What really happened at Pie Face, and more importantly, how is the brand getting back on track?
CEO Kevin Waite and chairman Andrew Thomson outline the steps taken to get the niche brand back on track, regain the trust of franchisees, and re-establish relationships with landlords and suppliers.
Waite was “flabbergasted” at the amount of attention paid to the decline of the Pie Face chain, he recently told a franchise forum run jointly by the Franchise Advisory Centre and Griffith University’s Asia-Pacific Centre for Franchising Excellence.
The franchise-experienced executive joined the brand from Brumby’s at Retail Food Group, and had already notched up more than a decade’s experience in Australia and South Africa leading franchise groups. Two weeks after the new managing director drew up his chair at the pie business, the company was unable to pay its employees’ superannuation.
When it all goes wrong
The business was haemorrhaging money (more than $40 million had been raised and effectively washed down the drain) and had made no profits in 10 years, had no franchise experience across the management team, was in arrears with every landlord, and had inherited 28 franchisee-failed outlets.
“This was a very painful experience,” he said.
It was a baptism of fire too for the new chairman, former Liberal MP Andrew Thomson. The morning after the first board meeting, Macquarie called in the receivers. Thomson told co-founder and CEO Wayne Homschek this was not a situation that could be traded out of – then he quit.
As Waite describes it, there was “a severe trust deficit in every area of the business. Trust has to be built on integrity and competence. Trust always affects two outcomes, speed and costs. Distrust is very expensive.”
So how did the company deal with what proved to be a toxic culture and militant shareholders – franchisees, suppliers and landlords?
Drastic steps were called for. The top level of management was removed from the business and the job losses went further.
“A lot of innocent people lost their jobs a month before Christmas. I had always promised myself I wouldn’t ever do this, but I had to,” says Waite.
Thomson was back in the chairman’s seat before the year was out and on the very last day of 2014 the Deed of Company Arrangement (DOCA) was signed. At that point, Homschek was fired as CEO and in January, still regarded as a liability for the brand, he resigned from the board.
Waite took on the CEO role. The low point for him was constant press coverage, suppliers cutting off support for back office systems, the factory running at 30 percent capacity, and concern among international licensees about what was happening to the brand.
“We needed to convince everyone we have to start things in a new way,” says Waite.
“When you take on a turnover, you have to be utterly resolved to fix it,” says Thomson. “You have to take steps with no hesitation. We had to raise capital and stabilise the business. A steady board is key. Management can’t get on with the job if they are worried about the board.
“We were so toxic, no-one would try and take us over, it was quite helpful in one way,” he reveals.
Franchisees were called into a meeting and told there was a fresh new approach.
“This is the first time I’ve done this, I’ve never been in a business so publically humiliated,” Thomson admits. “But when I met the franchisees I felt so sorry, some had invested their life savings into it. Having taken it on, I have to save them,” he says.
Starting again
Waite’s approach was warts and all with franchisees. His solution to resolving many of the problems franchisees had with the franchisor was to act transparently. “If you’ve got kick-backs, tell them,” he says. “Then the mystery goes away. I told them, if you don’t think I should be making money from this, tell me. It cleared it up.”
His priority was to bring in a highly experienced franchise team. Then he took actions to ease the load for struggling franchisees: key product costs were reduced.
Each department had to introduce a bottom-up budget. “We would go through every store, line by line, every week. Too often CEOs and MDs have a budget and say “off you go, make it work”. We handed accountability to the business development managers.
“Every aspect was driven by consumer research findings. And the good news was that consumers acknowledged the quality of the product.” This meant there was no need to enter price wars, says Waite.
Changes have been made to the menu to diversify the offer however, to include sandwiches and salads. That’s a big step for a niche pie business.
Thomson explains, “the good operators have a personal rapport with customers and have developed a coffee business for local office workers.
“It’s a bit much to expect them to buy a pie every day, but if you offer a good quality sandwich you might get [them to buy] three lunches.”.
The coffee offer is being modernised, pies are popular and a steady sale, it’s a good offer now the company is financially solid, says Thomson.
Even the changing demographics aren’t a cause for concern.
