Franchisees to sue Pie Face

Out of pocket: Prit Dutta, left, outside his Brisbane Pie Face outlet with former franchisee Aleks Trajceski.
Out of pocket: Prit Dutta, left, outside his Brisbane Pie Face outlet with former franchisee Aleks Trajceski.

Australian franchisees are set to sue Pie Face for millions of dollars, alleging the cafe and bakery chain misled them over costs and profits when they paid hundreds of thousands of dollars for a slice of the pie business.

But both the Australian founders and the New Zealand licensees have responded that there is nothing to the claims.

Pie Face shot to global prominence recently, opening stores in New York and featuring on The Late Show with David Letterman.

The chain announced in September last year that it is expanding into New Zealand, with a plan for 62 NZ stores via a licensing agreement.

Pie Face announced it has partnered with locals Julian Field and Jared Palmer to roll out at least 62 stores over the next 10 years across New Zealand. Field has been a multi-unit owner with Subway New Zealand for the past 15 years in the South Island, Pie Face said in September.

The first New Zealand store was expected to open by April 2013 after a training store's establishment in Auckland.

Pie Face would then be the second big pie chain to set up in shop, after Jesters, since Georgie Pie closed in 1999.

But some franchise owners in Australia are looking to get out.

Three of the franchisees involved in the court action - an IT executive, a lawyer and a former airline pilot - claim to have collectively lost over A$2 million by buying into the fast-growing snack franchise, which has 80 outlets in Sydney, Melbourne, Brisbane, Canberra, Perth and New York.

"After seven or eight months when I looked at the figures, they were totally different to what Pie Face projected for us," said Prit Dutta, an IT executive who owned a Pie Face store in Brisbane's CBD. "We lost faith."

Dutta, former commercial pilot Aleks Trajceski and lawyer Tom Bulmer expect to lodge their claim in the Federal Court in Brisbane in the next few weeks.

NZ licensee Field, however, said no court action has actually commenced and he has been assured it is a "storm in a teacup".

"There are a couple of franchisees where things haven't worked out the way they thought," he said.

Field said that can happen under any franchise system and he has seen it happen at Subway as well. Owners who fail are quick to blame the system, he said.

"They are quick to blame everyone else, but you have to work the business like any business."

He said not everyone is suited to franchised business. Most Pie Face franchisees were successful and happy as they are at other chains such as Subway.

The disgruntled franchisee's lawyer, Fred Potgieter, of Thomsons Lawyers, said some Pie Face franchisees were waiting for the Australian Competition and Consumer Commission to resolve their complaints, while others had joined the court action.

He said the case could be a class action involving millions in damages. "We are not just talking about the odd exception in terms of a franchisee experiencing problems," he said. "It's a systemic problem."

Pie Face's management dispute all the claims.

"No misleading or inaccurate cost information has been provided to franchisees," Pie Face chief executive Wayne Homschek said.

"Other than rent, costs are mostly controlled by the competency, attention to detail and the way franchisees choose to operate their business.

"For example, some franchisees work in their store, while others employ managers."

Even the most successful franchises had stronger and weaker stores, and leading franchisers such as McDonald's had closed stores.

Recent economic trends had been difficult, said Homschek, a former investment banker.

"While we work as hard as we can, the reality in franchising is that running a successful franchise is 80 per cent based on the person," he said.

"It also doesn't help that the retail market conditions have been the toughest in recent history."

Trajceski handed both his stores back to Pie Face at a loss of A$1.4m, Dutta has sold back one of his stores at a loss of A$170,000, and Bulmer hopes to sell his store back to the company.

All are part of the court action that will seek to cover the losses they made on operating and selling the stores.

Pie Face has around 80 stores, some of which are owned by the company and others by franchisees.

On the Pie Face website, 16 stores are listed for resale - an unusual rate of turnover, according to one franchise expert.

Pie Face is owned by Homschek and his wife Betty Fong, who launched the business in Bondi in 2003. In 2010 they began to publicise a plan to list the company, and valuations between A$70m and A$100m were mentioned. The float is yet to happen.

Not all franchisees are unhappy.

At the Pie Face outlet on Castlereagh St, Sydney, owner Paul Pellarini said the company had been good to deal with. An accountant, Pellarini bought his store next door to a large office tower under construction. He is breaking even and hopes to make a profit when the building is finished.

"We have our fingers crossed that our strategy works," he said. But he acknowledged Pie Face could open another store nearby and argued it had probably opened too many stores in Sydney already.

Additional reporting Sunday Star-Times