The Bagel Barons
If it weren't for union hoods, nightly payoffs, and a bad partnership, I might be running the lucrative business started by my immigrant grandfather.
Last month my two college-age daughters, Tracy and Meredith, asked me what happened to the family bagel business. They remembered my father visiting, always carrying a bag full of bagels freshly baked at his store. I stopped for a moment, wondering how I could explain the unlikely extremes of what would seem to be a simple story. My father had sold bagels. My grandfather had too. In the twenties and thirties, they had sold them for a penny apiece. Yet, one penny at a time, the family business grew to where it paid for lengthy family vacations, lavish bar mitzvahs, expensive gifts for my mother, and my college and graduate education. I remembered being out, as a boy, for dinner with my father and his well-dressed business associates, usually at the French Rumanian, an old steakhouse on the Lower East Side of Manhattan, my father vying for the check as a sign of personal achievement.
But I also remembered the fear my father felt as union leaders demanded wage increases that slowly sopped profits from our bagel bakery, and the time the Internal Revenue Service levied fines against him for not paying taxes. I remembered the bitter lawsuit between my father and his brother over who owned the business, and the bad deal my father made when he took on a nonfamily partner. I remembered my father telling me there was no place for me in the family business. And I remembered the sick feeling I had as 1, schooled in accounting and trained as a tax specialist at Laventhol & Horwath, where I still work today as a family business advisor, sold my father's business for less money than he would have made in a month two decades earlier. My father had failed, as so many family business owners do, to keep up with the changes in his market. If he hadn't been too busy fighting the day-to-day battles, the frozen bagels on today's supermarket shelves might well be "Drucker's" instead of "Lender's."
My family's business started in 1912 when my grandfather, Morris Drucker, an Austrian immigrant, arrived on New York City's Lower East Side. It was then a bustling community of small retail stores, push carts, and garment factory "sweat shops" operated by a new wave of Eastern European Jews who settled there just before and after the turn of the century. Morris's family owned a small grocery in the old country. Wanting to direct employees rather than be one,. Morris decided to find a way to open a business of his own. He had with him his life savings, less than $50, in those days sufficient capital for a small shop.
One of Morris's first experiences, venturing out in the New World, was searching for a bagel for breakfast, a staple back home. Although bagels had been made in the United States as early as 1896, they were not available in bakeries or food stores. If you wanted a bagel you had to make it yourself.
The baking process is complicated, though; bagels are made from heavy dough that is difficult to work with, and require boiling prior to baking. And because bagels harden quickly, they have to be made from scratch every day. At the time, most bakeries could charge only a penny apiece for rolls, and most of the bakers, primarily Germans, had been trained as pastry chefs, and could earn much more making cakes and pastries than bagels. So they had little incentive to waste their time on this new funny looking roll.
It was clear to my grandfather that there was a demand for bagels. The Jewish community was booming, with large numbers arriving from Europe each month. My grandfather concluded that he could make a go of it by massproducing bagels and delivering them to retailers like the many bakeries and luncheonettes that dotted the Lower East Side. He would pay his workers by the "piece," and in that way control costs, which clearly had to be much less than a penny a bagel.
My grandfather rented the basement of a five story tenement on Suffolk Street for what was probably less than $5 a month. The basement had an abandoned brick oven which had been used, on a communal basis, by the original German occupants of the old building. Morris bought a large, used mixer and a kettle, and converted the space into one of the first production bagel bakeries in the United States.
For most of the year, the stuffy basement was blazing hot. The four or five men Morris hired would strip down to their underwear, sweating for 10 to 12 hours at the bench, rolling the thick dough around their fingers and sliding a 20-foot-long wooden peel into the 500 degree oven, fired by coal they shovelled in. It was exhausting. Workers came and went, most of them Jewish immigrants. Yiddish was the language of the hot bagel basement.
To distribute his product, Morris used "jobbers," freelance men who would buy the bagels wholesale and then sell them, along with other baked goods, to the luncheonettes and other retail outlets. Jewish immigrants were delighted to find a product from the homeland. Other ethnic groups, particularly in the busy Wall Street area, also took a liking to "the roll with the hole." Demand grew quickly, and Morris and his workers baked more and more, keeping costs and prices down. Workers pulled down $5 to $10 a week, a wage equal to that of established electricians, plumbers, and other tradesmen.
