The Pizza Business: How Take N Bake Brings Big Money

by JT McGee

Papa Murphy's Take-n-bake loves food stamp money.What if I told you that I could build a market leading company with some of the thickest profit margins, the lowest level of service, and that I could gain a unique competitive advantage in selling this product in a highly-competitive industry to a demographic with the least disposable income?

You’d think that I was nuts. One company did it.

Papa Murphy’s Take’n Bake

Papa Murphy’s Take’n Bake is quickly sweeping across the nation. Their business model hinges on a Subway concept for pizza—you walk in, pick your pizza dough in the size you’d like, and design your own pizza from the bottom-up. Sauces, cheeses, toppings, and everything else; you walk down the assembly line as a helpful employee loads up your pizza with all the finest ingredients. But at the end of the line, the pizza is handed to you over the counter—and it’s uncooked.

Yep, that’s the “take n bake” part of the name—you have to take it home, and bake it yourself.

When I first heard of this company and its model, I thought it was crazy. Who would bother going to a pizza shop where you bought cold pizza? That’s just insane, I thought, since it would seem to me that pizza is a convenience food; why else is pizza virtually synonymous with at-home delivery if it wasn’t intended for convenience? Obviously, my love for greasy, convenient pizza is not in line with most pizza connoisseurs.

I wanted to know more.

Pizza Business in the United States

Thankfully, there’s a great pizza industry trade publication PMQ Pizza Magazine that provided me with tons of market data:

  • There are more than 65,000 pizza restaurants in the United States
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  • $36.286 billion worth of pizza was sold in the US in 2010
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  • 45% of pizza is ordered for carry out, 36% for delivery, and 20% for dine-in

That’s a big pizza. A single slice would be huge…so who owns it?

Pizza industry market share:

The US Pizza Industry is as competitive as ever.

The “Big 4” (pizza companies, not accountants!) controls some 31% of the American pizza industry. But it is still the independent chains that make up the majority—51.66%–of all pizza sales in the United States.

Papa Murphy’s Unique Competitive Advantage

Despite failing to register as one of the largest four pizza chains in the United States, I assert (perhaps boldly) that Papa Murphy’s will be the second largest pizza chain soon enough. And that’s because of its very unique competitive advantage: Papa Murphy’s accepts food stamps.

Yes that’s right, you can use food stamps to purchase Papa Murphy’s pizza. Data suggests some stores do anywhere from 10-25% of their sales from food stamps. Incredible!

Because Papa Murphy’s doesn’t cook the food—it’s intended to be eaten at home, a defining element of a food product that can be purchased with government aid—it can lock down a very important, non-core customer. And you wouldn’t believe how many people are on food stamps…blame the poor economy:

SNAP and EBT boom helps take n bake pizza chains

Since the Great Recession, food stamp participation has grown from 12.7 million households to more than 21 million households. The number of beneficiaries has risen from 21 million to 42 million people.

Meanwhile, the benefit per household increased during the recession, but average benefit per household is showing the beginning of a decline:

Food stamp growth during 2008-2011 helped take n bake pizzerias.

The data in the two charts above is from the US Department of Agriculture’s March 2011 data on food stamp use.

Food stamps are used by 1 out of every 7 Americans, or 14% of the total population. This works out excellently for Papa Murphy’s Take-N-Bake, which is the only national chain that currently accepts food stamps (also known as EBT, or SNAP).

Having fun with boring numbers:

My goal with this blog is to get everyone to think like an economist—that is, to think about things logically, but creatively, and to see how small happenings at the margin affect the greater economy, and individual firms within an economy. If there’s anything I want you to remember, it’s “incentives matter,” as does structural advantage.

