‘So what if you lose your house?’: Eagle Boys franchisee who lost everything seeks justice

Mildura store owner Andrew Kynaston had driven four-and-a-half hours to Adelaide for an emergency meeting between head office and other struggling franchisees — more than 40 of which were already up for sale.

The father-of-two recalls his disbelief when one senior executive asked him why he had bothered to make the trip.

“You’re going to have to close down soon,” he claims he was told. “You might as well leave the meeting now.”

But it was the words of an assistant manager Mr Kynaston says he will never forget.

“I told them, if I close the shop I’m going to lose my house,” he said. “[The manager] said to me, ‘So what if you lose your house? You can buy another one.’ That crushed me. I was a mess the whole drive back.”

Mr Kynaston had taken out a $400,000 loan in 2009 against his riverside home 55km away in the small Victorian town of Colignan to start his Eagle Boys franchise.

After it went under in 2011, the bank repossessed the house he had bought at age 20, leaving him living out of a caravan park across the road from his failed business.

“It killed me mentally to lose my home,” he said. “It was our pride and joy. Everything went haywire. I split up with my wife, my son was confused, his school grades were affected. It was just a big mess.”

Mr Kynaston says revenue wasn’t a problem, but crippling franchisee fees, high costs, lack of advertising support and a series of loss-making special deals dictated by head office made it impossible for the store to turn a profit.

“We were making good money. We were bringing in $11,000 to $12,000 per week, [but] our break-even was about $17,000,” he said. “I could have made more money sitting on the beach. I was led to believe it was a going to be a cash cow.”

In its first week of opening in late 2009 the store brought in $30,000, and Mr Kynaston says he did nearly $1 million in the first year.

Almost immediately, however, problems began. Some items such as pizza ovens were only provided second-hand, while other equipment for rolling and balling dough, for example, wasn’t provided at all, forcing him to shell out of his own pocket.

Mr Kynaston says “ridiculous deals” such as cheap Sunday delivery and ice cream promotions ate into profits, and constant menu changes confused customers and pushed up costs.

“They tried to introduce gourmet pizzas, and of course we had to carry the costs involved in holding that stock,” he said. “You have to throw out prawns after a day.”

He claims head office failed to provide advertising support that was supposed to be included as part of the store’s 12.5 per cent fee, opting instead to aggressively chase franchisees for payments.

“They just took as much money out of the franchise as they could,” he said.

“Another franchisee, his oven broke down, so he didn’t pay his fees that week because he wanted to get it fixed. They rang him up and had a go at him. He said, either I can pay the franchise fees and close shop, or I can fix the oven.”

After struggling to work out a deal with Eagle Boys that would have kept the business afloat, including reducing his fees for a set period, he was forced to call it quits in 2011.

“We were running the risk of running the business while insolvent,” he said.

“I didn’t want to go to prison. I said to them, if you’re not going to help us get this shop going, we’re going to have to close. They didn’t even bother to ring us back. They only rang us because the internet ordering was still switched on.”

Mr Kynaston is one of many mum-and-dad Eagle Boys franchisees who have lost everything. He argues “it’s only fair” those franchisees should receive something as part of the sale of the business, which went into voluntary administration last month.

“A lot of people in my situation who invested in Eagle Boys have gone bankrupt or lost their houses,” he said. “It would be nice for something to help some of these people restart their life.”

Only now, five years on, has he begun to rebuild. He now works in coffee sales and has an 18-month-old daughter with his new wife — but still lives out of the caravan park.

“[Going bankrupt] messes you up,” he said. “There’s no one out there to help you. When someone’s house burns down, the community gets together, neighbours help out.

“But when you lose your house through business, there’s no one.

“You’re stuffed for several years afterwards. Even lawyers want several thousand upfront just to look at it. They’re quick with ‘no win no fee’ if you have a car accident, but no one wants to take on the bank or Eagle Boys.”

Eagle Boys’ administrators SV Partners have been contacted for comment.

BUYERS CIRCLE EAGLE BOYS CARCASSS

Potential buyers had until Wednesday afternoon to lodge non-binding offers for the chain, which went into voluntary administration last month with $30 million in debts.

Among the interested parties are Domino’s, which on Tuesday announced a massive expansion of its store rollout plan after delivering a record profit result, and private equity firm Allegro Partners.

