Christopher Adams

The Business Herald’s markets and banking reporter.

Nando's franchise fight heats up

A national fast food chain is having to defend itself against criticism from disgruntled franchisees. Christopher Adams reports

Tani Fuga's Ponsonby Nandos is now in liquidation. Photo / Dean Purcell
Tani Fuga's Ponsonby Nandos is now in liquidation. Photo / Dean Purcell

Tani Fuga became interested in setting up a Nando's restaurant franchise during the decade he spent playing professional rugby in England.

The Apia-born hooker, who represented Samoa in nine test matches, liked the way the business - which promotes itself as a healthy fast food option - was endorsed by sporting heavyweights, including football legend David Beckham.

After retiring from professional sport in 2010, 40-year-old Fuga opened Nando's Ponsonby just before the 2011 Rugby World Cup.

He ran the business with wife Natalie, and their three children helped out in the store.

Fuga scored a marketing coup last year when he used Twitter to invite a group of rugby stars - including Sonny Bill Williams and All Blacks Ma'a Nonu, Cory Jane and Piri Weepu - into the restaurant for dinner.

Later that evening Fuga got the payoff when Williams and Nonu, who currently have a combined Twitter following of almost 400,000, briefly bantered on the social network about the "healthy options" available at his restaurant.

But even the power of an All Black endorsement didn't stop Fuga's business from going into liquidation this month.

A notice posted on the outlet's door thanks patrons for their custom over the past two years.

"We will miss you all," it says.

It's the fifth Nando's store to be liquidated since 2006, when the chain's New Zealand franchisor, Shailen Ramjee, took over the business.

Fuga claims the franchisor is to blame for his store's demise. But he won't go into specifics as he plans to take his story to TVNZ's Fair Go.

Ramjee is having to defend himself against criticism, not only from Fuga, but from a group of disgruntled current and former franchisees.

They believe a lack of national marketing is stifling the chain's growth, and store operators are required to purchase ingredients they feel could be sourced more cheaply from alternative suppliers. And they claim several franchisees are owed a substantial amount of money on loans they provided to the franchisor.

Franchisees have also raised concerns about incentive payments totalling $300,000 that Ramjee's company, Shivram, received from Nando's chicken supplier, Tegel, in 2009.

Founded in South Africa in the late 1980s, Nando's arrived in New Zealand in 2000 when the first store opened in Glenfield on Auckland's North Shore.

Since then it has grown to a 31-store chain with restaurants from Whangarei to Queenstown.

One store operator, who wanted to remain anonymous, says he has been struggling with the franchisor for "a good part of six years".

He claims a lack of advertising makes it difficult to compete against the likes of KFC, and the business is hampered by its "archaic and non-functional" website, which doesn't offer features such as online ordering and smartphone apps available in other markets where Nando's operates.

A former franchisee also questions the amount of marketing being carried out by the franchisor. "Once a year you might find a little bit of radio advertising, that's all," he claims. "Things are being said that marketing is being done but we don't see it. You ask the public, 'Have you seen any Nando's marketing?' Nothing."

Nando's franchisees are required to contribute 5 per cent of their turnover towards marketing expenses. A portion of that is retained by store owners for local advertising, while the rest goes to the franchisor to fund national marketing.

Roger Froes, who is in the process of opening a Nando's outlet in the South Auckland suburb of Takanini, says he only became aware of other franchisees' concerns after he'd handed $150,000 to the franchisor to get the ball rolling on his store, which will cost a total of around $400,000 to set up.

"I didn't know before I started," says Froes, who is in his 70s. "If I knew, I wouldn't have [gone ahead with opening the store], I must say."

He blames himself for not talking to other franchisees before he signed up, but says if Ramjee doesn't "do the right thing" after his store opens he simply won't pay his royalty fees.

Peter Taylor, owner of Nando's Newmarket, learned a $300,000 lesson from his experience with the restaurant chain.

He purchased the outlet in November last year for $380,000 and claims he understood it was turning over $14,000 to $16,000 a week.

In reality, Taylor claims, the store was doing $11,000 to $12,000 a week.

Now he is selling the business - which he says is making a loss of $4000 to $5000 a month - for $80,000.

"We haven't lost our home or anything but we're about three hundred grand down, so yes it does have a big impact."

Taylor says he is not blaming Ramjee for his experience.

"Shailen has actually been very helpful to us."

However, Taylor also has concerns about marketing.

"Marketing? What marketing?" he asks. "Of course we pay marketing levies but the only marketing I've seen is one billboard on the Southern Motorway and I haven't seen that recently ... and Nando's signs up at All Blacks tests."

What's Taylor's advice for prospective Nando's franchisees?

"I'd say look at it carefully," he says. "It's not a bad franchise. It's not a bad idea."

Disgruntled franchisees aren't uncommon in franchise systems like Nando's - and nor are failed business ventures by former professional sportspeople - and Ramjee rejects the claims that are being levelled at him.