My grandfather's business, M. Drucker Baigels (no one could agree on the correct spelling), grew in tandem with a steadily increasing post-World War I economic expansion. His was a flourishing business that sailed profitably into the early twenties, grossing from $30,000 to $40,000 a year, putting him in the respected middle class of businessmen.
The twenties brought the first major turning point to the bakery. Union power in New York City was growing steadily. The unions targeted the food, baking, apparel, and construction industries because of their many employees. By the mid-twenties, virtually all the commercial baking in New York City became the domain of Jewish gangsters made to look like union officials.
There were separate unions for bakers of bread, pastries, bagels, and bialys (a Jewish onion roll). Leaders of the bagel baker's union, like the others, began to demand increasing amounts of "grease" to avoid strikes. In return for wage increases and payoffs, the union, with the cooperation of the owners, divided up all of New York City into bagel territories.
Since my grandfather had one of the oldest bakeries, he was given the territory south of Houston Street (Gower Manhattan), a prime market that included all of the Jewish Lower East Side plus the luncheonettes that served the millions of workers on Wall Street. If another bagel company tried to sell to one of his accounts, my grandfather would report the encroachment and resulting work reduction to the union bosses, who would see to it that the would-be competitor got a message he couldn't ignore. Suddenly someone was putting sugar in his delivery trucks' gas tanks or blowing the doors off his bakery.
The union leaders did whatever it took to keep the monopoly protected. They received little objection from my grandfather or other owners, who clearly benefited from their monopoly. Worker wages rose steadily into the thirties, and with them the retail price of bagels, to 4 or 5 cents apiece. But the phenomenon remained localized; with the possible exception of Chicago, the rest of the country thought a bagel was a breed of dog known for its keen sense of smell.
With the help of the unions, M. Drucker Baigels grew steadily through the thirties, providing a comfortable living for our family as the country struggled through the Depression. Bakers made $40 a week, still equivalent to that of the best tradesmen. My grandfather made much more. For this one immigrant entrepreneur, America truly was the promised land.
But as much as my grandfather savored his success, some difficult issues arose. What career paths would Morris's three sons take? He could not simply put them on the payroll, because the union provided all of the workers, who completely controlled the baking process. This left my grandfather in control of delivery and sales, which were carried out by small jobbers who would pick up the bagels each night. As profitable as it was, the business was not large enough to require any management structure; the unionized bakers, the jobbers, and my grandfather comprised the entire business.
As the Depression wore on, though, Morris's oldest son, Harry, needed a job to support his wife and child. While he and his two brothers expected the family business to be there as a source of income if needed, it simply was not acceptable to them to live off the business. Harry had to find a job. With so many men out of work, there was a waiting list for admittance to the bagel baker's union. So my grandfather made the appropriate calls and payoffs and Harry jumped the list. Harry would sweat at the baker's bench his entire life.
The middle son, Isadore (Izzy), refused to sweat in the basement. Instead, he sought out those who controlled the unions and the streets and developed relationships with people who could give him power, money, and influence. If that meant being part of a somewhat violent world, he would walk that line, maintaining a fine family on one hand, while keeping company with people whose moral standards were adjusted to achieve the objectives they sought.
The baby of the family was my father, George. Initially, he followed in Izzy's footsteps. He tried running numbers for a local bookmaker, but was arrested the first day. Thankfully, his life in the fast lane was shortlived. Calls were made and the police file pulled. George, then 17, was not tried for this single offense but would be forever worried that "the file" would reappear, giving him a police record.
My grandfather saw he would have to try to control George so he wouldn't end up in the streets. A spot as a delivery jobber was the only way.
Since the unions had a lock on the baking, an owner's control of the business lay in carefully managing truck delivery. All the accounts were paid in cash, so the man on the truck controlled the profits. If you delivered good tasting, fresh bagels, on time, in the correct quantities, and didn't extend too much credit, you made a profit. My grandfather rented a truck, had a sign painted on the side — "The roll with the hole" — and took my father out to learn the business, replacing the jobbers. Anything to keep him off the streets.
It was quite an experience for a young man. The truck would be loaded between 11:00 p.m. and midnight. Deliveries began with a ceremonial egg cream, then on to six straight hours of stop and go through the narrow streets of lower Manhattan. The truck would fly through the darkness, speeding through red lights as if they weren't there. My grandfather would stack dozens of small bags of bagels on the side of the truck, using them to "soften" the cops who stopped them for traffic violations. No tickets were ever issued and dozens of policemen's families had fresh bagels each morning. While the system challenged one's sense of morality, it certainly worked well.
