Investors lifted Cosi (NASDAQ:COSI) shares 11.7% on Wednesday after the restaurant operator announced that it had priced 5 million shares at $6.30 apiece. The company plans to devote the deal's $29.8 million net proceeds mostly to developing new company-owned restaurants. While expansion seems logical, Cosi may also want to consider bolstering its marketing program.
OK, so increasing marketing expenses when a company is still posting a net loss may seem a bit extravagant. But there could be good reason for a little evangelizing.
When Cosi went public back in April 2002, it was in the right place at the right time. Fast food's popularity had plateaued, a situation most clearly reflected in McDonald's (NYSE:MCD) slump at that time. Industry leaders competed more on price than on the quality or uniqueness of their menus.
Cosi helped shake up the quick-service segment by responding to changing consumer palates. Through convenience, fresh ingredients, and innovative entrees, the newcomer filled a niche largely ignored by fast-food companies.
However, traditional fast-food outfits have adjusted. McDonald's has vigorously rebounded with salads and other new premium items. Wendy's (NYSE:WEN) is pursuing fresh options with its push into fruit. Even CKE Restaurants' (NYSE:CKR) new Thickburgers, though hardly healthy, contain 100% Angus beef -- another indication of fast food's new emphasis on quality. In this environment, Cosi no longer stands out quite so much.
Hence, Cosi needs to let consumers know what it has to offer. The restaurant operator has already shown that it can deliver strong same-store growth at long-established locations. But as it expands, Cosi will be confronting tougher competition from a revived fast-food industry. Given this new dynamic, a few extra bucks on marketing might be a wise investment.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
