When Investors Rein In the Free Spending
The relationship between the founders of Wetzel's Pretzels and their powerful investors has not always been silky smooth. "When the money all comes in, you get this euphoric feeling that the bank account is full," says cofounder Rick Wetzel. "All the things you ever wanted to do, you start doing them."
Newly flush with $1 million in cash from a team of investors led by famous Hollywood producer John Davis, Wetzel and cofounder Bill Phelps began by paying themselves salaries. Fair enough, said the backers. Next the founders hired five high-priced vice presidents of finance, real estate, marketing, franchise development, and operations. Then they signed up with an advertising agency, which devised a colorful campaign for the company's new products, such as its Cookies 'n' Kreme pretzels. They also retained a firm to redesign their stores. The bland wood paneling was stripped from the walls and replaced with vibrant mosaics and neon lighting.
But while the changes arrested consumers' attention, the mounting invoices arrested the attention of the company's backers. The losses at Wetzel's were growing and, worse still, deviating sharply from the projections in its business plan. "Our fixed overhead expenses went from $20,000 a month to $80,000 to $90,000 a month," Phelps says. "So we had a short honeymoon period followed by a losing-money pissed-off period. We were hemorrhaging."
The investors demanded that the profligacy stop. Davis -- perhaps made more empathetic by his experience of producing the famously expensive Kevin Costner dud Waterworld -- was delicate in his criticism of Wetzel and Phelps. But others, especially Gary Wilson, were blunt about their displeasure with the numbers. "Being the former CFO of Disney and Marriott, I do ask financial questions," Wilson says. "And I kept asking those questions until they produced positive cash flow." Wetzel and Phelps achieved that turnaround by paring monthly expenses back to $60,000, parting ways with their new vice presidents of operations and marketing, changing the salaried VP of real estate to a contract position, and throwing themselves into the task of matching choice commercial real estate with choice franchisees.
Meanwhile, Wetzel and Phelps used their investors' contacts to nail prime leases in airports, malls, casinos, and sports arenas -- most notably the Staples Center in Los Angeles. "I love going to the Staples Center for a ball game and seeing that line 20 people deep," Davis crows.
By early 1998 the combination of discipline and hustle began to pay off. Losses finally fell into line with the business plan, and in 1999 cash flow turned positive. The angels' million-dollar investment had sent the company sprinting. (It ranked #235 on the 2000 Inc. 500.) The chain expanded to 170 locations in 23 states and three other countries. Revenues exceeded $3 million in 1999, reflecting a gain of 1,063% since 1995, the year before Davis first sank his teeth into a Wetzel's Pretzel.
Intimacy, stability, and a commitment to active involvement have been some of the things that have allowed the founders and their investors to survive the initial rocky period of their relationship.
With Wetzel's, Davis says, he enjoys the "kinship" of a company that has only 16 unchanging shareholders. "We've all now been together for three years," the producer says. "Usually, you get in a deal, and then there's a second round and then a third and a fourth, and maybe you sell out. Or there's a huge group of investors, and you're pulled away from the action. I love the intimacy of this. It's been a blast."
It's been a blast for Wetzel and Phelps as well. They've enjoyed the glamour that has accompanied their Hollywood investor money -- which was a choice from the start. Wetzel and Phelps were already talking to a group of Orange County, Calif., angels when Davis approached them; it was the producer's promise to play an active role in supporting the company that ultimately swayed them. But they also liked the fact that their investor was a player, and through him they're becoming players, too. For both the producer and the pretzel guys, this company may just be the beginning of a beautiful friendship.
--As reported by Mike Hofman, Inc. magazine.
Copyright © 2000 G&J USA Publishing