Marriage made in Hell for upset pizza franchisees

A meeting of several dozen franchisees held in February expressed dissatisfaction with the supply arrangements for their ingredients and other goods…TPF set up its own supply and distribution operation and its outlets were required to buy most of their ingredients through that. The franchisees were concerned about the transparency of the new supply arrangements and the effect it could have on rising food costs.

http://www.stuff.co.nz/
August 3, 2008

Marriage made in Hell for upset pizza franchisees
Greg Ninness

There's trouble in Hell as the owners of the Hell Pizza chain face a possible legal battle with some of their franchisees at the same time as the company is looking to raise new capital.

The Hell chain was acquired in 2006 by privately owned TPF Group, which also owns the Burger King chain in this country.

TPF Group retail operations director Glenn Corbett said the company was seeking an injection of new capital which would mainly be used to fund expansion of the Burger King chain.

But TPF Restaurants, which operates the Burger King chain, has needed new capital for some time.

The accounts show that in the year to March 31, 2007, the most recent period for which figures are publicly available, the company was profitable but had negative shareholder equity and its auditors tagged the accounts with a statement that its viability as a going concern was dependent on the continuing support of its financiers.

The accounts show the company made a net profit of $1.53 million, down from $2.7m in 2006 but ended the year with net assets of minus $12.7m, compared with minus $2.2m in 2006.

The notes to the accounts state: "There is uncertainty as to whether the company and group will be able to continue to trade as a going concern and therefore whether it will be able to pay its debts as they fall due. However, the directors are confident in the ability of the company and group to continue as a going concern… in addition, the company and group has negotiated new and ongoing borrowing facilities with its lenders."

The company's auditor, Deloitte, also expressed its concern about its financial situation at the time in its report.

"If the financial support [of lenders] is withdrawn, the company and group may be unable to continue in operational existence for the foreseeable future and adjustments may have to be made to reflect the situation that assets may need to be realised other than in the normal course of business at amounts which could differ significantly from the amounts at which they are currently recorded in the statements of financial position," the audit report says.

Corbett told the Star-Times he was confident the company's situation had improved significantly, although he provided no new figures.

"Since the accounts were published, the business has been performing very strongly and generating very strong cash flows," he said.

"The process we are in is very clear in that we are looking for an injection of funds for growth and I think that speaks for itself.

"The business is in a very sound position, there's no question about that whatsoever."

The existing cash flows would allow the business to expand, but not "at the rate we have an appetite for", he said.

Meanwhile TPF faces simmering dissatisfaction from some of its franchisees who have bought Hell Pizza branches.

A meeting of several dozen franchisees held in February expressed dissatisfaction with the supply arrangements for their ingredients and other goods.

Previously, each franchisee bought ingredients such as flour, cheese, meat and vegetables directly from independent suppliers on a contract basis.

But in February, TPF set up its own supply and distribution operation and its outlets were required to buy most of their ingredients through that.

The franchisees were concerned about the transparency of the new supply arrangements and the effect it could have on rising food costs.

The franchisees were also concerned about the effectiveness of the company's marketing programme.

It is understood that TPF's franchisees are required to pay 8-10% of their turnover to the company to cover marketing expenses and other costs.

Some franchisees wanted the company to account to them for the way the money was being spent and complained that it was not producing the results they had expected.

Last week an email was circulated among Hell franchisees seeking support for legal action to be taken against TPF over the way it fulfilled its obligations as Hell's franchisor.

Corbett said the performances of individual Hell stores varied widely some were achieving excellent growth while others were underperforming and this was reflected in the attitudes of the franchisees.

"Hell operates at the gourmet end of the pizza market and the effects of the economy are playing out slightly differently in different parts of the country," he said.

"We are very committed to seeing the network succeed and where a franchisee is not comfortable for any reason, we would always want to talk constructively about a plan to go forward working alongside them."


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Risks: Profits from one franchise system sucked out to subsidize another one, Supply margins are a hidden added royalty payment, Must buy only through franchisor (tied buying), Monopoly, Gouging on supplies, Advertising fund use disagreements, Advertising fund put into general franchisor's coffers, Veil of secrecy, Franchisee revolt, Franchisor owns more than one system (subsidizes loses from cash cow), New Zealand, 20080803 Marriage made

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