Entrepreneurship Case Analysis Essay

THOMAS KNAPP

J ACQUE L INE ORR

Bratwurst, Beer and Business: Planning for Growth at Wurstküche

yler Wilson and Joseph Pitruzzelli locked the door to their restaurant and stepped outside into the snow, exhausted from the months of sixteen hour days leading to the grand opening party of their new Denver, Colorado location. Although they were experiencing one of the worst

snow storms of the season, 300 people had attended their event. Customers were excited for something new—a modern, authentic German/Belgian sausage restaurant. The duo felt reenergized by the enthusiasm for their concept and the potential they saw in this new location, which was different than their home-base of Los Angeles. As they meandered back to their temporary apartment, they relived some of the highlights from the night. “I left the party feeling like Denver could very likely be our most successful location yet,” Wilson recalled.

Once they got back to their barren apartment, however, they started to articulate some of their anxieties. They shared some serious doubts about their general manager, who had relevant experience but had never led a team. The local staff had not developed the close team culture that was a hallmark of the pair’s other restaurants. The restaurant opened months behind schedule as a result of problems with the building and bad weather. Still, the weather promised to improve, and they felt bolstered by their successful opening.

Appetite for Entrepreneurship First cousins Wilson and Pitruzzelli were born with entrepreneurship in their blood. Generations

of family members before them had started businesses, many supported and funded by other relatives.

Wilson followed suit, and at five years old he decided to start his first business selling oranges from his grandfather’s ranch to passersby. By high school, he had purchased two used margarita machines to rent out for events and parties. As an undergraduate at the University of Southern California (USC) in the early 2000s, he knew a traditional job was not in his future and that he would need to create his own career path. “I didn’t want to learn about the theory of business. I wanted to really learn what it’s actually like. I didn’t see myself ever working for anybody else,” recounted Wilson.

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An untraditional learner with dyslexia, he was rejected from admission to USC’s Marshall School of Business not once, but three times. Undeterred, Wilson petitioned for special permission to create an Entrepreneurship minor, and therefore gained access to all the Marshall courses.

Pitruzzelli had a similar experience creating his own degree as a student at the University of San Francisco (USF) five years prior. Pitruzzelli was an International Business major, but became fascinated by Industrial Design. Unfortunately, USF did not have a related course of study. However, Pitruzzelli found a USF partnership with California College of the Arts, which allowed him to pursue degrees in both International Business and Industrial Design. Eager to combine these knowledge areas and gain experience, he started his own design firm while still a student. Pitruzzelli found success designing and investing in bars and night clubs in San Francisco when he was barely of legal drinking age himself. But after he graduated, he began to contemplate his next career move. “I was ready to move on, and San Francisco was too cold. I was looking for a new challenge but I just didn’t know what it was, yet,” Pitruzzelli remembered.

Starting from Scratch: Wurstküche’s Origins Wilson knew that Pitruzzelli had an affection for architecture and up-and-coming artistic

communities. So when Pitruzzelli traveled south for a weekend visit in 2007, the two of them explored the Arts District in Downtown Los Angeles (DTLA). The Arts District sat as a vacant industrial area from World War II until the 1970s, at which point a group of artists known as the “Young Turks” illegally moved into abandoned warehouses to escape high rents elsewhere, creating an edgy underground arts scene.1

At the time of Pitruzzelli’s visit, DTLA was mostly known for its business center comprised of large corporate offices—and for its large homeless population. The cousins spent the weekend imagining possibilities for DTLA. Pitruzzelli remarked, “There was a sense that you could get in on the ground floor and really influence it. There was amazing infrastructure, but it was a ghost town.”

Pitruzzelli fell in love with one building in the Arts District in particular. After Wilson saw that building available for lease later that year, Pitruzzelli immediately contacted the broker and began to discuss leasing options.

Wilson and Pitruzzelli were excited to secure financing to use the space to create their next job opportunity and contribute to the revitalization of DTLA’s Arts District.

1 “Endings and Beginnings: A History of Change in Downtown L.A.’s Arts District,” Los Angeles Conservancy, November 10, 2013.

Thomas Knapp, Associate Professor of Clinical Entrepreneurship at USC Marshall, and Case Fellow Jacqueline Orr prepared this case. This case was developed from field research and published sources. Cases are developed solely as the basis for class discussion and are not intended to serve as endorsements, sources of primary data or illustrations of effective or ineffective management. Copyright © 2017 Lloyd Greif Center for Entrepreneurial Studies, Marshall School of Business, University of Southern California. For information about Greif Center cases, please contact us at greifcases@marshall.usc.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted or transmitted without the permission of The Lloyd Greif Center for Entrepreneurial Studies.

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Launching Wurstküche As a student living near USC’s campus just a few miles away, Wilson lamented the lack of nightlife

in DTLA and thought the building could address this need. Pitruzzelli’s experience designing bars seemed a perfect fit. The two envisioned a dance bar modeled on a lounge that Pitruzzelli designed in San Francisco. Unfortunately, they discovered that city regulations made it nearly impossible to obtain a license to serve liquor without also serving food.

