Five lessons from the collapse of Pie Face

Franchisees and pie lovers across the country have been left reeling after well-known pie franchise Pie Face plunged into voluntary administration at the end of last week.

While the Pie Face Group has said it is “business as usual” as administrators Jirsch Sutherland conduct a review of the company’s operations, further details are emerging about the course of events that left the 70-store chain in need of external assistance.

News Limited reports franchisees and managers attended an emotional emergency meeting yesterday, with many concerned about the future of the business.

Store owners were reportedly told the company-owned sites, which account for around one third of the Australian Pie Face stores, would likely be the first to shut.

“These are mum and dad owners – this is their livelihoods on the line,” one person who attended the meeting told News Limited.

“The mood was shock and uncertainty for the future.”

But founder and major shareholder Wayne Homschek yesterday insisted parts of the company are still profitable, telling Fairfax he is still considering taking the company public next year.

Homschek declined to be interviewed by SmartCompany but SmartCompany understands Pie Face is finding it difficult to service leases on three production factories, having shifted production to a single site in Sydney earlier this year.

So what can your business learn from the collapse of Pie Face? Here’s five lessons to take away.

1. International expansion comes with risks

The collapse of Pie Face follows news confirmation in October that Pie Face had quietly closed six of its seven stores in New York City and it is likely the chain’s ambitious international expansion plans – including agreements to open outlets in South Korea and the Philippines – put pressure on domestic operations.

Brian Walker, executive director of the Retail Doctor Group, told SmartCompany this growth strategy undoubtedly contributed to the collapse of the group.

“It’s the result of a culmination of a range of factors but over-expansion is definitely one,” Walker says. “They expanded far too quickly.”

2. Under-capitalisation creates danger

Walker also believes Pie Face attempted to expand, both locally and internationally, without adequate capital.

“They were under-capitalised to expand too,” he says.

While Pie Face had previously secured backing from high-profile investors, including  $15 million from US casino developer Steve Wynn and Bras N Things owner Brett Blundy. Walker says these types of franchise models are always at risk of expanding beyond their means.

“Because these franchise models are based on royalty income, by definition, you only make good money with a large network,” he says.

3. Make sure your company-owned stores are on the same page

While there is still some hope for Pie Face franchisees if a new owner is found for the group, it appears there is a disconnect between the performance of the franchise and that of the company-owned stores in the group.

Jirsch Sutherland partner Rod Sutherland told Fairfax a number of company-owned Pie Face stores are losing money, and although the company’s US partner “caused some grief”, it’s the company-owned outlets that “need restructuring”.

Jason Gehrke, executive director of the Franchise Advisory Centre, previously told SmartCompany in some franchise networks, company-owned stores can “be a drag on a franchisor’s resources if they are not part of a conscious growth strategy”.

READ MORE: When franchisors go bust: 10 risks to franchisees in cases such as Pie Face

4. Communication with franchisees is key

Regular communication with franchisees is essential in any franchise network and Walker believes a lack of support from head office may have also contributed to Pie Face entering administration.

“The management and executive team appeared to not be close enough to what was going on,” he says. “There are stories of multiple franchises failing in the same spot in Queensland.”

5. Understand the maturity of your market

“There’s a question mark over the pie category itself,” says Walker, who says while there may still be an appetite for hot pies in specific locations, overall Australian consumers are moving towards healthier food options.

“Supermarkets are also now selling hot pies, which points to the maturity of that category.”

Walker says businesses operating in markets that are maturing need to consider expanding their product range as a way of maintaining sales, and this may be where Pie Face came unstuck.

“The [Pie Face] menu was quite limited and in this environment, people want options and healthy choices,” he says.

READ MORE: Using a voluntary administration to save a company – the statistics are against you

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