Pie In the Sky

Every Sunday morning you’ll find me stumbling along a sidewalk in the Melbourne CBD with bloodshot eyes, desperately looking for a fix.

You see, to compensate for my weekday workaholism, when my son rises on the Sabbath (well before the sun), my wife gently elbows me in the head and grunts: “It’s your turn — get up.”

So I pack Louie into a pram and head down the street in search of coffee.

Amid the broken beer bottles, and the broken boozers still stumbling around, is a lovely young woman serving coffees at the local Pie Face cafe.

She makes Louie giggle and even gives him a free party pie, which I’m almost certain my wife wouldn’t approve of.

Up until a few months ago, the store was open 24 hours a day, which made me worry for this young woman’s safety. It’s a seriously sketchy time to be serving pies.

Yet, as I found out this week, I should’ve also been a bit worried for her boss, the owner of the franchise, who was also potentially putting himself at risk.

Here’s the truth. Some people get held up by a drunk with a knife — others get robbed by a salesman with a pen. Let me introduce you to one: a Pie Face franchisee from Queensland.

A slice of the million-dollar pie…

PETER* is stressed.

A few years ago, just after he got married, he decided that if he was ever going to get ahead, he needed to “have a crack” at being his own boss.

He looked at his options and decided a franchise made the most sense.

After all, he didn’t know anything about being in business, and a good franchise would provide the training, business systems and marketing he needed. A turnkey business.

Here’s the thing — Australia is one of the most heavily franchised places on the planet.

There are four times as many franchisors per head here than in the US — some 73,000 businesses, according to the Franchise Council of Australia.

After a lot of research, Peter bought a Pie Face franchise. He was convinced it was a young company going places — growing quickly and even expanding globally.

Yet what got him over the line was that the good people at Pie Face believed so strongly in their product that they offered him a ‘Profit Protection Plan’, which guaranteed he’d make $120,000 in the first year.

So Peter paid $500,000 to get his own store. What did he get for that? Pie Face negotiated the lease for his shop, fitted it out and provided all the training. But there were ongoing costs as well. He had to agree to purchase his food from Pie Face, and then pay them 8 per cent of his takings as a royalty.

So, he quit his job, flicked on the pie-warmer, and opened up shop.

Peter: “On the very worst case scenario — in year two, after the guarantee — I figured I would work 60 hours a week and make $60,000.”

Barefoot: “Less $25,000 in borrowing costs, right?”

Peter: “Correct”.

And now for the old pie in the face routine: guess what’s worse than owning one Pie Face business?

Owning two.

Peter was so taken with the concept that early on he decided he’d buy another store.

So today he works 18 hours a day, darting from one store to the other trying to keep things afloat. He’s tired, stressed and fearful about the future for his wife and newborn son.

“The bank is in the process of selling up our family home. I’m losing $10,000 a month. We’re basically bankrupt.”

So bye, bye Miss American Pie…

AS an investor, I can see how Pie Face would be a very attractive investment — for the franchisor, not the franchisee, that is.

Pie Face HQ (in Sydney) has three fingers jammed in their franchisees’ pie-holes.

First, they make huge margins on fitting out the shops, providing training and charging upfront franchise fees.

Second, all the franchisees are contracted to buy their pies only from Pie Face.

“They’re charging me $2.70 a pie! I wish I could go down to Coles and buy a frozen one for 60c,” says Peter.

Third, Pie Face is creaming 8 per cent of the gross takings of each franchise. (And, as I’ve warned other aspiring franchisees in the past, 8 per cent of the gross can be 100 per cent of the net.)

But then again, Pie Face is up for that PPP (Profit Protection Plan), which convinced Peter to sign on, aren’t they?

Well, it’s true they offered a guaranteed $120,000 in his first year.

Sort of.

It turns out that Pie Face added a couple of Ps. It was actually a Profit Protection Plan … Paid in Pies (PPPPiP). The $120,000 was to be paid in stock (pies, not profits).

“This wasn’t made clear to me,” Peter said. “Although to be fair to Pie Face, I’m sure they put it in the contract.”

Hang on a minute, is Peter telling porky pies?

Well, no. I verified his story with a number of franchisees, independently of each other, and they all said the same thing (though the dollar amounts promised were different).

But it gets worse.

One of the other franchisees said that Pie Face HQ used tough legal tactics to back out of the PPPPiP.

They threatened him with breach of contract for not running his business properly — to get out of paying up on the pies, he says.

As more and more Pie Face franchisees hit the wall, Pie Face has been forced to take over some of the stores.

And it turns out they aren’t any better at making a buck out of them than Peter and his pals.

Reports from a creditors’ meeting this week suggest that Pie Face is losing $150,000 a week.

Not that the new managing director, Kevin Waite, is prepared to eat humble pie: “I wouldn’t be here if I didn’t believe this company had a future … Our franchisees are first and foremost in everything we do.”

Fair shake of the sauce bottle, Kevin!

In my view, right now Pie Face is like that scene out of American Pie: the jeans are around their ankles, the pie is in position, and (hopefully) the regulator is about to walk in the door.

My only question now is whether the ‘brains’ behind this business will suffer the same fate as poor old Pete.

Tread Your Own Path!