In order to meet the zoning requirements, Wilson and Pitruzzelli decided they would open a small area for food just inside the front door. The dance bar area would be down the hallway in the back of the building. To minimize costs and ensure focus on the dance bar, their goal was to create a simple menu with food that did not require an expensive culinary team. They agreed that Pitruzzelli would design the space and help launch the business, and Wilson would ultimately manage it.

Wilson and Pitruzelli shared memories of family get-togethers and parties where friends enjoyed sausages and beer. They remembered how simple and enjoyable the food preparation was, and decided the front of the building would focus on gourmet sausage and beer. They would prioritize customer experience over producing their own products.

Wilson noted, “It became a game of ‘how do we brand sausages?’” They made the early decision to stay with a niche market, serving only sausage, Belgian-style fries, and German/Belgian beer. Unsure of what to name their business, they turned to a German-English dictionary, and settled on the name Wurstküche (pronounced Verst-Koo-Shah), or “sausage kitchen.”

In 2008, Wilson proposed marriage to his girlfriend and decided to drop out of USC to focus full attention on his nascent business with Pitruzzelli. That same day, Wilson and Pitruzzelli assembled their parents and grandparents. But this meeting was a far cry from a traditional family gathering.

Instead, 21-year-old Wilson and 26-year-old Pitruzzelli pitched their business idea to their extended family, aiming to obtain more than half a million dollars in funding. They gave a presentation complete with financial projections. Pitruzzelli recalled with a laugh, “We offered equity cuts. Our family was supportive, but I think my grandfather didn’t want the liability. So after some grilling, they offered a loan instead. That way they knew they’d be paid back.”

With an initial loan of $665,000, the two secured a ten-year lease on the building and turned their attention to launching Wurstküche. The building already had a Conditional Use Permit allowing beer and wine sales. But it was zoned for heavy manufacturing (M3), so Wilson and Pitruzzelli needed to apply for a variance to acquire a Type 47 liquor license from the state, and then receive special permission from the city to use the state license. While they undertook that arduous process, the pair decided they would open the sausage restaurant at the front of the building in the interim. They planned to launch the adjoining dance hall within the next year after acquiring the proper licensing and permission to serve liquor.

Shortly after obtaining the loan, the country faced the worst economic recession since the Great Depression. The recession was rooted in a real estate crisis in which banks struggled with the aftermath of a housing bubble that left many home owners unable to pay their mortgages. The devastating effects rippled throughout the global economy. In the autumn of 2008, the restaurant industry suffered stagnant sales for the first time in almost twenty years, creating financial problems

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across the entire industry. Many restaurants closed, and several others faced serious problems.2 Pitruzzelli reminisced:

I felt oblivious to it, or maybe I blocked it out. The world may have been crumbling, but in our Arts District bubble, everything seemed full of possibility. When I did think of it, I reassured myself that people still drink (maybe more) during down times, and dancing could be a way for many to let go of stress. I think about opening during a recession now and have nightmares. I’m thankful for how fortunate we were during that period.

Wurstküche opened in November 2008 with a total staff of seven people. Pitruzzelli recalled, “My dad was at the restaurant all the time, and Tyler’s mom was there a lot, too. Our family helped out wherever they could. They were doing everything from painting to helping with office work.”

The original goal was to sell 100 sausages per day from the small kitchen near the front of the restaurant. This would be operated by one or two people, utilizing a simple menu with limited cooking required. The menu consisted of twenty different types of gourmet meat and vegetarian sausages, ranging from traditional to exotic fare, such as rattlesnake and rabbit. Patrons could customize their sausage toppings from a list including sauerkraut, caramelized onions, various types of peppers, and gourmet mustard choices. They also offered Belgian fries with a variety of dipping sauces. Their carefully curated beer list included only authentic German and Belgian options.

Wurstküche opened before interior construction was complete, and before it obtained its liquor license. After the lunch rush each day, Wilson and Pitruzzelli resumed construction on the dining area. But construction did not serve as a deterrent to patrons. Wilson said, “People were excited to be part of building something new. We were honest with our guests from the beginning about our growing pains. Then they felt like they were part of the journey as we all created something together” (see Exhibit 1 for photos of the contruction of Wurstküche’s DTLA location).

Warming Up: The New Downtown LA Wilson and Pitruzzelli saw the Arts District in DTLA as gritty and full of potential. “When we

leased the building that became Wurstküche, Downtown LA was this area that everyone talked about as a place that would eventually become cool, but there was really nothing going on. It was completely empty after 6:00 PM every day,” remembered Wilson. The Wurstküche location was half a mile from a part of DTLA known as Skid Row, a 50-block area which contained one of the largest populations of homeless people in the United States.

But Pitruzzelli felt at home in the Arts District:

The Arts District was similar to the Warehouse District I lived in while in San Francisco. I mean, it was kind of deserted. There were literally couches on fire in the middle of the street. But in this particular zone, I saw potential. There was a creative vibe, just very little street activation. People were doing interesting things, but it was behind closed doors. There were no lawns or nice storefronts; it was kind of dodgy and private. As we became part of the neighborhood, we could tell it was residential, though. There was a community, but it wasn’t outward facing. We started going on the weekly security walk, where a senior LAPD officer would chaperone neighbors to walk around the area and listen to their security concerns. People would walk, bring their dogs, and share gossip with each other.