In thinking like an analyst, we have to come up with some assumptions. My assumptions are as follows:

  • All people are rational in the aggregate.
  • A family who utilizes government aid is just as likely to love pizza as any other American family.
  • A family who utilizes food stamps is likely to want to spend their benefits on pizza, just as they would (and did) spend their own cash on pizza before the Great Recession.
  • I assume that price is important even for those using government aid, but maybe with a minor twist. While price may not be as important, (I don’t know) I do know that I would prefer spend food stamps on pizza and save my cash for bills I can’t pay with EBT/SNAP. Makes sense. 68% of consumers say price is important.
  • I assume that proximity to a pizza shop is as important–maybe even more important–for food stamp users, who likely have sporadic or no access to reliable transportation. Proximity to a location is important to 66% of all pizza eaters.

Following these assumptions, I know that Papa Murphy’s is in an excellent position to tap into 14% of all pizza lovers that receive government aid. Let’s bring back that old chart that shows the American pizza marketshare:

The US Pizza Industry is as competitive as ever.

Assuming Papa Murphy’s attracts a customer that is structurally more likely to eat its pizza, it will necessarily become one of—if not THE—largest pizza company in the United States. If it attracted EVERY food stamp using customer, it would be the #1 pizza shop, even if it never saw a customer pay with cash. Obviously it won’t catch every food stamp recipient, so we’ll dig deeper.

What Americans want in pizza companies

We’re Americans. We like things the way we like them— we want to call the shots. The data supports this:

  • 86% of pizza eaters prefer to choose their own toppings vs. purchase what I call a pre-planned specialty pizza.
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  • 33% of all pizza fans say their pizzas aren’t made correctly to order all the time.
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  • 25% say that getting an incorrect order is a sure way to lose their business.

Papa Murphy’s fits perfectly in these criteria; they allow you to sculpt your own pizza. They shouldn’t mess it up, either, since you can watch carefully as it is assembled. These points provide a brilliant second layer on top of their already large competitive advantage in locking up the food stamp using consumer. I’m loving it already.

Papa Murphy’s Fantastic Growth Potential

It may be the fifth-largest pizza chain in the United States with $630 million in sales in 2009, but it still has plenty of room to grow. Quantitative factors aside, it has the qualitative going for it, too.

I’m not too keen on it, but many believe Papa Murphy’s has excellent pizza. The company has earned the title “Best Pizza Chain in America” by Restaurants and Institutions Magazine every single year since 2003, according to Funding Universe.

It also won the platinum award for pizza chains from Consumers’ First Choice in 2006. Pizza Today named them Chain of the Year in 2001, 2006, 2008, and 2009.

Let’s go back to the quantitative…

The “Take n Bake” and “food stamp model” give it some other advantages:

  1. Non-cyclical business – Because the business is buoyed by food stamps, they don’t have to starve margins to keep up volume. Every other pizza chain deeply discounted during the recession, but Papa Murphy’s barely budged on its pricing relative to other firms. It’s far easier to lower prices than raise them–how many chains do you know that have successfully wound down deep discounts?
  2. Time sensitivity – The pizza industry is constrained by the clock. Only 11% of pizza fans order pizza for lunch—that’s lost revenue on top of additional overhead for companies that don’t use the take n bake model. Take n bake companies can sell throughout the day, as their core customer isn’t going to eat the pizza straight from the store. Good luck selling a cooked pizza at 12:30pm for reheated consumption at 6pm.
  3. Small footprint – Take n bake stores have a benefit in that they don’t need a large storefront for eat-in traffic. Smaller stores mean less overhead. Also, there is no backlog in making, cooking or delivering the pizzas. More volume and lower fixed costs bring serious cash flow. I’m salivating at the prospect of selling more product that is made of…less? (Insert shoulder shrug here.)
  4. Market penetration – We know that 68% of consumers choose a pizza company based on proximity. Take n Bake’s small stores allow for more locations while maintaining the same operating costs as a percentage of revenues. Cha-ching! Pizza meets coffee.
  5. Inexpensive franchising – Scale, scale, scale—the best business models are scalable. Papa Murphy’s small stores make for more affordable franchises. Total investment to open a new store is $200,000 to $300,000. Net worth requirement for franchisees is only $250,000. Papa Johns, by contrast, wants entrepreneurs to have a net worth of $2 million and “substantial” cash on hand. Twenty-five percent of American households had a net worth large enough to afford opening a Papa Murphy’s in 2006; only 5% had a net worth large enough to open a Papa John’s.
  6. First mover – It was only recently that the CA legislature considered allowing one competitor, Pizza Hut, to join in on the food stamp action. Papa Murphy’s is still way ahead of the competition.
  7. Freebies – I like getting freebies. To take n bakes, food stamp customers are freebies–they have economic incentive to buy your product. Owning a take n bake, with its free customers, is analogous to buying Boardwalk and Park Place in a game of Monopoly and getting Mediterranean and Baltic Avenues for free. Sure, compared to Boardwalk and Park Place, the purple spaces may account for little more than a rounding error, but it’s cash flowing value-add in the form of two more properties against a finite number of spaces. That’s a win!

