Pizza Shops made By Emotion and not Logic? Do’s & Don’ts.
By Darrel Vecchio BIZMATRIX Interactive business technical specialist
Pizza is the convenience food, with a casual romantic appeal. There is theatre when you spin that dough and spread luscious toppings with the romantic red sauce.
It is easy to get caught in the emotions of pizza, having been involved with Pizza for over 25 years, I also had the urge to set up a pizza business to take on the world and show the world how to do it. It became an expensive lesson.
I and my colleagues have also witness many Pizza operators who have ventured down the same paths and often to a path of failure and financial disaster. There are many experts out there who are quick to give you advice, in many cases their advice is not on experience, but based on financial gains- their financial gains to your financial detriment.
I spoke to Paul Jensen the owner of Australian Food Equipment (AFE), a specialist pizza equipment supply company.
Paul has been a salesperson in the pizza industry for over 25 years, he has sold many pizza ovens, mixers , dough rollers , utensils, refrigerated make tables. Most of the equipment has been recovered from failed shops or trade in or customers wanting to renew their equipment. Over the past 2 years, Paul has seen an increase in failed pizza shops. Recently he bought the gear from a pizza shop in Brisbane which had been trading for over 27 years, the gear was sold to another shop in Melbourne .
Paul Jensen is one of the best salesperson in the Australian pizza industry. He will drive fly and swim 1000’s Km for a sale. Which is rarely seen these days? He knows pizza equipment and knows the industry- Paul during his travels has been shot at, threatened and has a wide variety of customers , to protect Paul I will not mention, I will let your imagination fill in the blanks, and his customers are of many nationalities. Many of his stories would make a good best seller novel and movie.
The equipment AFE market or is recovered from the failed businesses is second-hand, and in many cases virtually new. Paul said: Most of the new Pizza Shops today are failing within months from opening? I asked Paul why?
Paul said: “Many of the shops fail due to not understanding what it takes to run a pizza shop, the shop needs the owner to work the shop- You can’t run a pizza shop remote control or more importantly a pizza joint cannot be run like the big guys, if there is only one pizza shop owned.”
Paul said:” many pizza businesses fail , due to simple problems and sometimes obvious problems that can be avoided.”
Some of the problems that cause businesses to fail
- Number 1 reason (location, location, location). Signage and passing traffic
In my Brisbane suburb , we have a population of around 11,000 residence . We have 5 X pizza shops in a 5 km radius – Dominos, Eagleboys, Santos Pizza, La Cona Pizza and Pizza Capers with Pizza Hut and another private operators delivering into the area. It would be foolish for another chain or independent to set up in this area. The suburb is well and truly pizza saturated.
Locating a shop in an area, which is seasonal with your customers? Or the pizza shop is placed in a strip shop and or the pizza shop has poor signage- again another recipe for failure.
- The pizza price point
The price of the pizza needs to be in line with the area The menu needs to reflect what will be accepted by the customers- what will sell in the area. If the customers buy only Ham & Pineapple type $3.00 pizzas , the customers are unlikely to buy a $24.00 gourmet garden feta with egg plant and prosciutto pizza?
- Lack of capital or no starting cash
Every business needs a cash buffer to start and run the cash needs of the business. Rule of capital or a cash buffer, have around 1-2 months cash back up to pay the bills for that period, don’t forget the BAS and PAYG tax obligations every quarter/ monthly.
- Leasing the shop or (lack of a lease / lease voided) and renting /leasing your equipment.
Read the shop lease, understand what are your obligations. Before you sign the lease have a solicitor or lawyer read and advise on the lease. Be aware of hidden clauses, and don’t go into the shop until the lease is registered with the stamp office.
There has been cases where the business owner has set up the shop and invested time and funds , to find the lease was void. The owner was forced to close the shop 3 months after the opening date. There investment was lost!
In another situation the lease was a transfer to the new business owners, the old owner provided a copy of lease ( photocopy), the appendix was missing ,which said: The Landlord has ownership of the refrigeration equipment, exhaust canopy and dough mixer / dough roller. Basically the new owners bought nothing. It was fraudulent, but in this case the solicitor, accountant and the new owners failed to notice the missing pages. They failed to get the original lease document. Lesson: Get the originals before any money changes hands.
Avoid leasing or renting your equipment, look at bank loans and where possible buy the equipment with cash- Where you owe anything to anyone. I am not a financial adviser and I am not giving financial advice. I am giving you advise, when it all goes wrong. The directors and owners of the business, normally sign guarantees to the finance companies. The finance companies do not care if your shop is closed, they want to be paid and the finance companies will chase you for the repayments. When you do not have a shop income, it is difficult to find, say $5,000 per month from wages?
