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A pack of entrepreneurs chased the low-carb dream--over a cliff.Eight months after the launch of what seemed like a promising business, Brad Saltzman and Stephen Bikoff are scraping the bottom of their cracker barrel. They had grand plans for a nationwide chain of low-carb food stores under the name Pure Foods. So far their two stores, in Santa Monica, Calif. and Beverly Hills, are losing money, with scant prospects of recovering $400,000 in startup capital. They are also on the hook for $50,000 in personal guarantees on long-term leases. A onetime Atkins diet devotee, Saltzman went on a food binge in March, putting on 15 pounds in one month.
The Santa Monica store is doing $800 a day in sales, down from $3,200 in January. To avoid breaking the two-year lease in Beverly Hills, where sales never took off, the two grocers have turned the 1,400-square-foot store into a fancy market, offering such high-carb varieties as H&H bagels, Zabar's chocolate rugelach and Coppola pasta, all from New York. An Atkins food display that once occupied center stage has been relegated to the rear. The store once carried 1,300 low-carb items; now it's down to 100.
So what went wrong? "We thought we were invincible because the low-carb trend seemed so solid," says Saltzman, 36. "That's why we didn't do any due diligence. We just dove into it."
This story begins last summer. As general manager of the Red Lion Inn in Modesto, Calif., Saltzman set up a command center during the search for Laci Peterson. When allegations of murder surfaced against her husband, Scott, Saltzman refused to accommodate the Peterson family at the hotel. His bosses fired him in July. Emotionally drained, Saltzman turned to food as solace. His childhood friend Bikoff, now 36, was also miserable and getting fat. A talent manager, Bikoff couldn't deal with the fact that clients dumped him after becoming successful. To forget their woes, the two friends took a three-week trip to Europe, where they ate themselves into a frenzy--and, after jettisoning several business ideas, discussed what would become Pure Foods.
Once Stateside, the pair confirmed their low-carb-craze hunch by visiting a store, an hour from Modesto, where people were willing to wait in line 15 minutes and more to check out. Los Angeles, they decided, would be their starting place. "L.A. is vain and materialistic; everybody is on a diet all the time," says Saltzman, who was raised there. He tracked down California Pizza Kitchen's real estate broker. "Whoever their broker was, he had to be sharp; they have great locations," he says. Soon he and Bikoff met with the broker, Kyle Kavanaugh, over breakfast. By the end of the meal Kavanaugh's map of L.A. had 12 red dots, representing the city's neighborhoods. "We had to open as many stores as we could before someone else came along," says Saltzman.
Kavanaugh found a good location in a small strip center in Santa Monica. That same week Saltzman scouted for locations in Beverly Hills and came across a space two blocks from ritzy Rodeo Drive. At $45 a square foot per year, it was well below the neighborhood's average rental price; sensing a steal, Saltzman was determined to get it. Kavanaugh advised against it. It wasn't near a supermarket or in the "path of running errands," as he put it. "I know Beverly Hills, I grew up there," retorted an overly confident Saltzman, who expected a flood of diet-conscious denizens.
The broker also thought it was crazy to open two stores at once. "Open one store and wait at least 30 days to get the kinks out," said Kavanaugh. But Saltzman was in a hurry. He and his partners hadn't even drawn up a business plan or lined up any money yet. Saltzman called up two big suppliers of so-called natural foods in California and found out that they had some 1,300 low-carb foods. He wanted to stock them all.
He hastily put together a presentation to the landlords in Santa Monica and Beverly Hills, and by October he was on the hook for two leases. That's when Saltzman sat down and figured out it would cost $200,000 to open a store. He approached his two additional partners, Linda Mihka, an Atkins dieter who runs a bridal shop in Modesto, and her sister, Romina Kiryakous, a florist. They put up $50,000 each, taking IOUs from Pure Foods plus an undisclosed equity stake. Bikoff borrowed $25,000 from his grandmother and supplied the additional $25,000 from savings.
Saltzman emptied his entire savings of $18,000. He then pitched his father, a former shoe designer, and also a dieter, who lent his son $20,000. His grandmother, who had run shoe stores, was more cautious. She, too, warned her grandson against launching two stores at a time. Still, she lent him $12,000. Both she and his father also allowed Saltzman to tap up to $42,000 of their credit line for the second store. For the rest, the partners figured they could finance their operations out of the cash register.
In December they opened in Santa Monica, advertising in newspapers. Saltzman was euphoric when the store pulled in $96,000 in January. Beverly Hills, which opened in February, proved a different proposition. The location--between clothing boutiques and a hair salon--wasn't ideal. An ad blitz coupled with 40%-off coupons brought in perhaps ten people a day; six weeks after the opening, most of original merchandise was still on the shelves.
The bad news kept piling on. In February a Los Angeles TV station tested the carb-content claims of some food manufacturers and found that several had undercounted. Saltzman had to yank out his bestselling low-carb baked goods. Customers in Santa Monica dropped from 140 a day to 60.
About the same time, southern California supermarket chains resolved a long strike. Ralphs, a unit of Kroger, started devoting shelf space to low-carb foods; so did Albertsons, which now carries several hundred such foodstuffs. Saltzman couldn't beat them on price: He was selling a four-pack Atkins shake for $10.40; a nearby Target was charging $8. His wholesale prices from Nature's Best are 20% higher than what large retailers pay.
In May Pure Foods lost $18,000 on sales of just $27,000. Saltzman's best chance to recoup his and his partners' original investment may be a line of gourmet low-carb frozen foods he plans to launch in January and distribute to large grocers. Says he: "You live and learn." An expensive lesson.