Deal with dragon fires up Chimney Stax’ growth plan
Each week, Financial Post contributor Mary Teresa Bitti revisits CBC’s previous week’s episode of Dragons’ Den. She captures what the cameras didn’t and in the process provides a case study for readers, zeroing in on what pitchers and dragons were thinking and what the challenges for the deal are going forward.
The pitch Matt Lindzon was in Austria on a business trip in 2013 when he discovered fresh rotisserie-baked breads at an outdoor Christmas market. While popular across Europe, they are less known in North America. For Lindzon, the sweet and savory breads represented t he business opportunity he and his friend and fellow MBA grad Zach Fiksel were looking for. “I took a video and sent it to Zach.” He agreed and they got to work building Chimney Stax Baking Co.
Rather than jump into the expense of opening a store in their home town of Toronto, they decided to make the most of the rise in popularity of food trucks to prove the concept and get in the market quickly. They worked on a business plan, applied to the Canadian Youth Business Program ( now Futurpreneur) and received a grant of $15,000 which was matched two dollars to one by Business Development Bank of Canada.
“The money allowed us to fabricate a food truck, purchase our ovens and equipment and get to market,” Lindzon said.
Chimney Stax launched in August, 2014, landing space at l ocal events. The duo quickly learned which events worked (those where people have to pay to be there) and which didn’t (street festivals, where vendors hand out free products), allowing them to hit their stride the following summer. The rotating menu features sweet and savoury rotisserie-baked breads with a 24- to 36- hour shelf life at price points ranging from $6 to $14.
“Last winter, we were in the Distillery District’s Christmas Market. It was fantastic. We learned it’s almost the same effort to do a 30- day event as it is to do a single day event. We’re back this year,” Lindzon said.
In the 12 months before they pitched the dragons, during which they were operational for 90 days, they made $ 160,000 in revenue with a profit margin of 20 per cent. “We’ve proved the concept and now want to move into more permanent locations in high traffic areas that allow us to operate from small spaces and generate high value,” Lindzon said. “The long- term plan is to franchise.” The deal Lindzon and Fiksel asked for $ 125,000 in exchange for a 25- percent equity stake, valuing the business at $ 500,000. The money was targeted for expansion.
Michele Romanow, Manjit Minhas and Joe Mimran all made offers. The entrepreneurs, who were hoping to land Mimran and Jim Treliving, were thrilled to accept Mimran’s deal, for exactly what they asked for, with one proviso — a 50- per- cent vote until he recouped his investment. The deal closed in August.
Now, they are finalizing kiosk designs and scouting shopping malls in Ontario for their retail launch. “It was a fast closing and we had a stellar summer thanks to big events like the CNE, WayHome Music Festival and the Woodbine Queen’s Plate, among others,” Lindzon said.
“We’re up 325 per cent this fiscal year. We’ve had steady, strong growth but there is no further space to grow in this model.” Chimney Stax is ready to access the high volume in shopping malls yearround, while maintaining a small footprint.
Mimran is helping determine the menu for the mall concept, supply chain management, delivery, storage and the ramifications of each decision on cost, revenues and profit margins. “We want to knock it out of the park. Our vision is to be in malls and airports across North America,” Lindzon said. A dragon’s point of view Mimran remains impressed with the entrepreneurs and he contends they can compete against the Cinnabons and Auntie Anne Pretzels of the world.
First, however, they’ l l have to prove the concept can work in high- rent locations. “We have to see whether or not they can generate the right topline sales to afford being in triple- A freestanding locations. If they can, it’s a winner.”
However, he s aid it ’s still early for franchising. “They’ ll need several corporate kiosks functioning well f i rst. They have to make the model super simple for franchisees, offer them incredible value and discipline on the backend. There’s work to do.”
The same is true of branding. “A certain amount of education is needed. People know what a pretzel is and what a cinnamon bun is. How do they get their message across through i magery? What they have now is cool but doesn’t tell you what the product is.” An expert’s opinion John Cho, par t ner at KPMG Enterprise, shares Mimran’s approach to franchising. The key will be making sure they have the right recipe for success before franchising the model.
“It sounds like a winning product. They are getting good traction. Now it’s about taking a measured approach to growth. This means getting their retail footprint established with the right image, kiosk design and, most important, the right locations.
“Once they get a few corporate kiosks up and they know the model works, then franchising can be a good accelerator for growth,” Cho said.
WE’VE PROVED THE CONCEPT AND NOW WANT TO MOVE INTO ... HIGH TRAFFIC AREAS.