- The operator and staff
Having a passion for pizza is not a prerequisite to success?
Working at the coal face and in the shop is vital to the success of the business. Having the training and full knowledge of every process, is an assurance to the success., not a guarantee. Many new pizza shop owners set up the shop believing the customers will flock to the shop to buy their pizza, as their pizza is the best. The problem most cases, the shop owner have rated their own pizza as the best, not the customer!
The staff in the shop can make or break your success. Areas that could make the difference are ; choosing the right staff! Selecting the right staff characters, attitudes and personalities. Making certain the staff are trained, and making certain the staff are friendly and “smile”. Staff/employees are an extension of YOU.
- The product
Having the right pizza/ products matched for the area. Stick to a basic quality menu and expand the menu later. If the sign says “Pizza shop” make certain you are a “Pizza Shop” , what I mean is don’t try and sell everything else. You will confuse your customer and the sales will show. If your famous for ice-cream! Why would a customer want to buy your pizza in an ice-cream shop?
- The equipment
Selecting the right equipment for the job is vital. Having redundancy is a must- Make certain there is a backup plan, if something were to go wrong; E.G: The trend today is to have only one pizza oven, due to cost. One oven limits your production, and what happens when that oven fails. Usually the oven fails at the wrong time, yes in the middle of peak during a Friday night.
Would you fly on a 15 hrs flight across the Pacific Ocean in a 747 jumbo plane with one engine and a half a tank of fuel?
Customers also have a service expectation, thanks to Pizza Hut and Dominos where the customer expects to get their pizza delivered in 20-30 minutes and in some cases they expect to get the pizza in 5 minutes or instantly thanks to the Burger guys. Solutions
- Overheads or costs too high
Know your costs, what are your food costs, labour costs and overhead costs compared to sales.
Sales is not profit, judge your business success on net profit after overheads- you might be surprised.
If you sell $20,000 per week =sales, I am certain you would be happy. However if the costs were $21,000 per week, the sales now do not look good, in fact you would be closing the doors fairly soon with a loss of $1,000 per week.
If I said I was making $1,000 a week net profit before tax, after I have paid myself wages., then you know I was doing well.
Ask your accountant to help you with a budget and cash flow. Before you start a business consider a business and marketing plan and the budgets and cash flow will guide and help you .
I liken business plans, cash flows to going on a trip as the maps, goals and risks etc are the Business and marketing plans. The budget and cash flow for our trip is the fuel in the car and money we need for the journey. If we went on the journey not knowing what fuel we have for the journey we may be stranded along the way and never reach our goal or destiny. If the trip was across the desert , then we could perish.
- Low turnover
If the pizza shop is in the wrong place, or you have the wrong style shop for the area, you may suffer from a low turnover. In this case when you the sales drop below a certain weekly turnover, you could have issues with stock shelf life, over buying and over staffing. To avoid this issue, research before you start.
10. Business partners
Business partnerships, directorships before you start have an agreement , a legal agreement . What should be in the agreement – A buy sell agreement, or a get out clause, what happens with the share holdings and what each person’s responsibility is in the business. The conditions of the directors/partners wages and the rules. Should there be a problem, who is the mediator.
I would recommend avoiding partnerships, I have seen many over the years that have worked. But that is rare. The legal agreement removes the doubts or the assumptions of each party.
If your business gets into financial difficulty and you want to get out – sell etc. What do you do? It can happen where you have taken all precautions and made the best plans, and the business still fails?
I asked Paul Jensen what is the best thing for the owner to do? Paul said – “Avoid closing the shop, keep the shop trading and contact a company that deals with selling the equipment or businesses like a broker. If the shop is sold as a going concern, the shop is worth far more in cost recovery than a shop that is closed.”
“A working shop that is in trouble can be revitalised and fixed. A closed shop has to be stripped out and the gear sold, the remaining funds low.
In one case a small shop was bought for $36,000 2 years closed and striped and the equipment sold for $4,000. If the shop was trading, the shop could have sold for around $20,000.”
So if you are thinking of going into a pizza shop take some advise don’t use emotion use planned logic!
The information provide in this article is of a general nature, for more advise on financial and legal matters seek professional advice on your situation. If you would like more information on other items in this article, please contact me to or your feedback, please do not hesitate contacting Darrel Vecchio BIZMATRIX Business Technical Solutions Phone 1300 588 749 (1300LUVPIZZA) or 0411884901 fax: 07 32646539
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