Philly Pretzel Factory founders did 50 things right and 50 things wrong, but when they were right they blew the roof off the pretzel business
Daniel DiZio, left, and Len Lehman started Philly Pretzel Factory with $17,000 each. Today there are 136 open, with 26 under construction and systemwide sales of $50 million.
Pretzels are the holy grail to Philadelphians. Owning a pretzel-making machine was akin to holding the keys to the city. Daniel DiZio started in the business when he was 11, selling pretzels five for a dollar on street corners. And then he and his partner discovered a machine in Florida...
Daniel DiZio’s mother insisted on giving him his $7 allowance, even after she found the drawers under his twin bed overflowing with crumpled dollar bills. And even after she found out that at 14, her son was making more money than she was.
The year DiZio turned 11 two very different things altered the course of his life. His father died, and a neighbor employed DiZio to walk the white line of a busy thoroughfare selling pretzels to cars stopped at red lights.
This was over 30 years ago, and DiZio’s mother thought she was doing what her late husband would have done—not coddle his son. DiZio grins as he admits that in all likelihood his father would never have let him stand on street corners selling pretzels to strangers.
The job came about because his neighbor, Steve Auel, worked for his dad at his pretzel factory and was paid for his labor in pretzels. One day Auel, unable to sell his share of the night’s baking to his regular customers, came up with the scheme to have DiZio do it.
The pretzels were sold out of milk crates, five for a dollar and the split was 50-50. It became a regular gig, and the preteen often went home with $200 in one-dollar bills. Once his friends got a load of his roll of cash, DiZio was recruiting them to work the corners with him.
It has the makings of a modern-day Oliver Twist story, where the urchins worked the street corners for pennies. The mastermind and grown-up, Auel, stopped short of nothing to increase profits. He landscaped the corners where his sales team congregated, on his own dime, and even went so far as to bribe a city employee to sync the lights so cars were forced to stop several times along the sales route. The city employee eventually returned all the money out of guilt. To his credit, DiZio says, Auel told him to keep it. The tearful employee refused and DiZio ended up with $1,000 of the payoff as a tip.
DiZio says he hoarded the money for years, but then did what any boy his age would do, buy bikes and skateboards. At one time he owned 10 expensive BMX bikes. “I blew it all,” he says, regretfully.
If you’re not from Philly, you may not appreciate that pretzels are to Philadelphia as cheesesteak is to, well, Philadelphia—iconic. (If you need an out-of-state example, think New York City bagels.) “Those pretzels are a big deal here in Philly. They were really yummy,” photographer Joe Chielli said of the pretzels he and his assistant took away with them after the photo shoot, thus confirming that Philadelphians never tire of pretzels. The taxi driver who picked this reporter up after the interview made her wait while he went through the line to buy a pretzel sausage.
At the time DiZio started selling pretzels on the street corner, there were just 10 pretzel-making machines in the city, and their owners protected them as if they were a pretzel cartel. Since this was a Philly tradition, the machines were not in demand anywhere else. The bakers closed the factories at 8 a.m. after a night of baking and the pretzels were sold to sidewalk vendors, convenience stores, schools and to office workers who brought a box of pretzels to work. While other areas of the country celebrate breakfast at work with a dozen doughnuts, Philadelphians crave soft pretzels.
Why no one else thought to make the factories into retail is a mystery to DiZio, who started the Philly Pretzel Factory with his college roommate, Len Lehman in 1998. “Perhaps they were too busy baking,” DiZio surmises. And too tired.
DiZio stayed Auel’s right-hand man all through school. The only thing that changed was his attendance. When he was 14, his principal caught him selling pretzels when he should have been home sick. His stepfather, an FBI agent, made a deal with DiZio that he could continue his sales career as long as he was also on the honor roll.
Pretzels were forgotten when he went away to college, but not the regret at having blown through all that money that would have come in handy for tuition.
Fast-forward to 1998, DiZio, now a stockbroker, and Lehman, a psychologist, decide they hate their jobs. Entrepreneurship was no stranger to the two. In college they ran “the party house,” an enterprise that required doing chores for the neighbors and rotating the wealth with another house. “We charged $5 a head and the cleaning crew came in the morning,” DiZio says.
DiZio talked Lehman into going into the pretzel business together, but there were no machines to be had in Philadelphia. After six months of searching, DiZio located one a retired Philadelphian had moved down to Florida. The two friends decide to fly down to buy the 1920 machine sight unseen. The bank wouldn’t issue a cashier’s check for $20,000, so Lehman carried the cash in a fanny pack through airport security. This was pre-9/11, but nerve-wracking just the same—even for a non-drug dealer.
They rented a truck, and arrived at the home where the pretzel machine was stored to find a broken-down relic. “It had plywood holding it up,” Lehman says, shaking his head. “I said, ‘no way I’m paying $20,000 for this.’” They couldn’t even plug it in to see if it worked, because the house wasn’t wired for the voltage.
