‘Scared, broke’ pizza franchisees are fighting back

Dave Michael, the second ringleader in the lawsuit, said he is all for a solid contract that ensures quality and helps the company grow. But there are limits, he said, and they have been surpassed in the past few years. The contract “used to be used as a defensive tool to protect their name, to protect the quality of the pizzas and franchisees as a group. Today it’s an offensive weapon.”

The Toronto Star
May 3, 1993

‘Scared, broke’ pizza franchisees are fighting back
Exhausted, half-crazed with anger, the Pizza Pizza storeowner slaves on a dough-filled, tomato-sauce-and-pepperoni world.
Kevin Donovan & Paul Moloney

PizzaPizzaFightback.jpg

Another day, another dollar.

And not much more.

“I finally figured it out. Pizza Pizza is like a cult. We are so sleep-deprived from long hours, so financially broke and so scared of our company that it’s almost impossible to fight back,” says franchisee Tony Fammartino.

“I swear, it’s almost like they own us,” Fammartino says.

These words – dramatic, considering the topic is mere pizza – come from one of two ringleaders in a court battle between a group of Pizza Pizza Ltd. franchise owners and the giant fast-food chain.

It is a nasty fight that will certainly take months and could take years to play out.

Yesterday, The Sunday Star revealed a convicted conman and racketeer with a string of bankruptcies in the past is at Pizza Pizza’s helm, helping to oversee trust accounts worth millions of dollars that storeowners suspect have been mismanaged.

Toronto – born Lorn Austin, executive vice-president, was called one of Florida’s most prolific white-collar criminals when he was imprisoned in 1986 for multi-million-dollar gem, credit card and timeshare condominium frauds.

As company owner Michael Overs’ right-hand man since being paroled in 1989, Austin calls most of the shots, despite a rocky financial past that includes court judgements, two personal and at least two corporate bankruptcies that left creditors burned for more than $6 million.

Austin has been in the thick of the franchisee-company battle. At one recent meeting of franchise owners, an unwanted Austin waited in the lobby of the hotel where the meeting was held. Some franchise owners heading into the hotel turned around and left, fearful they’d be spotted and punished for attending. When hotel security asked Austin to leave, he booked a room so he would have a reason to be there.

He also showed up at a franchisor convention in Toronto where Pizza Pizza store owners were handing out pamphlets warning people of the pitfalls of franchise ownership.

“What are you doing?” Austin asked franchise owner Tony Fammartino.

Fammartino responded: “We’re trying to save people from going through the same nightmare we are.”

But there are those who speak highly of Pizza Pizza. One is Jerry Harb, former director of operations, now running his own franchise consulting company.

“It’s the best operating franchise system I’ve ever been associated with,” said Harb.

“I think they are the finest franchise operator I’ve ever seen. In all my dealings with them, they’re an extremely honest company. The owner, Michael Overs, is particularly honest.”

The 34 franchise owners involved in the current lawsuit, plus two dozen other current and former franchisees interviewed by The Star, break down their complaint like this:

  • Harassment in the form of company executives showing up at franchisee association meetings, fines, phone services cutoff and store termination.
  • Suspected mismanagement of, and no accountability for the approximately $14 million in pooled money that is supposed to pay for rent, advertising, delivery and telephone order charges.
  • Unreasonable and excessive charges involving rent, supplies, store renovations and other costs that make it almost impossible to do anything but go into debt.

As far back as 1971, an Ontario government report recommended legislation to safeguard those who invest their savings in franchises – but that proposal went nowhere. Yet other jurisdictions, such as Alberta, have tighter laws to regulate franchises, including a requirement that officers and directors disclose business-related criminal records.

Neither Overs nor Austin has, in the past few days, granted requests by The Star to be interviewed.

But in an earlier interview, Pasquale “Pat” Finelli, vice-president sales for Pizza Pizza, has told The Star the franchisees’ complaints were completely unfounded.

“(There is) no concrete evidence or backup, it’s all shooting guns and bullets at arrows and that would piss you off if you were in my shoes,” Finelli said.

Franchise owners say they have been harassed and intimidated for speaking out in the past.

Former franchise owner Gerry Kawaguchi was “written up” by Pizza Pizza for a number of things including that “a foreign language was being spoken between your two cooks and a driver,” according to an inspection report.

A second report complained that “staff are not speaking English” and a third listed 14 deficiencies at the store. Kawaguchi says he had no opportunity to respond to the reports.

The former part-owner of a high-volume Unionville store had been battling with head office and he wonders whether the reports were their way of fighting back.

