He is going to be out of business in six months.
Or so we thought when we first heard Frederick Peters' business plan in 2002 for his chain of pizza shops, Pizza Pan.
If you're not familiar, his concept works like this: Rather than selling one pizza for $12 to $16 just like other shops, Peters' pizzerias offer two free pizzas with the purchase of one if they are picked up at the shop, or one free pizza with a purchase when it's delivered.
At first glance, giving away that much of your product doesn't sound like a very smart strategy, but thanks to a huge volume of sales, bulk purchase agreements Peters has locked in with his suppliers of cheese, sauce, meat and flour and the creation of a unique franchise system, the North Ridgeville-based company now tops more than 100 pizzerias in four states.
Peters has found a concept — which some might call a gimmick — that is attracting the attention of his much larger national corporate competitors, as well as major franchisers who want to help him spread Pizza Pan around the country.
But clever marketing and low prices aren't enough. The pizza has got to taste good, too. Peters, who didn't know anything about the pizza business, never went to college and grew up in working-class neighborhoods on Cleveland's near West Side, still uses the same dough, sauce and cheese he used in his first store in 1984.
"At this point, I'm trying to harness this growth," says Peters. "I can open 50 or 100 stores a year, but I know with the right consultation, I can open up the entire country much quicker, stronger, better."
When Peters gets stressed, he'll grab a few colleagues from his nine-member executive team and hit the basketball court.
Just outside his new North Ridgeville headquarters is an asphalt half-court and hoop. Playing a quick pickup game helps clear Peters' mind and forges a bond with his co-workers, some of whom have been with him since the days when he had only a few pizza shops.
"I'm not bad for an old guy," the 49 year old says of his basketball skills. "I'll spend two hours out there just by myself, just because I want to think."
Formerly located above his first pizza shop, the new Pizza Pan national headquarters gives Peters the room to not only expand his central offices, but to build an adjacent test store to train his owners and try new recipes.
In early September, Peters was almost moved in. "I'm the only office that did not get a desk yet," says Peters, pointing to the two long tables in his office stacked with files and papers. He also didn't have a computer. "To be honest with you, I'm a little old-school."
There were still boxes lined against the wall and the smell of fresh paint permeated the halls, but with the move, Pizza Pan is starting to look much like the restaurant franchise corporation it has become.
"[Pizza Pan] has something that's unique," says Joel Libava, president of Franchise Selection Specialists Inc. in Woodmere. "It sounds like they are having some phenomenal growth, especially for a local operation."
A former home repair and remodeling salesman, a family friend recommended Peters get into the pizza business by purchasing a closed pizzeria on the corner of West 117th Street and Lorain Avenue. Although he didn't know anything about the business, Peters believed he could be successful.
"Challenge is what I'm about," says Peters. "I preach to all my store owners that failure is not an option, and I believe it myself."
He reopened the pizzeria in 1984. On his first day, he made $30. Today, that same store, now run by Peters' brother, Tom, recorded more than $1 million in sales last year.
Peters worked in his first store for two years before opening another in West Park. Then, two years later, he opened a third in Lakewood. Based on aggressive advertising through coupons and what he believes is a higher-quality pizza, Peters grew the Pizza Pan chain to eight stores, mostly on Cleveland's West Side. By 2001, he had built a small group of devoted shop owners.
But the post-9/11 recession hit Peters' business hard. From September 2001 to March 2002, sales dropped 30 to 40 percent. The fluctuating price of cheese — the most expensive commodity in the pizza business — skyrocketed and slashed his profits. Peters knew he couldn't wait for the economy to turn around, and the usual methods of attracting more consumers weren't working.
In April 2002, Peters awoke in the middle of the night with a vision: "Feed the people" was his mantra.
Right then, he jumped out of bed, went to his desk, started crunching numbers and arrived at his free pizza strategy. He knew it would cut into the profit per pizza, but the increase in overall sales volume would make up for it.
"I studied it for a month," Peters says. "I measured it and I weighed it because I didn't want to change my product — I was only taught one way. There's cheaper product out there, I just didn't want to use it."
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PIZZA PAN
By the Numbers
Founded:
1984
Owner and President:
Frederick Peters
Headquarters:
North Ridgeville
Full-time Corporate Employees:
9
Stores:
103
Franchise Owners:
70
States:
Ohio, Pennsylvania, Michigan and Colorado
Average Annual Revenue Per Store:
$300,000 to $500,000
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Most pizza chains use frozen dough; Peters uses fresh. He has a private-label pizza sauce, which is canned and distributed out of California, and his cheese is 100 percent provolone. His competitors, he contends, use only a small percentage of real cheese.
Peters took his new free-pizza business concept to Gene Zanonni, president of Zanonni's Food Service Distributors, which supplies the Pizza Pan stores in the Midwest.
"I was the doubting Thomas," says Zanonni, a friend and business partner of Peters for more than 22 years. "I didn't totally understand how this was going to work, but once he explained it to me, it made sense. Once Fred believes in something, there's no turning back."
The store owners thought Peters "was nuts," he says, but he assured them that if they would try the plan for 60 days, they could return to the usual coupons and other promotions if it didn't work. Peters advertised the special on television, billboards and promoted it through coupon books and newspaper inserts.
Within days, skeptical but hungry customers flocked to the stores to take advantage of the free pizza deal. In the summer of 2002, typically the slowest season of the year, sales more than doubled. The promotion became a permanent part of Pizza Pan's menu.
"The [customer] reaction has been amazement at what they're getting for their money," Peters says. "To do this concept, you must do it by volume. Otherwise, we couldn't do it at these prices."
As Pizza Pan's concept exploded, Peters trademarked and protected his brand and strategy. But soon he found himself involved in a legal battle in 2005 with another pizzeria in Elyria, which, Peters claims, copied his concept.
"I used to have one attorney, now I have 10," Peters says. "I've invested a lot of money in this concept, and I will protect my owners at all costs."
There are 70 Pizza Pan franchisees who own the 103 stores across Ohio, Pennsylvania, Michigan and Colorado. Peters believes he has the most loyal owners in the business because, unlike most franchisers, he charges a flat fee of $1,500 a month regardless of their sales. Most franchisers charge anywhere from 7 to 14 percent of the franchisees' revenues.
"I didn't want my owners lying to me," says Peters, who has heard about franchisees from other chains cutting corners such as ordering ingredients and other supplies from lower-cost distributors to hide profits. An average Pizza Pan store records about $10,000 a week in revenue and anywhere from $300,000 to $500,000 a year. Peters won't reveal the profit numbers, but he admits "it doesn't cost a lot to make a good pizza."
Although he recently started to appear in his television ads, Peters stays out of the public eye. However, word of Pizza Pan's success spread fast through the industry. Peters receives at least 60 to 100 e-mails a day from interested franchisees. The founder of the Boston Market restaurant chain called Peters looking to invest, as did the founder of the Buca di Beppo restaurants. Hormel Foods, the $5.7 billion food producer and one of Pizza Pan's largest suppliers, offered to fly Peters in a private jet to its Austin, Minn., headquarters for a meeting — Peters had to refuse.
"I told them, ‘I'm sorry guys, I'm just too busy,'" he says. Instead, the Hormel executives flew out to Cleveland to visit him.
Peters, who still negotiates every building lease on each Pizza Pan store, is talking to interested franchisees in Arizona, Florida, Georgia, Indiana, Maryland, North Carolina, Tennessee, Texas and Virginia, and those are just the new states. He's still expanding in his current territories.
"I'm excited because this is what I've been dreaming of all these years," says Peters. "I finally have what I always wanted."