News

8 Aug 2016

Vulture Gorges on Pizza

Biz Talk: Inside the Eagle Boys disaster

By Julius Grafton

As an ex roadie I have a healthy interest in pizza and beer. The former is of course easy road food, and Eagle Boys was one of the more ubiquitous franchise chains, behind dominant Dominoes and Pizza Hut, purveyors of the best Hawaiian pizza in my opinion.

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Vulture fund NBC Capital acquired an 85 per cent stake in Eagle Boys in 2007 and immediately fell foul of the 340 franchise holders. These are people who invested everything they had, and who were the life blood of the business.

When a group of franchise holders complained, they got short shrift.

Worse still, because NBC slowed down or stopped advertising, sales fell. Then many franchise holders started to lose money. When some of them shut their stores, they were pursued by NBC – hounded for money under the terms of their franchise agreement.

It reminds CX of the Blockbuster Video store franchise in our previous suburb, where the franchise holder resigned from Blockbuster due to excessive fees. Reopening under another brand they were mercilessly hounded and sued and subsequently closed down by Blockbuster.

There are over 1,100 firms selling franchises in Australia. Some notable failures are Krispy Kreme and Pie Face. The biggest disaster in franchise is currently convenience store chain 7/11 which appears to be unprofitable for any franchisee if they pay award wages.

But back to Eagle Boys, which is now in administration. NBC have had nine years of franchisee fees that they have ruthlessly and brutally pursued while many of their franchisees have gone stone motherless broke.

In the 1970’s Pizza stores took off, and in the 1980’s video rental stores did the same. Soon the franchise chains were selling overlaps and shrinking territory so that only the best operators were viable.

The horror of many retail franchise agreements is that the franchise chain hold the shop lease, so that if you stumble they simply boot you out and send in a manager. This company backed dude is empowered to dress up the business using whatever means to make it look good to sell to another sucker.

At the top of the totem, the big retail landlords in malls hold ultimate control over tenants, with a thing called Overage.

Overage rent is a term used to describe the additional amount of rent that a tenant needs to pay once sales reach a pre-determined target. The big mall owners know what you turn over.

They know how many people walk past your store, and thus using actuarial algorithms they know what that means for your sales. They can count empty milk bottles in your trash, if you sell coffee, to figure out volume.

Overage means you pay more rent when you sell more. You pay this also to the franchise company, who make a tidy profit from the fee they charge you every week, and from the markups on the goods you must buy off them. Too bad if you can buy it cheaper elsewhere – you are not permitted to do so.

Oh and about the mall rent? You are obliged to open your store all the hours the mall is open. Too bad if you feature lunch and the mall is open until 9pm.

Honestly, I’ve had a mall lease and I’ve looked hard at franchise deals and I cannot see any upside in any of it. For the sucker on the coal face. The franchise holders can scale fast and get fat off your sweat as you go broke.

Don’t do it.

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