With a model that is infinitely more efficient than its rivals, and with a competitive advantage no competitors can touch, this chain will be the dominant force in pizza soon enough. Hats off to you, Papa. I can say with certainty that you’ve already carved out every possible avenue for solid margins, growth, and sustainability. This is a company that could easily handle leverage, too, since it is anti-cyclical.

Too bad the buyer, a private equity firm, is a known unlevered buyer. It might be the right time to ask Mr. Lee, “Where is your exit? Because I want in.”

Questions for Readers

Do you have a Papa Murphy’s near you? Can you dig it?

Do you own a restaurant, or know someone who does? Care to share any cool stories?

Would you ever open a franchised restaurant? Is there anything that interests you about restaurants?

P.S. I hope that readers choose not to turn the comment section into a debate about government aid, especially foodstamps. Regardless of how awesome our econoMEs might be doing, the average American is still in a world of hurt.

I may be critical of social programs, and government spending as a whole, but we have a responsibility, in public or private, to take care of people who need a helping hand. If you really think that food stamps are breaking the US Federal budget, then I hope you go take a look at the data.

That said, I believe in free speech, and I will not censor any opinion you might have. Let’s aim to shoot above the circus that I see on news websites and blogs.

Photo by: Undertow851

{ 38 comments… read them below or add one }

Jonathan Harms June 6, 2011 at 12:04

When I was in college, I worked at a Papa Murphy’s. And I loved it! One thing not to forget is that Papa Murphy’s Pizza is a superior product. Papa Murphy’s pizza tastes so good. Having a quality product is at the center of longevity in business.

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JT McGee June 7, 2011 at 11:25

They do have a great product. While I’m too lazy to get into the take n bake thing, I know no shortage of people who go NUTS for their pizza. I’ve had their pizza a couple times, and the difference in freshness was obvious, no doubt about it.

In my area, a group of entrepreneurs opened one and two years later we have four of them. They’re doing excellent here, and across the country.

Did you enjoy working there?

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Jonathan Harms June 7, 2011 at 13:22

Yes, very much enjoyed working there. It was a neat community of college peers that worked together for minimum wage and hung out after work too. And we all ate lots of pizza!

One more demo worth mentioning is the gatherings/hosting crowds. For example, church youth groups and their lock-ins. Can’t get pizza delivered at 3:00 am in small midwestern towns…”Oh, wait, no problem, I just picked up 20 Papa Murphy’s pizzas this afternoon!

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JT McGee June 7, 2011 at 22:31

Wow, that could definitely be a cash cow, too. I know how much of a pain it is to order a bundle of pizzas even when they are open for business!

Did the owner of your Papa Murphy’s try to go after this market? Was it a big money-maker for your store? Did you actively promote your location as being perfect for something like this?

Sorry for all the questions, but you’ve really got me thinking now!

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Jonathan Harms June 8, 2011 at 11:10

Absolutley went after this market! Truth be told, my college town had 6,000 people in it and 9,000 when school was in session. So market saturation (getting into the churches) wasn’t hard, but the quanity was limited.

Another market he had was a few bars and night clubs. Every Thursday we would make a batch of pizzas and drop them off to a network of bars around town. They would put them in the beer cooler and cook them up in a pizza oven for the patrons when they wanted them.

