I recently read Lowenstein's book on Buffet, and I was particularly intrigued by Buffet's process to analyze private businesses. I think that's the true benchmark for they way we, investment analysts, should look at opportunities. Last week, I wanted to test what I had learned from that book by challenging myself to come up with a value I would pay to buy my favorite pizza place in Westwood. I was happily surprised with my findings as a lot of them fit the guidelines of a 'good business'.
Enzo's Pizzeria a 17-year old restaurant that makes the largest (23") New York-style pizzas in Westwood. They have been immensely successful even when competing with chains like California Pizza Kitchen, Pieology and 800 Degrees. I did some homework trying to understand restaurant economics and then went to speak to the owner of the restaurant to understand more about the place.
These are the key insights I gathered:
Notes:
Enzo's Pizzeria a 17-year old restaurant that makes the largest (23") New York-style pizzas in Westwood. They have been immensely successful even when competing with chains like California Pizza Kitchen, Pieology and 800 Degrees. I did some homework trying to understand restaurant economics and then went to speak to the owner of the restaurant to understand more about the place.
These are the key insights I gathered:
- In the commodity-like business of cheese pizza, they are the lowest cost providers. They use the highest quality ingredients (like tomatoes from Maples and cheese from Wisconsin, often paying 3x for raw materials as compared to their competitors) and yet charge half of what 800 Degrees would charge for the same quality of food ($0.05/sq inch vs $0.11/sq inch).
- They are able to keep their costs down because of their ability to identify and cater to their core customer - the frugal college student. They have a small restaurant which lowers maintenance expense by reducing number of staff required to serve; they focus on deliveries more than dine-ins; and do not have a liquor license because they know that college kids do not pay $5-$7 for a beer with dinner.
- In stark contrast to their competitors, they spend no money on discount coupons because their giant pizza boxes (almost 2.5 ft wide) are self-advertising. They keep costs low and pass on these savings to customers.
- They are the official and exclusive sponsor of the UCLA Recreation and they supply pizza to a lot of sporting events. Because of their accounting structure, they are one of the few vendors who are able to work with purchase orders, they are able to supply to UCLA meetings and thus make big margins on bulk orders.
- They raise prices each year (slightly more than inflation) and are not worried about losing market to competitors, because as the owner told me, as long as UCLA keeps enrolling a higher number of students each year, their volume sales will keep going up.
- The best part - because of their lean operating structure and high-volume business, their pre-tax margin is about 20% whereas the competitors are anywhere between 6-10%.
- Based on the volume numbers the owner gave me, I estimate them making ~$600,000 in revenue each year which translates into $90,000 in net income. They have very little maintenance capex as their cooking equipment is pretty basic. So the $90,000 can be assumed as owners earnings, and if we can buy the business today for $500,000 and sell it after 15 years for the same amount, it would generate a 18% IRR.
Just a fun little exercise I indulged in while procrastinating on school work.
Notes:
- Enzo's Pizzeria: http://www.enzospizzeria.com/
- Link to my class presentation: https://drive.google.com/file/d/0B_uPXHuj2aJqc2VZTUNKZGFiZHc/view?usp=sharing