Backed by Billionaires, These Guys Want You to Eat Their Lunch: The Earls of Sandwich

Eric Gleacher, the renowned hostile-takeover banker, was trying to decide what to eat for lunch. He and Chas Phillips, his No. 2 at the boutique investment bank Gleacher & Company, were riding downtown in a black Lexus sports utility vehicle to have lunch at the Cosí sandwich bar on Park Avenue South. “I’m going to have the roasted peppers and the tandoori chicken,” Mr. Gleacher declared.

“Right,” Mr. Phillips said. “I’m probably going to have that, too. That’s my old standby.” Then he considered the spinach artichoke spread. “You know, if you put a little bit of that on the tandoori chicken and the peppers, that would work!” The two bankers nodded in agreement. A fine idea. Synergy.

These two titans of high finance were discussing sandwich fillings because they are principal investors in Cosí, the fast-growing chain of sandwich bars founded in New York in 1996 by Mr. Gleacher’s nephews, Jay and Shep Wainwright. The Wainwrights, a pair of preppy brothers raised on the Upper East Side, have capitalized on their connections to get some big-time money behind what might seem a silly idea: fancy sandwiches for the masses. Cosí has 18 restaurants nationwide, 13 of them in Manhattan. But the Wainwrights’ dream is to have a Cosí on every corner, in every mall. They want to do with sandwiches what Starbucks has done with coffee.

They have a shot at realizing that dream in part because they have enlisted the support of prominent investors who would usually not even deign to spill diet Coke on a business plan that featured caramelized onions and basil-roasted plum tomatoes instead of fiber-optics and network systems. Besides Mr. Phillips and Mr. Gleacher, the former Morgan Stanley mergers and acquisitions chief who figured prominently in Barbarians at the Gate as an adviser to Kohlberg Kravis Roberts in its hostile bid for RJR Nabisco, Cosí’s backers include leveraged buyout mogul Henry Kravis and former Morgan Stanley chief executive Parker Gilbert. It is a bizarre but fruitful intersection of the old-boy network and the old-school inclination to bake things for money. (Everyone knows at least one burnout who has opened a bagel store somewhere in the Rocky Mountains.)

Over lunch at Cosí, The Observer asked Mr. Phillips whether he would have invested in Cosí if he hadn’t known the Wainwright boys as well as he did. “Never!” Mr. Phillips said. “Not in a million years! I mean, if someone showed up and said ‘I want to open a restaurant business in New York,’ we’d be howling with laughter.”

“Are you serious?” Mr. Gleacher said. “Do you think we’re brain-dead?”

Now the investment seems to be panning out. On Sept. 15, Cosí announced plans to merge with Xando, a chain of coffee-liquor bars started by Nick Marsh and Andy Stenzler, a pair of Larchmont, N.Y., entrepreneurs whose investors include the Ziff family and Chicago real estate magnate Sam Zell. The combined company, Xando Cosí Inc., now has 40 stores nationwide and is valued at $112 million. The two companies hope to go public in 2001. They’ve even picked a ticker symbol: XOCO. Suddenly, this little sandwich bar concept has the potential to reach a lot of mouths and generate some serious wealth.

The identical Cosí restaurants with their slate floors, earth tones and assembly-line sandwich counters are scattered strategically near office buildings throughout Manhattan, Boston, Washington, D.C., Chicago and Philadelphia. The entry in Zagat’s calls Cosí “a deli for the next millennium,” but complains that the wait makes it seem “like the yuppie version of a Soviet bread line.” At Cosí, for $6 to $8 you get up to three fillings between Cosí’s signature olive-oil-dipped, baked flat bread. It’s still a sandwich.

But Wall Street loves it-the sandwich and the story. “I’m a card-carrying Cosí man,” said Jack Levy, head of mergers and acquisitions at Merrill Lynch & Company and a longtime competitor of Mr. Gleacher’s. Mr. Levy was referring to his sandwich card, which gets him a free sandwich for every 10 he buys. “Once you try the bread samples, you’re not getting off the line.”

This is what a mom-and-pop family business in Manhattan can become, if the right people are involved. Hey, Larry Tisch’s nephew works with Xando: He’s a landlord. Reached by The Observer , Larry Tisch, a co-chairman of Loews Corporation, said he had never heard of either Cosí or Xando, but when he heard that Henry Kravis was an investor, he brightened. “Oh, good!” he said. “Henry likes salads.”

Awesome Investors

On a recent evening, Jay Wainwright, 29, and Shep Wainwright, 27, were in a Soho gallery, attending the opening of an art show by one of their classmates from boarding school. Many of their own Wall Street friends were there. Jay lives downtown; Shep, who is married, lives uptown. But the two sandwich guys still spend all their time together.

At the gallery, a friend, an equity trader, approached them and asked about their recent merger with Xando.

“Have you been taken out with this merger?” the trader asked.

“No, no …” Shep began.

“This is huge-a huge deal. It’s been all over the news!” the trader said. “I should have forced Jay to let me invest. He said, ‘No, no, no. We’re full.’ I should have said, ‘Shut up and take my fucking money!'”

“Yeah, well,” Shep said. “It’s all on paper now.”

After the art show, the group adjourned to L’Orange Bleue, a French-Moroccan restaurant in SoHo. Jay was chatting with an old friend and was picking at some hors d’oeuvres. He talked about how Cosí was going to start serving hors d’oeuvres at night. He spoke of his “awesome” investors, Mr. Gleacher and Mr. Phillips, both Morgan Stanley alums.

