Lessons Learned From a Failed Ivy League Entrepreneur

A "Case Story" By Chris Cononico
 

Chapter Four

George, Mark, Jake, and I met informally after our management class during the first few weeks of the semester with nothing new to report. I liked the restaurant meal plan idea, but I didn’t expect something we dubbed “QuakerCard” to become my full time job. Without a viable business idea, I expected to have no choice but to accept a job after graduation.

As a result, a lot of my time was spent sending out resumes, and trying to get a summer internship at an investment bank. The QuakerCard felt like a novelty project that would be fun to research, whenever we got around to it, but I certainly never lost any sleep at night dreaming about swipe card machines or student meal plans.

About half way through the semester, the fear of getting a bad grade in the class motivated us to work more diligently on our project. We held an emergency meeting after class one-day and split up the work amongst us. Jake, who majored in marketing, was going to develop our marketing strategy and conduct market research. Mark was in charge of building our financial projections. George was going to research the technology and figure out how we would implement our idea. My responsibilities were to evaluate the demand from the local restaurants in the community and do our competitor analysis. There were obviously more parts to our business plan, but this was how we got started.

Classes at Wharton were extremely competitive, and the grading policy stated that only 20% of the class could receive A’s. As a result, whenever students prepared for exams or worked on group projects, the effort was intense. I had no idea whether or not a QuakerCard would ever exist, but I wanted to do a good job. In my view, that meant speaking directly to the local merchant community and assessing their interest.

Unfortunately, as a student doing a class project, I considered it unlikely that a restaurant owner would take me seriously. I feared he would regard me as “just a student,” and would discount whatever I had to say. As a result, I decided to position myself as a fellow businessman with a new business concept. By doing so, I hoped to have more meaningful conversations.

My plan was to meet with each owner as the co-founder of the QuakerCard. In fact, I even decided to approach the merchants with the intent of convincing them to sign a “non-binding letter of intent” to join QuakerCard. Even though we didn’t yet have a program, the letter was a document I typed up in the computer lab and it meant nothing, but it required restaurant managers to show us they were interested in participating. They had to either sign up and "save their spot" or decline.

At the time, I felt a signature, even in a non-binding document, still conveyed an important message. A signature would indicate a more sincere interest in the program, because people usually think twice before they sign something. If enough restaurants were willing to attest to their “interest” in such a concept, it was a huge vote of confidence for the idea. Of course, it was all subject to us following through, but I knew if enough vendors were interested, we would have been keener to implement the plan.

I presented all prospective merchants with a folder that cost me $0.50, which contained my business card and the “non-binding letter of intent” document. It was followed with my verbal pitch, which sounded something like:

“[Mr. or Mrs. Merchant], we’re trying to set up a restaurant meal plan to compete with the school's cafeteria program. With our meal plan, students can eat at the local restaurants rather then at the cafeteria. So, rather than parents paying another $2,000 a year to the school, so that their kids eat 21 meals per week at the cafeteria, parents will pay you so their kids can eat at your restaurant instead.”

I was trying to drive home our unique benefit for them in simple language, no jargon. I would continue:

“Look, it could be better for the students because it’s better food, better value, and unlike the cafeteria, any money they don’t spend will be refunded back to them. What’s important for you is that this could represent a big pool of money and new customers you never had before. We’re trying to take the business away from your biggest competitor, the school cafeteria program. If we’re successful, it could mean a lot of new business for you. Are you interested?”

From the merchant’s perspective, their main competitor was the school cafeteria. By siding with the merchants against the cafeteria, I looked like the hero. It turned out the merchant community had quite an axe to grind with the University. Not only did the school cafeteria compete with the restaurants, but the University also owned most of the commercial properties around campus, and the merchants complained that Penn charged a hefty rent. It was a double whammy.

By offering a way to compete with the cafeteria, I managed to strike a chord with the vendors. As soon as I got my first signature, I brought it with me to the next merchant, and showed him others were interested in the idea. Once I gathered 10 signatures, I had enough credibility to get almost everyone. Admittedly, there was a bit of a herd mentality among vendors to be involved together.

Not every meeting was exactly the same, however. Probably the strangest meeting I had was with the owner of a local 24-hour Philadelphia cheese steak restaurant. In this establishment, all of the grill men wore pagers, and I don’t think it was to help them deliver cheese steaks. The owner’s office was in the back of the restaurant. I entered the room and he sat behind his desk with a police officer-- fully attired with gun and badge-- standing behind him to his left. The cop didn’t look like he had any intention of sitting (there was no chair), and the owner of the restaurant barely acknowledged him.

