Are You Ready to Turn Pro, Part 4

Note from Peter: We've had great response to this series by John Arena, which has been a true reality check for all of us. For those who haven't seen the previous three installments, or who may want to review them, they are all still here on the homepage (scroll down a bit), and also in the Guest Columns section. Thank you so much, John, for sharing your lifetime worth of experience!


Before we move on to the fun stuff, let’s take a look at just a bit more pizza math. Remember that in our hypothetical pizzeria we determined that we needed to make $2100 per day to succeed.  That doesn’t sound hard does it? Well, here’s the tricky part. The bulk of your sales are going to be concentrated in a 3-4 hour span. You will take in 75% of your money between 11:30 AM and 1 PM and from 6 PM to 8:30PM. That works out to about $400 per hour. Let’s say that you are making artisanal pizzas that sell for $13 each on average. You will have to make 30 pizzas every hour during peak times to get to $400 per hour. That means a pizza will have to go in to and come out of the oven every 2 minutes for 4 solid hours. This is why I stress the need for speed.
I know we have all heard the stories about old school pizza makers who were famous for making their customers wait, limited the numbers of pies they made each day, and would throw anyone who complained into the street.

Sorry folks, those days are over and here’s why: Many of the legendary pizza makers used old math to run their businesses. Now, I’m not suggesting that anyone does these things today, but here’s the way it used to work. First off most of the immigrants from Southern Italy came here to escape feudal conditions at home. Let’s just say that they had a healthy distrust of the government. They ran cash only businesses. Many of these places employed only family members or friends from the old country. This meant they paid little or no taxes and had no insurance costs. They paid their vendors out of pocket and kept two sets of books, or none at all. Their restaurants were built with no permits or plans, and most of their equipment was scavenged from the neighborhood or brought from their home kitchens.

You may be thinking, “How much difference could that possibly make?” Well, here is a small example: If sales tax in your area is 8% and you take in $500,000 but only declare $250,000 you are holding back $20,000 tax-free that goes right to your pocket. Many if not most, old time pizzerias worked that way, enabling owners to keep their prices down and still make a healthy profit: DON’T EVEN THINK ABOUT IT!!!

Let’s say you have your kids working for you “under the table.”  You pay no payroll taxes, workman's comp, overtime, or social security. You didn’t pay an architect and engineer to design your pizzeria. You are using non-commercial grade equipment that is cheaper to purchase. All of this sub-rosa activity is going to save you some money and enable you to sell your products for less than the legitimate operators, but, you won’t be able to sleep at night and you will get caught.
First off, in the modern era, 70% of your sales will be debit or credit cards that leave an electronic trail a mile wide. Your guests don’t carry cash anymore so you will lose them if you don’t accept cards. Second, your suppliers use easily audited invoices, the government can track your purchases and they know how that translates into sales. Third, Uncle Sam doesn’t trust restaurants; you will get audited at some point and it is simple to place an auditor in your restaurant to track sales for a day. They will then multiply that by the number of days you are open and assume that is your annual sales. Guess what? They will pick the busiest day of the week and calculate your back taxes based on that number. If you can’t pay, they will lock your doors, auction off your equipment, and you will owe them the balance. You will lose everything and could even go to jail.

There are many other ways that old time operators made the math work for them, not the least of which is that they overcame obstacles with an unbelievable work ethic. They often sacrificed to buy the buildings they were located in and their descendants are benefiting from to this day. In addition these landmark places paid off their investment decades ago so their financial picture is quite different from what yours will be. They rarely upgrade their facilities and invest little more than what it takes to keep the equipment running each year.

Of course there are still some artisans who seem to be uncompromising and are held up as role models of what we would like our lives as pizza entrepreneurs to be. So, let me make this clear: YOU ARE NOT DOM DEMARCO! The truth is even Dom DeMarco wasn’t Dom DeMarco for the first 40 years that he was in business. Until Dom was discovered by some powerhouse food journalists, DiFara’s was a simple neighborhood pizzeria and Dom was no more famous or highly regarded than any number of hard working Brooklyn pizza guys who labored in anonymity banging out great pies all day long. After decades of back breaking work Dom has finally reached a point where his talent is recognized. The plain truth is that, unlike DiFara’s, you will not be able to charge $5 for a slice of cheese pizza and that makes all of the difference in the world. At that price an 18-inch cheese pie is bringing in $40! With a food cost that is probably around 12% and, doing much of the work himself, Dom and a few others like him are not subject to the same economic realities that you will face as a start up operator.

Now that we have some of the basic mathematical realities out of the way we can begin to explore the development of your pizzeria. But that will be in the next installment.

 

Comments 

 
#1 SZOT 2012-12-24 08:29
I own a microbrewery in Chile, and my advice is similar to those who want to open their own brewery (the pizza advice given is so similar to brewing!)- it really helps if you inherit the property so you don't pay rent, then buy the equipment from someone who bought everything new and then went bankrupt (resale value of used equipment is much lower than new - like buying a car, it "depreciates" immediately once you drive off the lot) - and the work ethic mentioned is important. The tax authorities here, or anywhere for that matter, don't offer pardons (unless you're a big, big company or a bank "too big to fail"). If you start from scratch, pay rent, then buy all new equipment - it will be very difficult to break even. Pizza is a hobby for me, and I've learned to make good pizzas, better than anything I've tried in commercial establishments, but it would be a tough business! Saludos, Kevin www.szot.cl
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#2 Ben Kalow 2012-12-29 17:13
Thank you for sharing your experience. I'm really enjoying this series. The next time I hear, "This is so good, you should open a restaurant!" at one of my back-yard pizza parties, I can say, "NO" and send them here.
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