George learned quickly, talking up the product to potential retail merchants, building his wholesale route and his profits. As the son of the owner, he could buy the bagels from his father for less than the other jobbers could from other bakers, then sell them for less and pick up more new customers.
Life on the truck was pretty wild, but if you were going to manage the bagel business, this was how you earned your MBA. In time, my father would develop the delivery route and supervise each account, taking the orders directly and making deliveries. By the early forties the business was called M. Drucker and Son's Baigels (we never could get the spelling straight).
As my grandfather's health declined in the forties, my father played a greater role in running the business and ultimately assumed control when Morris died in 1946. Wages, demand, and income grew rapidly after World War II and again after the Korean War. Bagels sold for 3 to 4 cents wholesale, 9 cents retail by the late fifties. At that point, the average union baker was earning $22,000 a year, the highest paid union employee in the world. While he still worked 12 hours a day, 6 days a week, he made enough so that his children would become doctors, lawyers, accountants, and teachers, and would not sweat in the basements of the Lower East Side.
The owners were obviously making much more. By the early sixties, Drucker and Son's grossed $250,000 a year. Still operating with only four or five full-time employees and a few part-timers, the payroll probably reached about $100,000. Subtracting for ingredients, rent, insurance, and professional fees, it still left a substantial profit for my father. My family would stay in a first class hotel for summer-long vacations, my father joining us on weekends, sometimes renting a private plane to reduce his time away from the bakery and the family.
The business offered me some vivid boyhood memories, too. One night in 1954, when I was 12, my father was injured in a fight with local thugs who tried to steal merchandise from the truck. The would-be thieves were taken to the hospital, as was my father, who had broken his foot on one thief's head. He would need help for a few nights on the truck, and he asked me to go with him. The memory of the excitement of those two nights, charging through the streets, will always be with me. My father's reward to me was a new Gil Hodges' baseball glove, purchased from the original Herman's World of Sporting Goods store, on Nassau Street.
Though the family business flourished from the late forties to the early sixties, new problems began nagging my father. In 1952 he felt the long reach of the Internal Revenue Service. A 1948 audit of a competitor had revealed underreporting by the employer and his employees, so the IRS undertook an industry-wide investigation. A court battle ensued: D&H Bagel Bakery Inc. vs. Internal Revenue Service. The IRS won the right to tax bakeries based on a formula that predicted production. It worked like this: Owners would pay union bakers by the "boxes" they produced. A box was a shallow wooden tray that held 56 bagels. By tracking how much flour the bakery ordered, the IRS felt it could tell how many boxes of bagels were being made, and therefore how much the bakers were getting paid. Also, since the IRS could predict the output, they could calculate sales, and thus figure out how much the owners were making.
All the bagel bakers objected, maintaining there were other costs-cash bonuses to employees, spoilage, and free bagels used for promotion. But the IRS and the courts didn't buy it. The bakers were assessed taxes back 3 or 4 years to the year the investigation began. In 1952, my father received a tax bill in excess of $25,000, which grew with interest and penalties.
Most bakers found a way to pay, but my father would not. To him, the tax was unfair. The IRS attempted to levy on his assets, but during the years of investigation and trial, my father consumed his liquid assets and gave a lot of spending money to my mother, which she saved. He placed all future assets in her name. Because they filed separate tax returns, the IRS would find collecting a challenge.
Ultimately, after graduating from law school more than 20 years later, I would have the liens lifted. The IRS had given up collecting anyway. My father was astonished that I could work my way through the government bureaucracy. "It was better to have paid my son's education than to have paid the IRS," he would comment. That is not the advice I give my clients. Not only is it illegal, but the strain of constantly being hounded by the IRS is simply not worth the extra dollars. It clearly wore on my father's and my mother's nerves over the years.
In the early fifties, another development occurred that would permanently alter an owner's ability to control his own business. The Teamsters Union began to organize all the truck delivery systems in the city, and once again the bakers were a target. The Teamsters used the same methods as the baker's union. With production and delivery both under union control by the late fifties, the owner was left with little way to control his income or profits.
Actually, there was one way out. And that was to move, to Connecticut or New Jersey, or anywhere the unions were ineffective or nonexistent. Some bakers who took some time to study the market opened retail establishments, baking their own products, and selling the excess to other retailers outside the city. They began to open bright new retail stores in the boroughs of Queens, Brooklyn, and the Bronx. The bagel market was changing.
