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Milling profits from spice

At his Midwestern headquarters, Bill Penzey tells FSB how home cooks fueled his seasonings empire.

By Fawn Fitter, FSB Contributor

(FSB Magazine) Brookfield, Wis. -- By the time Bill Penzey left college, he had spent 13 years working at his parents' spice shop in Milwaukee. It seemed natural that he would take over the family business. Instead, he launched a spice company of his own, securing his first orders from a handmade mail-order catalog. Today Penzeys Spices is thriving: The privately held company won't discuss revenues, but in March told the Milwaukee Journal Sentinel that the range is in the tens of millions of dollars. With 270 employees, 600,000 mail-order customers, and 32 retail stores (up from five in 2001, with four more opening by the end of this year), Penzey, 44, has built a fast-growing, innovative company in what was regarded as a sleepy niche of the food industry. Here, in his words, is how he did it.

I grew up in my parent's small coffee, tea, and spice store, called the Spice House. By the time I was 13, I was knocking down walls and moving things to create more sales space when my father wasn't looking. He sold spices to restaurants. I was more interested in creating an environment that worked for retail customers. Sales improved when I did that. Working for my father didn't seem like an option, so I started my own company. I didn't go to business school - the last thing I needed was some professor telling me how to run a company. I didn't finish college, but I studied food science while I was there, which helped my business succeed. I look at saffron and love the fact that dirt, DNA, sunlight, and water created this magical thing with a golden color. It is a kind of alchemy.

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After leaving school in 1986, I moved to Dobbs Ferry, a suburb of New York City, where a girl I had met lived. I rented a store but never opened the shop. Instead, I started a mail-order business. My first catalogs weren't exactly sharp, but at least I introduced something customers had never seen before - four different cinnamons, for instance.

I was driving around in a used van I bought for $925, doing all the things you have to do to bootstrap a business into existence. It was hard. We didn't have a fax machine. I worked 12-hour days. Within a few months I realized I'd be better off in Wisconsin, where real estate was cheaper. My relationship with the woman ended, and I moved home within a year and a half.

I landed in a 2,800-square-foot warehouse in Oak Creek, Wis. No office space - just a little processing room. My parents had a few accounts that were horrendously unprofitable, but because I could work cheaply for myself, I took them over. Then I put together a catalog and mailed it out. At that time it was inexpensive to buy customer lists - we started with one from a New York City spice company that had gone out of business.

When we moved in, the food inspector said, "You're really ambitious," and laughed at the idea of using that much space for spices. But we used it all up blending and grinding the spices. It still wasn't easy. For a while our employees received 50 cents an hour less than wages at McDonald's. Total revenues were $38,000 over those first four years - about $9,500 a year.

Starting a business is like a football game. No matter how great you do in that first quarter, no matter how far ahead you are at halftime, you have to go all four before you win the game. After a year at our second location (we moved to an 8,400-square-foot spot in 1994), I thought we had a victory. I flew to India for the first time to buy spices directly from growers rather than go through importers. That was a big step. It allowed us to control the quality of our product and cut middleman costs. I was finally able to pay myself more than minimum wage and have money left over for growth.

Then we hit a money crunch. We had to lay off a bunch of people, and I remember lying in bed kicking myself because I had accumulated $24,000 in expenses that didn't get me anything I needed. They were investments for the future, but I needed the money now. I didn't have it. We hunkered down.

That was when I began thinking about how people buy spices. It's different from other food staples. When you sell a family a pound of peppercorns, they won't be back for a year and a half. You have customers who don't spend much money, and it's a long time before they spend again. So you need a lot of customers.

Knowing this, we made some changes. We redesigned our catalog so that it was more seasonal. We beefed up each issue with recipes and tips so that buyers would look forward to receiving it. We mailed out more catalogs during our busy season - October through February.

We were prepared to hibernate during the off-season, but we needed somewhere to do it. We opened our first store in 1995, in front of our warehouse. It turned out to be a great way to complement the mail-order stream. Our customer base expanded. Catalog customers are folks with more money than time or people who live in Montana with no place to buy spices. But virtually everyone shops in stores, and they always pick up a few things they didn't intend to buy.

There were plenty of "Aha!" moments along the way, not all of them good. One was after 9/11, during the anthrax-in-the-mail scare. About 90% of our business was mail order. That changed. Suddenly customers didn't want to touch a package with a ten-foot pole because it might kill them! It didn't help that some of the spices were white powders and that almond extract smells like cyanide. If people didn't feel comfortable anymore when things came in the mail, they wouldn't feel cozy. So we decided to open more stores, which helped us understand how customers perceive spices.

I've heard folks passing by a spice store say, "That's not for me; it's for gourmets." It reminded me of a conversation I heard a few years back between two women walking out of my store. They didn't buy anything, but one said to the other, "This store makes me feel like I should buy a book about spices so I know how to use them." I realized that if customers need to read a book about what you do before they buy from you, it's not working.

So we sent out a survey and found that more than 50% of our core mail-order customers ate out fewer than six times a month. Virtually all the media we saw about food weren't reflecting reality - the folks who cook nightly are a very different group from those who watch the Food Network. We found that our customers are families who were cooking skinless chicken breasts 20 times a month, and we had to reach out to them.

Sure, we still carried a catalog that helped people expand their horizons, but it was important to remind them of the basics: By using a variety of spices, you can create new meals with essentially the same main ingredients. To communicate that, we opened more stores, handed out easy recipes, and launched a magazine, One, full of articles and recipes from home cooks. That was a big shift for us - discovering that we're different from the celebrity-chef restaurant market. We're a company that serves customers who are home most nights, and we wanted to provide role models and guidance for them. That focus helped us open new stores faster. Our sales used to be split evenly between retail and mail order (we have 600,000 catalog customers), but last year retail became the bigger part of our business.

My attitude has always been "I'm going to succeed or die trying." Last year we opened a store in New York City's Grand Central Terminal. That was a good moment. And our new building came with a big water tower, which we plastered with "Penzeys Spices." It lights up at night! Having your name up on a water tower? I'd say that counts as success.

PENZEY'S RECIPE FOR SUCCESS

Cut your overhead. When Penzey realized that his spice sales couldn't fund the costs of running a New York company, he moved back to the Midwest, where real estate was cheaper and taxes were lower.

Know your customers. Six years into his business, Penzey sent out a survey and found that many of his buyers were home cooks. He refocused his marketing strategy to reach out to them.

Stay on message. It is tempting to expand into related product lines, but Penzey concentrates on his niche. "We could sell $180 bread mixers, but then we're not Penzeys, we're Williams-Sonoma," he says. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.