Are You Ready to Turn Pro? Part 3

OK, so you have considered the physical challenges and demands of becoming a pizza professional. You are confident that you want to transition from being a great amateur to becoming a successful pizza operator. Allow me to introduce you to your new best friend…MATH!
I know that many of you have a dream of escaping from the mundane business world and earning a living as a pizza artisan. Math may not be why you want to open a pizzeria, but my mission is to keep your pizza dream from becoming a nightmare. If you intend to stay in business math is what’s going to keep the doors open and the lights turned on. Math is the spot where art and commerce meet. Having numbers that work is just as important as having the right equipment and recipes.

So let’s get started with some basics. Please keep in mind that although the numbers may change slightly from place to place, this is information based on what is common in our industry, so please don’t make the fatal mistake of thinking you are going to circumvent the economic realities.
Rule number 1: Everything starts with the rent. No matter how much money you take in you cannot overcome a bad real estate deal. To be safe, your rent should not be higher than about 8% of your projected sales. That means that if your rent is $5,000 per month you would have to take in about $63,000 per month to make a decent profit in your pizzeria.  At that rate you are going to have to ring up about $2100 per day.  It also means you will have to be open 7 days per week. My motto is “Every day that you pay rent you should be generating sales”. If you closed 4 days per month you would have to make up that $8400 in the remaining 26 days and there are no guarantees.  I know a lot of the old timers closed on Mondays, but the fact is they did a lot of things that you will not be able to do in the modern world (we will get into that in the next installment).

Rule number 2: If you are starting with a raw space you should plan on spending about $200 per square foot on your build out. Sure you can try to get by cheaper but factoring in fixtures, furniture, equipment and signage this is about right. Remember that a pizzeria is a special use project that requires costly plumbing, venting and electrical work that is usually not provided by the landlord. The days of having your brother-in- law “who’s a pretty handy guy” building your restaurant are over. Local health and building codes are getting stricter as municipalities run out of money and seek revenue from licensing and fines.

Let’s review our math:
Rent is $5000 per month
Construction investment is $200 per foot. Let’s say that your restaurant is 2000 sq ft. That means it costs $400,000 to build.
Assuming that you are getting that 63k per month in sales you are at about 750k in annual sales. $100,000 per year in profit will give you a 25% return on investment. You would need a 13% bottom line to make $100,000 on $750,000 in sales. Can you do that? Under the right circumstances the answers is yes, but it won’t be as easy as you think, so here is the most important lesson of the day and it addresses the most common mistake that I see beginning entrepreneurs make: Never base your price structure on what your competitors are selling their products for! Their costs and financial considerations have nothing to do with your business.  Your prices must be based on what it costs to make your pizza, including food cost, labor, rent, utilities, insurance, taxes, legal expenses, and that 13% you need at the bottom. Always keep in mind that your goal is to have a business, not just buy yourself a job.

This math stuff may not be what is calling you to a career in pizza, but understanding it and preparing yourself will make it a lot easier for you to experience and enjoy the more artisanal aspects of the journey.
Stay tuned for Part 4....

 

Comments 

 
#1 B-ry 2012-12-05 10:20
Great column!
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#2 Trevor C. 2012-12-05 19:08
Great stuff. Valuable advice. I've always wondered what it would take to start a pizzeria and know I know. I expect you're saving people a lot of heartache with such direct advice. Cheers
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#3 TonyC 2012-12-09 15:37
Great post. Please could you explain where the $100,000 (13%) profit figure comes from?
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#4 Brad English 2012-12-11 21:04
John Arena emailed me that he was trying to log in and respond to your comment TonyC, but couldn't. So, he asked me to post this response for you:

"The $100,000 figure was calculated by taking the build out cost of $400,000 and assuming that an investor would want an annual return of 25%. While this may seem like a high rate of return on investment, a restaurant is considered to be high risk so it generally demands a higher rate of return to be worth a try. Naturally if you spend less to build you would require less annual return to make the investment pay off, bu the 25% calculation will still hold true."

John Arena
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#5 TonyC 2012-12-11 23:45
@John Arena: Thanks for the explanation.
@Brad English: Thanks for relaying John's reply.
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#6 Amy T 2012-12-12 19:56
Thank you so much for posting this!! I have been racking my brain around everything I am doing to get my pizzeria started and the business plan has got me running circles! :-x The math you have done will help out tremendously and I thank you!! Maybe I will be the next pizza guru! :P :lol:
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