inviting than the typical fast-food eatery.”

At the same time, the locations, which measure between 1,600 and 1,800 square feet and include about 50 seats, are designed to be operationally functional. “This allows our franchisees to serve our customers better,” says Dunaway.

Further, all sandwiches, made with the freshest ingredients and hearth-baked bread, are prepared to order directly in front of the customers. Menu items unique to Penn Station include a fresh-grilled artichoke sub and other hot-grilled East Coast style subs. “That’s one of our differentiators. Not many of our competitors grill their subs,” Dunaway points out.

Other menu items include hot-grilled-to-order sandwiches such as chicken cordon bleu, chicken Parmesan, Reuben and vegetarian, as well as a chicken salad club, cookies, a kid’s meal and, for health-conscious dieters, 10 sub salads. “The salads are basically a sandwich served on a bed of lettuce instead of bread,” says Dunaway.

Dunaway reveals that the restaurants and their fare are popular across a range of demographics. “We’ve succeeded in all kinds of settings and with all kinds of people: in metropolitan areas with office employees, in industrial areas with blue collar workers, and in residential settings with moms and kids. Wherever we’ve gone, we’ve been well received.”

Keys to Success

Obviously, a large part of that success derives from food quality and unique menu offerings. But, by design, Penn Station also keeps its menu rather simple. “One of the keys is to not expand your menu too much. You don’t want too many sandwiches with too many variations,” says Dunaway. “In order to grow, you need to keep it tight. This makes it easy for the consumer to understand and easier for the operator to run the restaurant efficiently and effectively on a daily basis.”

Another important key to success has been the company’s “ownership mentality” that Osterfeld fosters among his franchisees. The concept evolved from his realization that in the stores he ran, his presence had a significantly positive impact on product quality, customer service and sales. “After his first store was a success, Jeff opened a second and a third, and he found that each operation functioned much more smoothly when he was on the premises,” recalls Dunaway.

That led to the idea of keeping restaurant owners as close to the counter as possible, through the manager/owner approach. “We developed a contract where managers are paid according to a percentage of restaurant profits,” explains Dunaway. “So, because their income is tied directly into the profits, they’re compelled to run their restaurant as well as they can. This ensures that the customers are taken care of properly and that the restaurants are clean and operationally efficient. The restaurants are run the way they should be run, according to our stringent standards.”

This turned out to be a win/win/win situation, for the company, the franchisees and the customers. Because of customer satisfaction, Penn Station has managed to pull in nearly $90 million in sales each year. Furthermore, in 2006, Entrepreneur Magazine rated Penn Station East Coast Subs as one of the top 200 franchise opportunities.

Staying Close to Home

As far as expansion, Penn Station has no immediate plans to venture far outside the geographic area it staked out for itself. (Its latest franchise opening has brought it all the way out to Pittsburgh, Pa., but that city is really more of an a Midwestern metropolis than an East Coast one, when you stop and think about it.) Several considerations went into that decision, says Dunaway, including brand recognition. “If we decided to open up in a place like Denver, no one out there would know who we were,” he points out.

The company was also looking at the logistics. Penn Station does business with a regional food supplier, and it needs to make sure that all food products arrive at its restaurants in timely fashion. Finally, oversight is easier to accomplish on a regional basis. “We have stringent standards that we want to maintain, and we want to be sure that our people out in the field can oversee and support the restaurants,” says Dunaway. “They serve as both a consultant and a policeman, and their diligence protects the integrity of our brand and enables our franchisees to succeed.”

In addition, ample opportunity still exists in Penn Station’s own back yard. “Our approach is that there is plenty of room for growth in our existing markets,” says Dunaway.

In Philadelphia, restaurateurs have demonstrated that cheese on a steak sandwich goes together like mustard and a soft pretzel. Jeff Osterfeld and his franchisees have enriched themselves by demonstrating that the sandwich can be appreciated beyond the Delaware Valley.

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