“They just wanted us out because we were raising too much of a ruckus,” Kawaguchi says.

In a court affidavit filed as part of a lawsuit, in which franchise owners are seeking an accounting of the trust pools, Gary Solomon alleges he was fined $1,000 when his store ran out of pop and got a couple of cases from a nearby store.

The franchise agreement requires stores to buy all supplies from the company, which adds an 18 per cent mark-up.

A fine like that angers and frustrates a man like Solomon, who purchased his store three years ago for $225,000, works 60- to 70- hour weeks and takes home only about $500 a week.

For the 35-year-old father of three, it added insult to injury.

In some cases, Pizza Pizza “terminates” a contract and takes away a person’s store, known as a “flip” in the company vernacular. Pizza Pizza gets a $20,000 franchise fee when it resells or “flips” a store.

Matthew Weenan was one of those cases. In a lawsuit that Pizza Pizza settled out of court in 1992, Weenan alleged that he was terminated after a successful five-year run as one of the company’s top franchisees.

Why was he terminated? Because he forgot to send a note to head office six months before his contract expired telling them he wanted to renew for a further five years, according to Pizza Pizza’s pleadings in the case.

Weenan stated that he was so busy making pizzas, he simply forgot. Since he saw his area representative every day, and was obviously intent on staying with Pizza Pizza, the section of the contract requiring notification has no been on his mind. Even though he dashed off a note the same day that Pizza Pizza told him of the oversight, it was too late.

His telephone order service and supplies were cut off, Weenan states in his pleadings.

Other franchisees have told The Star how their phone service to the central 967-11-11 number is sometimes temporarily cut off if they speak out against the company.

For Weenan, there was a happy ending. Pizza Pizza settled with an undisclosed amount. Like all of the franchisees with which Pizza Pizza settles, Weenan is under a gag order and could not be interviewed.

One of Pizza Pizza’s current middle managers boasted to The Star that he had “taken back tons of stores for no good reason.”

“I was a terminator,” said the man, who gave The Star an interview on the promise of anonymity.

“I was pretty good at it, too. You go in and throw the people out. You can always find a reason. The only thing is, it got me after a while, because I had trouble sleeping at night,” the man said.

Tom Missios, a former franchisee, said a number of franchise owners are new Canadians unfamiliar with the franchising system because they are less likely to complain.

Pizza Pizza’s Finelli, commenting on the question of fines, said his company conducts itself professionally.

“Fines and harassments? I’m looking forward to going to court. There’s a lot of stores that say: ‘I’ve been threatened with harassment, fines and intimidation.’ Well, they should check their records,” he said.

He added: “We donate all of the fines…I don’t know to who, Sick Children’s, or whatever the hell it is.”

Pizza Pizza certainly does give to charity. When an Oakville woman and her two sons faced eviction from their home in Oakville in 1991, Lorn Austin arranged to send a $2,679 cheque to clear up the woman’s back rent.

Finelli blames the recession and lawyer John Sotos, who represents the franchisees, for instigating the lawsuit.

And Finelli, who has been with Pizza Pizza since 1984, said franchisees should remember how he and other company executives helped them out.

“They own businesses now. All that’s forgotten. All of a sudden some lawyer comes around stirring up what or whatever and they’re best friends…all the memories of good times and bad times are all forgotten,” he said.

Sotos remains convinced that his growing list of clients has been wronged and continues to demand an accounting from the company of how the trust dollars are being spent.

“I am satisfied that these monies are not Pizza Pizza’s to do with as they please,” he said in an interview.

The Latin phrase bandied about by those involved in the conflict is caveat emptor – “Let the buyer beware.”

It’s an important concept that is not lost on Al Wilde, a retired engineer whose Oshawa store is involved in a separate lawsuit.

“I bang my head against the wall when I think of this mess I’m in. You simply do not expect a company to behave this way,” he said.

Everything at Pizza Pizza begins and ends with the contract, or franchise agreement.

A former senior executive with more than 10 years’ experience, who asked that his name not be used, had this to say about the contract:

“We were always proud of our franchise agreement because it was totally weighted on our side. Every time we noticed a loophole the franchisee could use to his advantage, we put a note on it and sent it off to legal to make it stronger,” the former executive said.

Many would say that tough contracts are simply good business.

Dave Michael, the second ringleader in the lawsuit, said he is all for a solid contract that ensures quality and helps the company grow. But there are limits, he said, and they have been surpassed in the past few years.

The contract “used to be used as a defensive tool to protect their name, to protect the quality of the pizzas and franchisees as a group,” said Michael. “Today it’s an offensive weapon.”

