Three franchisees from the fast-food chain Pie Face are threatening to sue the company for millions of dollars, claiming they were misled with regard to both cost and profits when they first bought into the business.
But Pie Face founder and chief executive Wayne Homschek told SmartCompany this morning he denies the accusations, and defended the chain by saying 2012 was a tough year for all food-based companies.
“All I can say is that we’re in the business of franchising, and not everyone is going to be a good franchisee,” he says.
“Not all of them are going to make the business what it could be.”
Pie Face has 80 stores in Australia, but also has stores in New York where the company is pursuing aggressive expansion plans.
A trio of franchisees, Prit Dutta, Aleks Trajceski and Tom Bulmer, have said they collectively missed out on $2 million after buying into the company.
“After seven or eight months when I looked at the figures, they were totally different to what Pie Face projected for us,” Dutta told The Australian Financial Review. “We lost faith.”
The trio’s lawyer, Fred Potgieter of Thomsons Lawyers, was contacted by SmartCompany, but was unavailable to comment prior to publication. However, he told the AFR that Pie Face “could not provide us with any information whatsoever on what is the reasonable basis to make their predictions”.
“We are not just talking about the odd exception in terms of a franchisee experiencing problems,” he said. “It’s a systemic problem.”
The accusation is not uncommon among franchisees. The Australian Competition and Consumer Commission receives similar complaints every month, with disgruntled franchisees claiming they were misled as to the capacity for earnings.
Similar disputes have occurred in the past year, including the more recent controversies surrounding restaurant franchise Billy Baxter’s. A Victorian court awarded one franchisee $1.3 million in damages, based on incorrect estimates of turnover.
But Homschek says given 2012 has been a tough market for retail in general, it’s unrealistic to expect every franchise to do well.
“This year has been a tough market; we’ve had a pretty rough time. We’ve seen a lot of slowdown in the economy, foot traffic is done, and franchisees are working harder to get customers in the door.”
“And when business conditions get difficult, the market tends to separate the good operators from the not-so-good operators.”
Pie Face has focused on significant international explain. Last year the company received a massive boost in its popularity after being featured on the American TV show Late Show with David Letterman, while Homschek says plans are also in place to open in New Zealand and Britain. The business also received a $15 million investment from American casino billionaire Steven Wynn.
Homschek says same-store sales have declined, even though the average sale price has increased.
“On the whole, it’s been a challenging year. We’ve done fewer deals, and sales have taken longer,” he says.
“We’re starting to see recovery in some of the sales’ performances, and we’re starting to grow more. We’re definitely working a lot harder to get that same level of growth.”
Homschek says the tough retail conditions weaken the claims of the aggrieved franchisees, saying that while he cannot comment specifically, “we don’t think there’s an issue”.
“Generally speaking, the men and the boys get separated in a tough retail environment.”
Two of the three franchisees have reportedly already sold their businesses back to the company, with another hoping to sell his shortly. They are all seeking damages for costs.
Disputes between franchisees and franchisors are common – the current review into the franchising code of conduct is an ongoing attempt to minimise those conflicts. However, disgruntled franchisees have formed groups including the National Franchisee Coalition, in an attempt to gain more power.
Patrick Stafford is a freelance journalist and a former deputy editor of SmartCompany.