Later that night, another Morgan Stanley alumnus, Phil Potter, walked into the restaurant. Mr. Potter, who was fired from Morgan Stanley in 1997 for talking to the press (and has since landed a more senior position at a rival firm), eyed the hors d’oeuvres as he was introduced to Mr. Wainwright and his friends. He and Jay started comparing Palm Pilots. Mr. Wainwright admitted to going through three Palm Pilots a year. He talked about how he lost the receipts, so he couldn’t get the free service plan. Mr. Potter was amused. “Sounds like Mr. Cosí needs a lesson in recordkeeping,” he said.

“I have a problem with things like that,” Mr. Wainwright said.

Before long, Mr. Potter decided to move on. As he was leaving, he pointed to Jay Wainwright and said, “Just keep making those sandwiches.”

Helplessly Hoping

“I don’t want to make it sound as if Jay and Shep had a humble life,” Mr. Phillips said. “But they grew up in a modest family. They weren’t affluent and couldn’t rely on their family for a quick start in life.”

Depends on one’s definition of affluence. The Wainwright boys grew up on 96th Street between Park and Madison avenues. Their mother, Patsy, was the head of the upper school at Nightingale Bamford School on East 92nd Street. (Now she’s the headmistress of Greenwich Academy.) Their father, John, was a lawyer at Cadwalader, Wickersham & Taft. They attended St. Bernard’s School and played squash at the Union Club. They spent summers in East Hampton, L.I., where their family belongs to the Maidstone Club. They skied during the winters, staying either at Mr. Gleacher’s house in Snowmass or at Henry Kravis’ house in Vail. They both attended Hotchkiss School in Lakeville, Conn. (where Jay distinguished himself by performing Crosby, Stills & Nash’s “Helplessly Hoping” for a school talent show in the dining hall. “Everyone thought it was terrible except for Jay,” a friend recalled. “He didn’t know how to play guitar”). Both brothers then went to Hamilton College.

When Jay went to Paris on vacation in 1993, he discovered Cosí, a small restaurant in the Latin quarter owned by Drew Harré, a violin maker and wine taster from New Zealand. Shortly thereafter, Shep spent a semester in Paris and fell in love with Cosí as well. At the time, Jay had graduated from Hamilton and was spending a postgraduate year in Telluride, Colo., “I kept remembering that place,” Jay said. “It’s my favorite place in Paris.”

So he and his brother came up with an idea. They approached Mr. Harré. “We said, ‘Hi, we’re Jay and Shep, and we want to open Cosí all over the U.S.,'” Jay recalled. “He said, ‘Whatever.’ We made no headway. We faxed him three times a week in May through September. Finally he called me up and said, ‘O.K., you wore me down.'”

The Wainwrights went over to Paris in November 1994 and spent two months learning how to duplicate Mr. Harré’s bread. Then they came back to New York and with the help of Mr. Phillips’ associate at Gleacher & Company, Emil Henry, developed a business plan and began shopping it around.

When it came time to raise money to start a business, they had people to turn to. “We weren’t scraping the bottom of the barrel,” Shep said. To start with, over dinner a few years before in Aspen, Mr. Gleacher had encouraged his nephews to be entrepreneurs, offering to help back them financially if they came up with a good idea. The Cosí idea may not have been what he had in mind, but he liked it enough to help them out. Mr. Gleacher, after all, knew the food business. He was the man who in 1988 insisted that Ross Johnson, then chief executive of RJR Nabisco, meet Mr. Kravis, touching off one of the most heated and celebrated takeover battles in American history.

Mr. Gleacher required them to put up some money of their own. “I remember the look on Jay’s face when Eric told them that as a condition of funding they had to put every last cent of his available capital into this business,” Mr. Phillips said. But eventually the bulk of the capital came from family friends: Mr. Phillips, whose son Scott grew up with Shep (Scott Phillips and Shep had a window-washing business in East Hampton when they were teenagers); Mr. Kravis, whose son Robbie was a close friend of Shep’s, and Parker Gilbert, whom they met through the Kravises. They raised $500,000, and in February 1996 opened their first restaurant, on East 52nd Street, where they made the sandwiches themselves.

“The first investment I made was an expression of admiration and affection for the boys,” Mr. Phillips said. “They invited us over to a rental apartment in some horrible neighborhood to eat so that their investors would actually know what they’d invested in. But the sandwiches were so unbelievably good. That was the first time I felt like, ‘Man, this could be a good company.'”

After several more rounds of financing, the group, which also included the Wainwrights’ parents and grandparents, has now raised a total of $15 million. Mr. Gleacher is the lead investor.

According to executives at both Xando and Cosí, the stores turn a profit, though the companies as a whole do not.

Now that Cosí has joined with Xando, which, because it serves alcohol, is well positioned to draw people at night, the combined company has tremendous potential for growth. “They’re well on their way,” said Charles Weissman, a restaurant industry analyst at Bear Stearns & Company. “Their growth has been exponential. The concept-it’s very well run. They use the commissary format. They don’t actually cook food on the premises, which limits production complexity. It opens up possibilities in terms of where they can lease space. Starbucks is the same way.”

“I thought this might be a good four-restaurant business in New York,” Mr. Phillips said. “Now, with Xando, I’ll be surprised if by 2005 we don’t have several hundred.” Backed by Billionaires, These Guys Want You to Eat Their Lunch: The Earls of Sandwich