At first, my father was slow to pick up on the trend. But then he met another businessman, from a similar bagel family, who had a territory in the Bronx and a lease in a prime retail location in Forest Hills, Queens. They went into partnership in 1961. My father got ownership of the retail store, while his partner shared in the profits of the wholesale route. My father would not have needed a partner, had he taken the risk of opening his own store. By sharing the risk, my father limited his flexibility. He had to get his partner's concurrence on all decisions. Since his partner had other stores from which he derived income, he had greater leverage if there was a disagreement.
Initially the store, known as the House of Bagels (we finally got the spelling right), fared well enough. The first full year my father drew $40,000 in salary and still had a profit to reinvest in store improvements. I worked there periodically, and saw how the market was changing. At first, we sold plain and salted bagels. But as a retail store, we had to meet the demands of increasingly finicky customers, who began demanding poppy seed, sesame, onion, garlic, and raisin. Some wanted flat bagels to fit in their toasters. Others wanted them plump with no hole so food did not fall through. One guy wanted them "raw" as he found bagels to be excellent bait for fishing, but only if sufficiently soft.
And seemingly all of a sudden, we were shipping bagels to different parts of the world. First to Los Angeles and Miami but then to other cities where ex-New Yorkers were living. I remember packaging 20 dozen bagels for shipment to Bombay, India. I had no idea how long the trip would take, only that some poor soul was going to break a few teeth on the first bite.
Bagels were still selling for approximately 9 cents apiece, but we made a good profit. I suggested to my father that he start a mail order business. He wasn't interested. We would have had to advertise, something my father was not comfortable with, and then we would have to find inexpensive, and fast, shipping methods. To make so many types of bagels, the dough had to be refrigerated while smallbatches of bagels baked. Timing became a problem because the dough cannot sit for long. Packaging for shipment would further complicate all the staging. My father doubted there was sufficient demand to warrant all the effort.
Alternatively, I recommended we try to automate. I had seen how large bakers like Nabisco and Sara Lee could solve production and packaging problems similar to what ours would be. I pushed him on this, seeing that automation and frozen bagels were changing the business, and that New York City could not forever be insulated from the trends.
In retrospect, I should have pushed my father even harder. But I wasn't mature enough to get locked into battle with him "for the good of the business," especially since he still saw me as "the school-kid who oversimplifies everything and doesn't know what he's doing." Then the market openedwide in the mid-sixties, with the breaking of the unions.
Because outsiders were supplying bagels directly to retailers, the wholesale delivery routes, for decades the mainstay of the business, became less profitable. The owners told the bakers union that salaries would have to be cut. The unions refused, and so the owners decided to lock out the bakers, making bagels themselves and buying from the outsiders, who had bagel machines that eliminated the need for "benchmen." It worked so well that the union employees became scared and began to flee the union, and set up their own independent shops. The union lost its clout. In turn, the growing number of bagel retailers (former union men) lessened the wholesale demand, diminishing the Teamsters' power as well. This should have been good news to my father. Except that at the same time the market became flooded, and retail prices dropped to 5 to 7 cents a bagel. Wholesale prices dropped too.
It was at this point that the partnership destroyed my father. His partner had purchased a bagel machine for his other stores, and offered to produce the bagels we needed at a price that gave him a substantial profit on production. The bagels would be shaped in the Bronx, and be sent to our store for baking. My father began to go into debt to him, buying bagels on credit. I would have told the partner to go to hell, and hired nonunion labor or bought my own machine. But my father remained loyal to is partner and continued to buy from him. My father was caught between the manufacturer and the retail customer. We weren't adding sufficient value to the product to make a profit.
Automation began as an experiment in the late fifties, by the out-of-towners. The unions made it plain to the city bakers that they would not tolerate automation, because it would mean the loss of jobs. The out-of-towners beat the city bakers to the punch, and began producing much greater volume and broadening their customer base further and further away from the city. This is how Lender's Bagels, in West Haven, Connecticut, today the largest supplier of frozen bagels to supermarket chains, got its start.
We had missed it completely. By the late sixties my father's portion of the partnership had dwindled to simply selling what he could from the store in Forest Hills. The debt increased.
