The Pizza Guy That Shouldn’t

During our Vermont vacation, when we weren’t lunching at Simon Pearce and when the chef of all chefs needed a night off, we were eating dinner at our favorite pizza place – Goodman’s American Pie (no website) in Ludlow.  The proprietor is a Ludlow born and raised man who literally built his oven brick by brick and found a VW bus to serve as his counter and prep area.  Mr. Goodman (never got his first name) is a one-man show and  fiercely entrepreneurial.  This year, he told us about the wholesale business he started last Winter.  The Pizza Guy as I will call him par-cooks four types of his pizzas, cry-o-vacs them and freezes them so that they are good for 8-12 months.  He then wholesales them to local grocery and convenience stores in the area; dreams of Ben and Jerry’s and Papa John’s dancing in his head.  Mr. Goodman is not only the chef, salesman and cashier, he is also the delivery guy to his wholesale customers.

Not for me to step on anyone’s dreams, but, man, makes me cringe just to hear about this new business.  Wholesale is not retail.  It only works at scale and, more importantly, only with a certain amount of working capital.  If you can not hire staff, create inventory and manage accounts receivable, the business is beyond difficult.

Here is the napkin math:  being aggressive, at retail, he probably averages 80 pies per day 160 days per year (seasonal business) at an average price of $14 = $180,000 with margins of, say, 60% (remember, he has no employees), so @$110,000 net to the Pizza Guy.  A lot of work for sure, but not a bad living.  Now add the wholesale business – he sells the same $14 pizza for $8.  So margins are now down to @30-35%, or about $3 per pie, this being generous and including the cost of storage and delivery.  Mr. Goodman says he sells an average of about 200 pies at wholesale per week.  He closes the retail store on Monday and Tuesday to make the wholesale pies and delivers them on Wednesday morning.  His accounts receivable averages thirty days for his bigger accounts.  Bottom line, best case, the wholesale business will make the Pizza Guy an extra $30,000 per year.  However, he is probably financing $3-5,000 in A/R and has to give up his days off.  Pretty clearly, he doesn’t have the money to hire staff to cook and deliver the wholesale pies.  His dream is to get into the bigger supermarkets in the area.  My nightmare.  These stores run accounts payable much longer than 30 days and will not guarantee volume.  So he could have 1,000 pizzas a week in season and none when not.  Hard to eat A/R when business is slow.

What does this have to do with creative businesses?  A basic understanding that wholesale is not retail.  If you are a “preferred vendor” at a venue – lighting, flowers, catering, etc. in exchange for giving up a percentage, then you are in the wholesale business.  Same goes for bartering.  Like Mr. Goodman, if you are not set up to service this kind of business, you are asking for trouble.  More to the point, engaging in these types of relationships is not growth, it is a distraction.  Simply, the pizza guy has to sell two wholesale pies to equal one retail sale.  Why not focus on retail?  Temporary outlets?  Store in store (maybe in the ski lodge)?  Rather than be seduced by the “volume” that wholesale offers, why not put the energy into expanding your offerings in new and unexpected arenas?  And, if you are going to enter into these kinds of relationships, know what it will take to make them work going in.  If the business is not sustainable on its own and can not be run almost independently from the rest of the business, walk away.