The Australian Financial Review earlier reported the firm was in “advanced talks” to buy Eagle Boys along with the Pizza Hut business from US parent company Yum! Brands in a merger that would form the country’s second-largest pizza chain.

“We are operating on a short time frame to minimise interruption to the Eagle Boys business, including that of franchisees,” administrator David Stimpson of SV Partners said in a statement.

“We have had a large number of interested parties contact us and are now looking for a clear commitment through the due diligence and binding offers stage.

“Despite recent press articles, we are not preferring any one interested party over another at this point. That decision will be made during the due diligence stage once expressions of interest have been received.”

Eagle Boys has closed all of its corporate stores but franchisee outlets continue trading. In a series of press releases issued since the announcement, the company claims franchisees have seen “record” sales growth.

The Australian Financial Review reports the company’s Indian operations are a “mess”, with more than 80 per cent of outlets closing down and others on the verge of collapsing.

“There is virtually no management of Eagle Boys and the organisation has/had gone headless for years,” the AFR quoted a source as saying.

The paper added that one Indian franchisee had sent a threatening legal letter to Eagle Boys about a “misleading” article published in the Economic Times in May which claimed the company planned to expand to 300 stores over the next four years.

According to an information memorandum issued to potential buyers by SV Capital, Eagle Boys made an overall loss for the year of $181,887.

The pizza chain has faced significant difficulties over the past five years. In 2014-15, nearly half of its stores closed down, dragging its market share from its estimated peak of 8.1 per cent in 2013-14 with 340 stores to 4.6 per cent in 2016-17, according to IBISWorld.

Domino’s has about 25 per cent market share of the $3.7 billion industry, with Pizza Hut lagging behind at 10.7 per cent.

Eagle Boys, caught in the middle of an aggressive price war between Domino’s and Pizza Hut, found itself unable to pay its debts. In 2014, Fairfax reported that 30 Eagle Boys franchisees were considering taking legal action against head office.

Customer food traffic data by market research firm NPD showed Domino’s increased its traffic by 14 per cent last year, while visits to Pizza Hut collapsed 15 per cent, and Eagle Boys lost 7 per cent.

Private equity firm NBC Capital bought 85 per cent of the business in 2007 when there were 200 stores. One former employee told news.com.au the dramatic increase in store numbers was designed to for a “good news story” for a potential IPO.

“In 2007-08 the current management decided to increase franchise numbers and signed mum and dads up with false promises. Most of the sites they selected were secondary at best,” he said.

“The growth was designed for a good news story for a potential IPO. There were some 100 new stores and all but one or two failed.”

The insider said the pizza chain “could have tried to gel” by providing additional marketing and support to generate franchisee sales revenue, but they “decided to go hard against the tenant, enforce penalties and even litigate”.

He recalls Eagle Boys wanting to “get tough” with franchisees who fell behind in their payments. “The culture was to put resources into recovery of royalties, rather than resources to improve sales,” he said.

“I remember one [problematic store] where there was no car parking, even in the street — remember, most of the purchases are from pick-up. It was a backstreet location without exposure, and the rental was above-market.

“Turnover was around $4500 a week, the break-even was often $6000 to $7000, and the store became profitable with turnover in excess of $10,000 a week. This wasn’t an isolated example.

“It would make a good case study in how to destroy a successful brand and business.”

It comes after one potential buyer, ice cream mogul Stan Gordon, said he was having second thoughts after receiving “superficial” financial details of the pizza chain.

Franchised Food chief executive Stan Gordon, who owns a string of retailers including Mr Whippy and Cold Rock Ice Creamery, said he was reconsidering whether to pursue Eagle Boys after receiving the information memorandum from administrators.

“We were interested and we briefed solicitors and received an information memorandum but it was superficial at best,” Mr Gordon told AAP last week. “I don’t know now if I want to incur the costs involved in pursuing Eagle Boys.”

Mr Gordon said media speculation that Eagle Boys was set to do a deal with Pizza Hut had also made him reconsider making an offer.

The veteran retailer had shown interest in Eagle Boys previously, making an offer for the company in November after he was approached.

Mr Gordon said he never heard back from the company and only learnt of Eagle Boys going into administration when it made media headlines in early July.

Mr Gordon is the majority owner and CEO of the Franchised Food Company, which has more than 150 stores across seven brands, including Pretzel World, Nutshack and the recently acquired Healthy Habits business.

frank.chung@news.com.au

— with AAP