DiZio says he turned to Lehman and said, “If we go home with an empty truck, we have to go back to our jobs.” He let it sink in, and then added, “I think we can get him down.”
The negotiations started at noon. By dinner they were still thousands of dollars apart. The man’s wife made dinner and they all sat down to eat. By 1 a.m., the pretzel maker was theirs for $11,500. “I think we physically wore him down,” DiZio, says, grinning.
When Marty Ferill was brought onboard, he implemented systems, hired key employees, developed manuals and upgraded processes.
And that’s when they realized they still had to load the extremely old, fragile and heavy machine into their U-Haul truck. The next surprise was it didn’t have wheels. They called a tow truck and a few hours later the machine was lifted into the back of the truck and the pair were ready for their 1,200-mile trip home.
The truck was so heavy all four tires blew out on the interstate and they had to hole up at a rest stop to wait for the rental truck company to come change the tires, which made them miss the auction for a mixer. They later purchased the mixer from the buyer at a 100 percent markup.
Remember, all this was before cell phones played a major role in our communications.
For about $17,000 each, the two 26-year-olds got into the pretzel business. They rented a space along a busy street in the Mayfair area of Philadelphia and set about making pretzels. Their intention was to operate much like the traditional bakers, bake all night, close up at 8 a.m. and have vendors sell them. But after their first night, people walking by saw the pretzels coming out of the ovens and asked if they could buy them. The line never went away. “People would wait up to a half an hour” for the next batch to come out of the oven,” Lehman says. It was a new twist on an old favorite—warm pretzels.
They were an overnight success, which was part of the problem. All their work wasn’t done over the course of the night, but night and day. The first three months were brutal. “We were making money, but we didn’t have time to spend it,” DiZio says. “It was seven days a week, 16 hours (a day).”
They were too busy to figure out a better way to do it; too busy to even find employees. “We’d sleep on the flour bags, because if you fell asleep at home, you’d never get up,” DiZio remembers. When he made deliveries, he had to put the car in park at red lights or he’d fall asleep and drift into traffic, he says.
Saturdays were spent buying flour at Sam’s Club because they didn’t know they could get it delivered. Orders were written on the dry wall, even after they added the airport to their list of customers.
Plus, adds Lehman, it was a sweatshop. The temperature easily reached 120 degrees, and they listened to an old-timer who told them you couldn’t air condition a bakery.
And then Lehman told DiZio he wanted out.
DiZio panicked. Not only would he be losing a friend, he’d be losing his baker. In the end, he convinced Lehman to hang in there. The fact that the two have remained not only business partners but friends is a testament to their character and communication skills.
The 4.0 version
“We did 100 things,” DiZio says. “Fifty right and 50 wrong.” But the right decisions overpowered the wrong ones.
That original store on Frankford Avenue is still the No. 1 store in the chain, even though it has limited street parking and little-to-no visibility. Most likely it would never be a site they would consider today.
Eventually the partners added staff and opened more “factories.” They found a company to manufacture the pretzel-making machines as a proprietary item for Philly Pretzel Factory.
Their model is different from a competitor, such as an Auntie Anne’s, another Pennsylvania-based pretzel franchise.
While Auntie Anne’s pretzels are oversized, slightly sweet and dipped in butter, Pretzel Factory’s product is more basic. They are still twisted, but into a figure-eight shape. A store’s average sale is 30 pretzels per person, DiZio says, making their operation more of a wholesale model than retail. The hot pretzels out of the oven and a few other products such as pretzel dogs and pepperoni pretzels extend their retail offerings. But they’ve been careful not to add too many products to the mix. A chief selling point of the franchise, DiZio says, is its simplicity. They’ve attempted to add other products—such as a breakfast line, since Philadelphians eat pretzels for breakfast—but unless those products hit the numbers out the ballpark, it’s not worth complicating the system for, DiZio explains.
Because the ingredients aren’t costly, Pretzel Factory can afford to sell them at a discount. Pricing is five pretzels for $2; 10 for $3 and 100 pretzels for $29.
In 2007, they opened 45 units. And then there was 2008. Before the recession, franchisees were able to not only get loans, but working capital. Afterward, the loans dried up. The lack of loans was actually a blessing in disguise, DiZio says. “We saw a significant drop which helped us slow down.” It also forced them to look at other solutions for growth. The end result was a scaled-back model, with a small oven that no longer needed to produce 550 pretzels every seven minutes like the one for the original factory locations.
The problem with strictly retail locations is whether the economics work when people aren’t buying in bulk, because the owners don’t want to raise prices. “People look at us as a value,” he says.
One of their best moves, the two say, is not letting their egos get in the way of bringing in professional management. Lehman likes taking a backseat to DiZio, who has become the face of the company, especially after appearing on Undercover Boss’s third season.
When another Philadelphia mainstay, Rita’s Italian Ice, was purchased, they hired Marty Ferrill. With Ferrill came systems and departments and a POS system. All the trappings to make it as professional a system as it is a beloved product. And it works outside Philly as well as inside the city of brotherly love of pretzels.