As if this wasn't enough, my father was dealt a personal blow which destroyed his spirit. His brother Harry, in fear for his retirement, which was tied to a bagel bakers union pension system then in jeopardy, sued my father. He contended my grandfather had left the business to both sons. He would have some success in the courts, since my grandfather had not left a will, but he never collected a dime. This episode greatly depressed my father, who treasured his family relationships.
The store was sinking. The only way to save the business was to invest personally in a new store or to automate the existing store, which was not acceptable to his partner. Bagel bakeries were opening in other cities; relocated New Yorkers, television, and modern marketing was exposing the bagel to the entire country. Demand would soar for those who automated, looked for new markets, and were prepared to change. My father was so busy fighting the little battles that he was unprepared to make the big move that could have saved the business.
After graduating from law school in 1976, 1 would have the lousy job of selling the bakery to his partner. My father had given up. His interest was sold for a mere $3,500, all that was left once the debt was subtracted.
I carried out the legal details. I thought about trying to get my father to hang in there, but the entire operation had become a severe burden to him, nothing more. I had no interest in running the business; I had a career as a tax consultant at Laventhol & Horwath, and had just made partner. I should have put up more of a fight, if only to keep my father's legacy. But I felt I couldn't interfere.
The sale took a heavy toll on my father. Only the constant support of my mother, Yetta, and frequent visits by my wife, Susan, and me, and the rest of the family prevented him from becoming severely depressed. He had been entrusted with the family business. To lose it meant personal defeat and the loss of control over his life.
Only in recent years have I been able to understand how I feel about what happened to our family's business.
In the late fifties I was nearing my graduation from high school. My grades had steadily deteriorated, I was gambling heavily, and I generally found school far less interesting than my friends on the street corner. A substantial weekly allowance paid from business profits gave me considerably more personal freedom than most other kids. My father came to me in total frustration in April of 1960.
"What are you going to do with your life if you don't graduate?" he grilled.
"I could always work in the bakery," I countered.
"No way in hell," was his reply.
I was devastated. All my security went out the window. I was the oldest son in a "father and son" industry and, therefore, I assumed the legacy was mine. I knew profits from the family business could be substantial. During the fifties my father never carried less than $500 in cash and often he would have a few thousand dollars. He would go to the racetrack and bet a few hundred dollars on a racehorse. It never crossed my mind that the business might not be there for me.
I could not see until much later why my father was so against my taking over. It may have been that, despite his financial success, be felt trapped by the business. Maybe he felt owning a business was not "clean" enough. He wanted his children to be professionals. Being a professional, in the fifties, was "better" than being a business owner. Given his experiences, he probably felt a business owner had to do things, at times, that he was not proud of.
Too, I think he was pessimistic about the future. He had not planned for succession or even planned ahead for the business. He may have felt he personally had few options and the business would not survive to provide his children with a livelihood. He was trying to protect me.
He also knew the frustrations of working with relatives, like the pain he felt when his brother Harry sued him, I would not have to face such problems if I was not a part of the business. In addition, in the sixties, he had had both myself and my brother, Sheldon, to consider. Could the business accommodate both? Which one would he choose? He would never have to answer that question if he got out.
I continue to ponder these questions. My father died in 1983 leaving a proud and close family. I sometimes feel I let him and the family down because I could not help when help was really needed. Once I got to college, I gave up the idea that the bagel business was for me; college had opened up worlds of other possibilities. 1 was disappointed to see the business go downhill. My father had limited business training and no mentors, but he would not have accepted help from his sons. Nor did we have the skills or maturity to help. My father could only turn to my mother, and she could only supply encouragement. The idea of seeking professional help was never considered. Men like my father felt it was their responsibility to solve problems themselves, and were generally wary of outsiders.
Today, companies such as Lender's and Sara Lee serve a half billion dollar market that neither Morris nor George could have imagined. Tragically, our family business, the company that helped build that industry, died a premature death.
Just as my father never recovered from the defeat that the sale represented, I will not forget the trauma of the task I was given as a young lawyer. It was the very education the family business had paid for that I had to use to bury it. Maybe some day my brother and I will buy a racehorse and name it "Son of a Bagel." My father and grandfather would appreciate the humor, whether the horse won or lost.
Ronald H. Drucker is a partner and the director of family business consulting services at Laventhol & Horwath a national accounting and consulting firm in Philadelphia. He is a CPA, holds a graduate law degree, and is coauthor with his partners, Benjamin Benson and Edwin T. Crego Jr., of Your Family Business — A Success Guide for Growth and Survival, published by Dow Jones-Irwin.