Cost of sales $16,400 $18,800 (Materials, direct labor, building rent and utilities, depreciation)
Gross profit $9,800 $12,600
Gross margin 37% 40%
Expenses $8,500 $9,400 related; tractor-trailer leases; professional services; insurance; debt service)
Pretax profit $1,300 $3,100
Pretax margin 5% 10%
WHAT THE EXPERTS SAY
Observer
Ray Lahvic, editor, Bakery Production and Marketing Magazine, Chicago
There are three or four other bakers currently serving Pittsburgh, and they're not going to roll over and play dead. That's too much business. The United States today has too much baking production capacity, and what's been happening over the years has been attrition, with the little guys being squeezed out by the major bakers who invest in capital improvements that make them more efficient and larger. And those guys are rough competitors: they have to keep their plants full and want to run two and a half shifts.
They're going to be highly competitive, which translates into cutting prices. That's where Curtis is vulnerable. Supermarkets can be fickle; chains change their minds, especially if someone comes along with a lower bid. The buyers City Pride is talking to now might go along for nine months or a year, but if they are offered lower costs to produce their private labels -- a quarter of a cent, half a cent -- they're going to be pressured by their management. Giant Eagle has gotten good publicity from this and would have a hell of a time walking away, but supermarket profits are very slender.
There's a price for the merchandising help City Pride offers -- a competitor might say, "We don't do that, but we'll give you a quarter of a cent off in return." Customers may like the merchandising, but I don't know if that will offset the price competition.
Efficiency is a combination of equipment and trained personnel, and that's what City Pride will be competing against. Its equipment is used, and while there's nothing wrong with that, it is not a highly automated plant. Which means that Dan's costs are OK, but they're only average. And while I think it's really great that he's going to have all these programs -- day care, education development, stock ownership -- they cost money and are an added expense. I guess they're meant to stimulate productivity. If City Pride is going to compete in the long term, they'll have to.
Potential Customer
Bill Shaner, director of marketing, Charley Brothers, a division of Super Valu Stores Inc. in New Stanton, Pa., and a wholesale supplier for 90 Shop 'n Save stores and 15 County Markets
I'm as impressed with Dan Curtis as with anyone in quite some time. In his presentation to us, there was a room of probably 12 people, and there is absolutely no question that he knew more about the bakery business than all of us put together. People like me, in charge of buying and merchandising, are cynical because there are so many ill-prepared salespeople. But his credibility and real commitment are impressive.
Price will be very important in our ultimate decision, particularly if some of the stores we compete against have a better price. Everybody in the world is going to want to help City Pride for about six months, but ultimately, people are interested in the things that affect their pocketbooks. If we become a customer and another bakery offers us a much better price, I'd certainly have to tell Dan he needs to be at that price; there would be ongoing negotiations about those things. We'd have a contract, but contracts are somewhat loose because regardless of what you sign, if the quality and dependability aren't there, that contract goes right out the window.
The market is ripe for City Pride because I think the quality of our private-label baked goods right now is not as strong as it could be. In going after only private-label work, City Pride really has found a very special niche. The idea of its people in stores fighting for shelf space for the private-label product -- that's appealing.
The fact that City Pride is working with Giant Eagle, by the way, is a plus and a minus. It helps make the bakery stable, and we would need it to be stable. But I hate Giant Eagle, and I don't like anything that has to do with Giant Eagle. There's always a voice in the back of your mind saying, Is he giving them better service or better prices? Time will tell. I would have to trust Dan, and right now I do.
Financier
Thomas Smith, principal in Edison Ventures of Lawrenceville, N.J., a $100-million venture firm that reviewed, then declined, involvement in City Pride
There are three critical factors for City Pride's success, and I think the company can meet them all: producing a quality product, which I don't think will be that big a chore for Dan; having a large-enough market opportunity -- I think he's got that; and being a low-cost producer.
The company has started with a low cost of capital -- there are certainly more subsidized loans and loan guarantees from different government organizations than I've ever seen come together in one project. Couple that with a below-market cost of assets, a below-market lease, tax subsidies on the property, wage concessions from the union in return for the ESOP, and the savings on transporting bread mostly within a small radius, and the company should be a low-cost producer with a substantial margin.
I wouldn't be surprised to see the company lose some money the first year and have to give up some of its margin for market share. But you don't need to earn 10% pretax for this to be successful. We didn't invest because there wasn't a clear exit strategy, and I don't know if the business would ever get beyond $50 million to $60 million.
One final risk is Dan. He's been the key to the success so far. The loss of him would potentially mean the difference between success and failure. He's an exceptional person.