One thing I tried to convince him to do was add a bike delivery service (think, wood box attached to the back of the bike). You don’t have to worry about keeping the pizza hot, because it’s take and bake. And our town was small enough and a bike friendly mountain town, but the owner couldn’t get over the insurance cost to add this benefit to his business model. Think about the chunk of delivery business he could reclaim from Dominos and Papa John’s! And dang, he doesn’t even need to buy the expensive equipment to keep the pizza hot during the delivery time. Delivery appointments need not be strict either because the take and bake model is on demand when the customer chooses to bake it rather than have to deliver and eat it when it’s hot.

Doggone, Papa Murphy’s is amazing!

JT McGee June 9, 2011 at 19:01

Replying to your latest comment…I’ll have to use this one.

You’ve an excellent point with the delivery. You could theoretically send a guy out with 20 pizzas and still manage to have delivery times that are way better than the competition. You might even be able to beat the competition even including the time it takes your customers to cook the product. I can recall a number of times where quoted delivery times were one hour or longer. This business model is extraordinary.

BTW, do you know if the meat ingredients were cooked before putting them on the pizza? Another commenter, LaTisha, who commented below, was concerned about safety and food prep. Any wisdom?

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Jonathan Harms June 14, 2011 at 09:32

Yes, all meats are pre-cooked. The cheese is shredded by hand in house, often on the morning before use on your pizza. The mushrooms are fresh, as are the tomatos, green peppers, etc. The only canned items are those you would expect like artichoke hearts and black olives.

Good point of taking multiple orders out!

Evan June 6, 2011 at 12:28

By me there is just too many amazing pizza places (NY/NJ area) to buy from a chain just doesn’t make sense…I can tell you the last time I touched a slice of the chain/franchise stuff was – Spring Break Mexico in 2000 lol

It’s hard for me to even believe they are profitable

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JT McGee June 7, 2011 at 11:27

Eleven years? I think we can put you in the “pizza snob” category. ;)

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krantcents June 6, 2011 at 14:02

Yes, there is a lot of “dough” in the pizza business! The success of pizza is people like it and it is relatively a cheap food. Heavily discounted with a lot of competition. Food stamps helps too. From the restaurant’s POV, food costs are low and it is very profitable. Sounds like a win/win.

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JT McGee June 7, 2011 at 11:28

Definitely. I’d love to take $2 of ingredients, and turn it into a $10 product with 3 minutes of minimum wage labor. What’s not to love about that model?

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Jonathan Harms June 7, 2011 at 13:24

I saw the product cost sheet one time on my boss’s desk, you are not far of JT. Of note though maybe is that pizza sales drop off in the summer because of the nice weather and not wanting to heat up the house by turning on the oven.

What did Papa Murphy’s do about that? Included directions for cooking your pizza on a coal Weber BBQ! Brilliant!

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JT McGee June 9, 2011 at 19:04

Wow. That’s genius.

I wish I could turn $2 into $10. Those are some fat margins.

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Norman June 6, 2011 at 18:32

There’s a Papa Murphy’s about a mile from me. I got hooked on them last year and been back many times. The quality is great, the price is great, and you get it fresh from your own oven. I sound like a commercial, but I really do like their product. At first I thought, what? you have to take it home and cook it yourself? But once I did, I was sold.

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JT McGee June 7, 2011 at 11:30

I almost added a disclaimer to the article that I was not paid for writing it because it sounds like I work for them. Your experience with Papa Murphy’s sounds like a lot of others. First there’s the “you’re not going to cook it for me” thought, then the “wow, I don’t even care if you cook it for me!”

Just out of curiosity, is this your go-to pizza joint now? Did you frequent another national chain before you started going to Papa Murphy’s?

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June@CreditDonkey June 7, 2011 at 06:52

Wonderful innovation. People get hooked on convenience and taste when it comes to food. This is a low cost business in a growing and stable industry. Papa Murphy’s is going places!

