Billion Dollar Buyer

Self-made billionaire: This common distribution mistake is 'bad for business'

Even a one-of-a-kind product won't get very far when it falls victim to a common distribution pitfall, according to self-made billionaire and restaurateur Tilman Fertitta.

Looking to improve sourcing at some of his popular seafood restaurants, Fertitta stumbled upon the nation's first open sea oyster farming company on the latest episode of CNBC's "Billion Dollar Buyer."

His conglomerate's huge orders often provide much needed business for small businesses. But though the flavor of Santa Barbara Mariculture's oysters is unique, the price is originally prohibitive, thanks in part to owner Bernard Friedman's decision to outsource distribution.

Billionaire Tilman Fertitta tries his hand at stripping farmed oysters off the line in Santa Barbara, California as Bernard Friedman (right) looks on.
Billionaire Tilman Fertitta tries his hand at stripping farmed oysters off the line in Santa Barbara, California as Bernard Friedman (right) looks on.

"Instead of selling right to restaurants for something like $2.50 a pound, he sells to a distributor who marks it up to $3.50 a pound — a price many restaurants just won't pay," Fertitta explains. "He's had to outsource his distribution and that's bad for business."

For Friedman, who launched the startup after working as a diver for a company that harvested mussels off oil platforms, the decision to outsource distribution was a necessary one. The bulk of his time was dedicated to overseeing the practice of farming oysters in the middle of the ocean, and FDA regulations required near-immediate storage of fresh oysters, which was more cost effective to leave to the wholesalers in town.

But when a buyer like Fertitta, who spends about $500,000 a year on oysters for his restaurants, approaches Santa Barbara Mariculture, that equation has to change.

Bernard Friedman captains his boat out into deeper waters where thousands of oysters grow on individual lines.
Bernard Friedman captains his boat out into deeper waters where thousands of oysters grow on individual lines.

In a taste test at Fertitta's Mastro's Ocean Club in Malibu, California, customers prefer the saltier, sweeter taste of Friedman's open ocean mussels. But supply problems with Santa Barbara Mariculture's distributor shut down the test deal just four weeks in to a six-week trial.

"I realized my mistakes by not following my product all the way to the dinner plate," Freidman tells Fertitta. "I was too worried about the offshore production and not worried enough about the onshore connection with you."

To ensure that delivery runs smoothly, Friedman promises to take on distribution himself by purchasing a refrigerated truck and cutting out the middle man. That allows his company to drop the price tag to $3 per pound from $3.50, which is an attractive enough proposition to lock in a $60,000 deal with Fertitta's restaurants.

That one deal increases revenue for Freidman's start-up by 26 percent.

"[He] hit some bumps along the way, but he owned up to his mistakes and made the changes he needed to make," Fertitta says. "His little mussels are going to be big business before he knows it."

CNBC's "Billion Dollar Buyer" airs Tuesdays at 10 p.m. EDT.