The meeting started when the owner pulled out a gun and put it on his desk directly in front of me. The piece hit the table with an ominous thud. Somehow, having the cop in the room didn’t make me feel safer. The owner said, “What can I do for you?” I managed to ignore the gun, and start my sales pitch.

As I spoke, the cop kept nodding his head in approval and muttering to the owner, but the owner never acknowledged him. I finished my pitch and handed him the folder with my business card and the document. He pulled out a pen and signed it on the spot. He muttered back something about screwing over the school and that he liked it. He went on a tirade about how much business his restaurant already did. With each point, the cop shook his head and agreed for emphasis. It was a little intimidating, but I left with a signature nonetheless.

Within a week or two, I had letters of intent from 20 restaurants, and was in telephonic talks with the corporate offices of several large chains. Working by telephone was a blessing for me, because no one ever requested to meet me. That was convenient because I didn’t have an office. It would have been pretty awkward to set up a meeting with the regional manager of McDonalds at the local coffee shop.

There was one question that kept surfacing among vendors, which I skillfully deflected. “How much is this going to cost me?” My partners and I spent some time discussing how much we should charge the merchants. Mark had crunched the numbers, and the business model just didn’t work at a per transaction fee of 2-3% like VISA and MasterCard. A transaction fee of 4% like American Express didn’t get us into the black soon enough either. Since we didn’t expect to have significant volume in the early years until the program became popular, we estimated we needed to charge a transaction fee of 10% from the merchants to make it worth our while. I thought it sounded ridiculous.

The good thing about academic projects is that you can make lots of unrealistic assumptions and footnote them with rationalizations. We reasoned that if we truly were providing merchants with new customers, we should be highly compensated. George looked at a typical restaurant’s profit margins and wanted to use 12.5% as our per transaction fee. However, some of us were concerned such a fee was unrealistic and merchants never would agree to it. Giving up 12.5% of your business just sounded too daunting, especially when compared with the fees charged by credit card companies.

We ultimately decided to test a proposed per transaction fee of 11.8%. We reasoned that merchants were accustomed to giving 10% discounts for special promotions, so 11.8% might not be out of the question. We speculated that 12% would be the breaking point for the merchants, so we picked a price point just below it. My job was to go back to the merchants and see if they’d accept it. If they threw me out of their stores, then we needed to change the business model or determine it couldn’t work.

In order to justify our fee, we came up with the “incremental business” argument. It said that as long as we added new customers that covered the variable cost of the food, it was a profitable transaction for the merchant, because every extra bit of gross profit helped to pay for existing fixed costs. Since restaurants had 50% - 65% gross margins (or more), they had plenty of room to pay our fee. I also reminded the vendors it took a big investment to fight the school cafeteria system, but it would be well worth it for them in the long run.

My first restaurant to sign the agreement was a local sushi shop named Genji. When I saw the manager take out a pen and sign his name, agreeing to the 11.8% fee, I was almost shocked. When I walked out of the restaurant, George was waiting outside. When I showed the signature to him, his jaw almost hit the floor. He couldn’t believe it.

As I went around campus talking to owners, I held my other agreements in my hand as “proof” that other merchants thought the fee was reasonable. It was also helpful that many of the restaurant owners knew each other, and discussed the program together. We began to get some very good word of mouth, which gave us momentum, and helped to convince more vendors to join the program.

As successful as I was, my hit rate was not 100%, and not every merchant agreed to the 11.8% fee at that time. There were some conservative owners that either didn’t want to embrace change, or needed to see the program running for a while before joining. Fortunately, there were enough interested vendors to offer a meal plan that was “good enough.” We didn’t need every restaurant in town; we only needed enough menus to show parents and students there was plenty to eat. In fact, as more students participated, more restaurants would join, which would lead to more students and so on, until we saturated the market, or so we hoped.

I don’t know if it is better to describe our reaction to the merchants’ acceptance of the 11.8% fee as disbelief or excitement. Nevertheless, it made us sit up a little straighter in our chairs and take a more serious look at the business. Maybe we had something here.
 
 

Copyright  2005 by Chris Cononico
All rights reserved. No part of this manuscript may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the author, except by a reviewer who may quote brief passages in a review.