“As Australian demographics change, people are not moving away from pies,” Thomson insists. “I had misgivings but the more I ate the pies… it’s qualitatively different from Four and Twenty pies.”
It is, perhaps surprisingly, the product of a French baker from Brittany.
Product extension is taking place at a wholesale level too. The factory can make non-branded pastry for third parties and that helps utilise the kitchen facility.
“We can snap freeze and export the pastry. That reduces the capital expenditure of new licensees. They just have to add the filling. We can make some money and they can save a bit.”
This prudent approach will be extended to the finished pies, once the business gets the relevant export licence for meat products.
One single point of sale system has been introduced across the network, and the company decided to foot the bill for this. Waite says, “I couldn’t burden franchisees with more costs and we needed the information to run the business. We had to think, what can we do differently now to maximise our facility and bring processes in-house.”
With manufacturing facility, baking bread and rolls rather than outsourcing them made sense, as did employing an in-house butcher. “We were going to third party suppliers, now we can go direct to the manufacturers.”
More business opportunities
Signs that Pie Face is emerging from the gloom include new wholesale accounts with businesses like Jetstar. “Strategic alliances add value to most licensees, it’s more than just retail.”
Now the business is able to pay its bills and honour commitments to suppliers. “We’ve built ourselves back up. The balance of power is starting to shift back to us, the customer,” says Waite.
There are now just 10 company owned stores, and they are making money. Seven of these will be franchised.
Pie Face plans to open eight more outlets this year; four are already in progress.
New generation stores will roll out domestically and internationally with vastly reduced costs.
“We’re in the business of getting franchisees into stores and running them successfully,” says Waite.
Key to this is achieving better terms out of banks, and reduced costs for design and fit out.
The good news is that franchisee sentiment has become more positive and enquiries for the stores are increasing.
Building an overseas business
There are still roadblocks though. In the US a lawsuit over the closure of the eight Manhattan shops is underway, with high profile investor and Las-Vegas based casino owner Steve Wynn, wanting to get back his funds. “The burden is on us to refinance our brand and then we’ll make an arrangement for him to exit,” says Waite.
Despite the closures, a plan of attack for the US is underway: a broker has been appointed and marketing is expected to start from July, this time focused on an entirely different expansion plan.
“Pie Face will fit better in the mid-West rather than with a flashy presence in New York. We could get 200 stores in ‘tornado alley’,” says Thomson.
The UK and Europe will be the following initiatives, with the process to find the right partner expected to take up to 18 months.
Thomson believes this arena is a more natural habitat for the pie brand than the more challenging Asian marketplace, although two stores are set for an October/November opening in Tokyo.
“Someone wanted to open 1000 stores in China but there isn’t even a word for pie in Mandarin,” he says.
He believes continuing with overseas expansion will pay dividends. “Preparing the market for signing up master partners, if done over two years, gives us a higher chance of getting the right partner.
“We have to convince people experienced in QSR of our value, and that could take two years. It’s a bruised brand.”
In New Zealand three stores are open, seven will open their doors this year.
There are outlets open in Singapore, Malaysia, the Philippines, and United Arab Emirates. A central kitchen facility that is fundamental to the model is under construction in Thailand and South Korea. Sites have been secured in Japan; Indonesia is in the pipeline.
“Australia will always be the head office. But should all go according to plan, there will be 700 stores in 10 years overseas and this will be by far the biggest operation,” says Waite.
This will also allow the business to embrace opportunities to export product.
“The great news is that turnover is up three percent year to date on budget and the prior year. We’ve been very conservative with our budgets.”
Waite was also pleased to reveal a successful capital raising initiative that gives the business surplus funds and positions the company for the next five years.
One requirement from the investors is to extend the brand beyond the city into regional areas.
Pie Face today
Three business entities were put into Deeds of Company Arrangement: two are now out of this – Pie Face Franchising and Pie Face Holdings.
“We are meeting our DOCA obligations. The DOCA was good for us. It gave us the opportunity to confess, it was open and public,” says Waite.
“We should be profitable by the end of the calendar year. We’re looking to make increases over the next three calendar years. The growth path should steadily build.
“We can meet our debts and grow the business. Pay our way, on time and in full.
“All of us collectively have moved on, it’s a new team. And customers are returning.”