One clause in particular gives the company strong control: It says that, as soon as a store is purchased, Pizza Pizza gains complete access to the storeowner’s bank account.

Pizza Pizza then makes a weekly withdrawal for myriad charges based on the store’s sales. The charges include rent (many of the stores are leased or owned by the company, then sub-leased to the franchisee), advertising, telephone order service, delivery of supplies, and royalties.

But despite percentages agreed to when the franchisee signs the contract, Pizza Pizza has increased the charges.

For example, contracts signed in the past four years allow Pizza Pizza to electronically withdraw an amount ranging from 51/2 to 8 per cent of sales each week for rent.

Yet records show that 10 per cent is now being deducted.

“What can you do,” wonders Dave Michael, “when they control your bank?”

Glen Yuill, Michael’s accountant, discovered something very interesting when going over computer printouts of deductions from his client’s bank account in 1992.

Pizza Pizza tallies sales based on the opening and closing inventory each week for a store’s supply of pizza boxes, slice trays or pop cans, and so on.

An examination of these “weekly sales reports” shows the head office computer has inflated Michael’s sales to the point that $9,219 was incorrectly taken from his bank account over a 10-month period.

An area representative who recently left the company told The Star that this is done routinely.

“They would just do it, basically telling the guy he had sold more than he did and head office would get a little extra,” he said.

Many franchisees also complain about what they consider unnecessary renovations of their store.

At Pizza Pizza, all construction of new stores and almost all renovation jobs are done by Al’s Contracting. It is a company run by Al Colterman, a one-time pizza cook in one of Michael Overs early stores.

Colterman developed a close working relationship with Overs during the six-year period beginning in 1980. At that time, Overs was performing a gigantic renovation project on his fabulous Brule Gardens home near the Humber River. (Overs sold the house last December for $2 million, although it was listed in 1991 for $3.7 million.)

Colterman was approached for an interview two weeks ago but did not respond.

However, in one case researched by The Star, a recent immigrant to Canada who purchased a store went bankrupt and lost his home due to what he considered unreasonable and excessive renovations on his store.

“I bought a store and I knew I would need some renovations,” said the man, who asked that his name not be used because he fears retribution from Pizza Pizza. “But I thought it would be only $30,000. Then they told me it was about $160,000. I said, ‘I do not have that kind of money,’ and Pizza Pizza set me up with bank loans and private financing. It was too much for me and I went bankrupt,” the man said.

The bankruptcy statement of the man, who is 26, shows he owes over $300,000 to various lending institutions and lost his house, which had been used to finance his purchase of the store.

Times had been good for Pizza Pizza franchise owners until the late 1980s.

When the recession struck, and competition intensified, store profits of as much as $100,000 a year shrunk rapidly. That’s when rent and other charges began increasing and franchisees were squeezed into debt.

Former franchise owner Pam Shirakawa aid her St. Catherines store “would suck money.”

“I’ve had three stores before and made money. But this one, every week if you worked open to close seven days a week for free all by yourself, at he end of the week you would owe them $700 or $800.”

The company’s response: Work more hours to reduce the cost of labor, one of the few items over which franchisees have direct control.

Shirakawa points to a December, 1991, financial table from head office showing that if she kept her in-store labor costs to $800 a week, she would make about $550. That’s on sales of $10,000 a week.

But, she says, there’s a problem making even a $550 profit: at slightly more the minimum wage, $800 would pay for only one employee in the store over the 120 hours a week to maintain two people in the store.

Converted to an hourly wage, the owner’s 120 hours of labor to make $550 comes to $4.58 an hour.

In his interview with The Star, Pizza Pizza’s Finelli stressed that many of the problems are due to the recession.

“Everyone is frustrated,” he said, shrugging off franchisees suggestions that money was being mismanaged.

“They’ll see right down in the lawsuit if money is being diverted. Trust me, it isn’t.”

Finelli said the court case will show that Pizza Pizza has never done anything wrong.

“You’ll see. Trust me, you can bank on it.”


Risks: Dave Michael & Tony Fammartino, Lorn Austin, Lorne Austin, Lawrence Austin, Immigrants as prey, Termination, individual, Must buy only through franchisor (tied buying), Bankruptcies, several, Tied contracting, Fear of poverty, Happy serfs, Racketeering, Unfaithful servants, Dissident leaders, Gag order (confidentiality agreement), Fraud, Misrepresentations, Broken relationships, ruined lives and alienated children, Health consequences, 101 ways to terminate a contract, Bank account access by franchisor, Lost homes, Pooled money, Grange Report, Canada, 19930503 Scared broke

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