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JT McGee June 7, 2011 at 11:31

They definitely are going places, figuratively and literally. They recently opened in Canada, so it will be interesting to see what Canadians think of Papa Murphy’s.

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Jeff Reed June 7, 2011 at 09:39

Another outstanding job of analysis by JT. I never considered the take & bake model before but now I am very curious. Could this “pie” be ready for the oven by the time the IPO flow gets back on track?

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JT McGee June 7, 2011 at 11:36

Thanks, Jeff.

I’m hoping that it could. I fear that Lee Partners is going to hold it for quite some time. I’m not familiar with their own fundraising details, but I would think that they’d be looking for an exit within…what? 5-7 years?

I would think they’d have an incentive to take this company public this year, given how trigger happy them market is for IPOs. As far as I see it, this is just one of those great companies, with a great model and excellent product that will have long lasting success. I’m interested to see how they do overseas…the international market could prove to be huge for this brand. Success in the US is already locked in, as far as I see it.

What do you think?

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Financial Success for Young Adults June 7, 2011 at 12:50

Am I the only one who sees the risk in this business model? Why would you give a customer raw, uncooked food when most people don’t even know the correct temperature food should be cooked to? When I worked as a restaurant manager I had to become Serv-Safe certified and there are so many risks to undercooking food when it is not handled properly.

Of course people buy uncooked food at the grocery stores all the time, but it is prepackaged in sterile environments, not handled by employees who sometimes don’t even wash their hands. I see a disaster for the company when a customer gets sick because they didn’t cook the pizza to the right temperature and then try to blame the franchise for incorrect food handling.

I guess that’s the reason the business is franchised, that’s too big of a risk for me to even consider buying the pizza or a franchise.

Nice analysis though.

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JT McGee June 7, 2011 at 13:03

That’s a very interesting perspective. The pizza does come with instructions on how to cook it, just like any other pizza you’d buy uncooked. I suspect that the risk is just like any other restaurant, though. I’m guessing the meats are fully cooked before being put on the pizza (I don’t know, I’m guessing).

I wonder if Papa Murphy’s owners pay more than other restaurant owners for general liability insurance. That would be the best way to see how they’ve managed dealing with consumer complaints and sue-happy customers.

Thanks for reminding me about how we live in such a litigious society. LOL. I almost forgot people sue for anything now. You bring up a very important point.

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Financial Success For Young Adults June 7, 2011 at 20:57

Those are exactly the type of people I am referring to. The people who won’t take a second to read instructions, but then want to sue. But then again, that is probably a good idea that they decided to franchise and limit their liability.

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Buck Inspire June 9, 2011 at 16:40

Nice breakdown. Interesting take about tapping the food stamp using market. Great point by FSYA, too. This reminds me of a Korean market I go to. They sell pre-marinated meats so you can take it home and fry it. Potential health hazard yes, but you pay for not having to prep and season the meat yourself. That’s the risk you take for saving time?

Haven’t tried their pizza, is this only on the east coast?

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JT McGee June 9, 2011 at 19:03

Nope, not a east cost thing. At least, I’m in the “middle cost” and we have a few.

On second thought, I think they operate in the majority of US states now. See if there’s one close to you: http://www.papamurphys.com/StoreLocator It really is worth a try.

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Khaleef @ KNS Financial June 10, 2011 at 12:17

JT, I have never heard of Papa Murphy, so I am assuming that we don’t have any out in Jersey. There is a pizza shop on every corner where I live, so I couldn’t see trying to put money into a franchise. However, I do think this is a great way for a company to crack into a saturated market.

I have the same concerns as FSYA. It may seem like a stretch, but it wasn’t for McDonalds when they were sued for selling hot coffee!!!

By the way, you did a great job of displaying how to conduct a basic analysis of a company – especially when considering macro-economic factors.

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JT McGee June 12, 2011 at 13:26

Thanks, Khaleef. I enjoy breaking apart business models because there is so much that can be learned about micro/macro trends by observing how different models succeed or fail.

I’m guessing that they won’t ever do too well on the east coast. You guys are pretty big on “your brand” of pizzas.

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No Debt MBA June 10, 2011 at 13:02

Great analysis. I only disagree with one point: “All people are rational in the aggregate.” See market bubbles and crashes for why this isn’t always true. But the rest of your reasoning provides a very solid case for the chain’s continued success.

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JT McGee June 12, 2011 at 13:25

Assuming that people are rational is the only way that I can make the assumptions that follow. I agree that it is a very dangerous assumption, one that makes prediction dangerous. If I don’t assume people to be rational, then I can’t assume that people are equally likely to like pizza whether they receive federal aid or not.

So, basically, it is an assumption I have to make for the purpose of making others. I absolutely agree with you that it isn’t always true.

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Car Negotiation Coach June 11, 2011 at 11:43

I love this business model as well. Where I grew up there was a small shop that’s been around for about 25 years (Mom’s Bake at Home Pizza) and they’ve always done really well….I don’t think they ever explored more than one store though, but they do have a sustainable business.

For a lot of the same reasons I’m also very high on Chipotle (CMG)….I see lot’s of growth potential there.

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JT McGee June 12, 2011 at 13:23

Wow, only imagine what they could have become if they did try to scale it. Bummer.

I’m glad you mentioned CMG. I’ve been watching them like a hawk, and have previously owned shares of it. Great company, great business model, and superior products, from what I understand. Also, I like the natural leverage of a restaurant to an improving consumption economy. It’s no wonder their shares have exploded in value in recent years–all the factors came together perfectly.

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Barb Friedberg June 11, 2011 at 16:44

I really like the franchise concept and this one seems great. But restaurant franchises for me have too much “personnel management.” Seems like a great niche.

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JT McGee June 12, 2011 at 13:21

I really like it too. Like you, I dislike greatly the “personnel management” portion of the business, which makes scaling any restaurants infinitely difficult. From the corporate level though, I appreciate what Papa Murphy’s has managed to put together.

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Sustainable PF June 13, 2011 at 18:20

I can’t believe it took this long for someone to run with this idea that was presented in Seinfeld episode: June 14, 1990 – Male Unbounding (Season 1 Episode 4).

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JT McGee June 21, 2011 at 12:29

Haha, I’m going to have to include this in the article

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Wifey of a Roadie June 19, 2011 at 19:17

Wow. I never thought about owning my own pizza joint but this article definitely made me think about it. The best part is that it’s broken down so I could actually understand it and it was interesting to read!

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JT McGee June 21, 2011 at 12:33

Thanks, Wifey of a Roadie, I’m glad you enjoyed the article. :D

I used to joke with my dad that owning a pizza shop would be the most fun you every had being so stressed out. Heh, I’m sure there’s a lot of work that comes with the business, but supposedly owners who manage the store 40 hours a week can bring home $200,000+ per year. Not too bad of a haul!

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Amanda L Grossman June 20, 2011 at 19:02

That is incredible that you can use SNAP benefits to buy pizza to take home and cook! Definitely an innovative idea, and I think they are certainly going to tap into that niche market. Good analysis and thoughts.

The only thing is, I question how much it costs. I am reading a book right now about a couple living on a dollar a day for food. They go on to do another food experiment where they spend the amount they would be given from SNAP. Needless to say–their budget is much better than when they did the $1 a day budget, but they still were hurting by the end of the month. Getting takeout convenience food seems like it would only be a treat for your SNAP benefits every few months, and after sacrificing for it at that.

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JT McGee June 21, 2011 at 12:30

Yeah, it’s definitely not a product that could be eaten every day. The SNAP angle is multi-faceted; while I think they have a (small) advantage in being able to accept it, I’m thinking that once those who are temporarily on SNAP go back to work, they’ll keep buying Papa Murphy’s pizza.

What is the name of the book you’re reading? I think I remember seeing someone on TV with a similar book, but couldn’t remember the name. Would you recommend it?

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