And nobody is questioning the quality of Nando's product offering or the strength of its brand, which has had sufficient heft to take the business into 30 countries, where it operates more than 1000 outlets.

With its peri-peri flavours and menu options such as Portuguese paella and chicken liver salad, the restaurant chain has some valuable points of difference in New Zealand's cluttered and ultra-competitive fast food market.

Ramjee says he fully supported Fuga and waived his royalty fees for two years.

"Each of the stores that got liquidated has cost me money because I didn't get paid royalties."

At least one franchisee felt so strongly that he reported Ramjee to the authorities. An email obtained by the Herald shows that the complaint was followed up, but the investigation was closed and no action was taken.

Ramjee confirms that he was cleared by the investigation.

"I'm not the kind of person to go pointing fingers in the press, but I know in my heart that I've done nothing wrong to cause them [franchisees] harm," he says. "Every franchise group has disgruntled franchisees and bad operators."

Ramjee won't disclose what Shivram has spent on marketing in the past year, but says all marketing funds are spent and accounted for correctly.

"Marketing remains an integral part of Nando's New Zealand business," he says. "The marketing dollars have been divided between radio advertising, sponsorship of The Jono Project on TV3, rugby sponsorship - including around the 2011 Rugby World Cup - and more general marketing campaigns."

Ramjee says many franchisees are using the money they retain for local marketing for other purposes.

"I'm re-looking at that policy," he says.

Before taking over as franchisor in 2006, Ramjee was himself a Nando's franchisee, running the chain's Botany Town Centre restaurant.

"I knew what it took to run a store," he says. "It was the most successful Nando's in the world at one time."

Ramjee says Nando's was only operating seven outlets in this country and the business was in a state of disarray when he took over the master franchise.

"It was a disaster," he claims. "The culture was bad ... people weren't paying their [royalty] fees because they felt Nando's Australia - who's the international franchisor - was doing nothing for them."

Ramjee says Nando's New Zealand is in a solid financial position and its turnover and profit is "in a similar range" to publicly listed fast food operator BurgerFuel, which reported a net profit of $1.09 million in its latest financial year.

BurgerFuel operates a similar number of stores to Nando's in this country and reported total system revenue of $31.3 million for its New Zealand restaurants in the 12 months to March 31 this year.

Ramjee says that of the five stores that have been liquidated since 2006 (which includes those in Takapuna, Wellington's Courtenay Place and Ponsonby) only two outlets - Grey Lynn and Tauranga - have permanently closed.

"All of the stores that have gone into liquidation and then have gone under new management we've found have done really well."

He says the global financial crisis made trading conditions tough and it had been the Inland Revenue Department or the banks, rather than Shivram, which brought on all of the liquidations.

Asked about the Tegel incentive payments, Ramjee says: "Our contractual arrangement with Tegel is confidential but in general terms, the benefits for franchisees are consistent and managed price, daily deliveries and reliable distribution nationwide, six days per week. In return, we provide Tegel with our loyalty as is the case with many businesses."

He says the "mutually beneficial elements" of Nando's relationship with Tegel were outlined to franchisees at a forum before the supply arrangement was finalised and were accepted by all the store operators at that time.

"We think that having a key long-term supply arrangement with Tegel has has delivered better bottom line outcomes for franchisees."

Tegel's general manager of marketing, Nick Edgar, says the company can't comment on specific customer arrangements.

"All I can say is marketing payments to some sort of extent aren't uncommon," Edgar says.

Ramjee says Nando's International is in the process of updating the chain's New Zealand website.

"Plans are also underway for a fully integrated social media campaign, which we presented at the franchisees' conference earlier this year," he says.

"The new campaign will include a new point of sale software system which has smartphone app capabilities."

Ramjee says he has taken loans from store operators. "I have loan agreements with them," he says. "I can't give you a figure because it's confidential."

Ramjee says a large majority of franchisees are happy with the franchisor and the business in general.

One of them is Kuldeep Arora, owner of the Nando's stores in Auckland's Epsom and Hamilton's The Base shopping centre.

He's so happy, in fact, that he plans to open his third Nando's store in a location he didn't want to disclose.

Arora says some people think they can buy a franchise and it will "run itself", but it actually takes a lot of hard work to make a business a commercial success.

"Nando's is a great system."

Arora says he has an excellent relationship with Ramjee, adding that it's "human nature" for people to blame others for their business failings.

"This is just a blame game - it doesn't help anybody."

Another franchisee who is happy with his business, but doesn't want to be named, questioned the suitability of many Nando's franchisees.

"A lot of these franchisees have failed with their stores because they haven't run them properly," the franchisee says, adding that he spends 80 to 90 hours a week in his store, which is turning a profit. "This isn't McDonald's where you can stay at home and just check the tills everyday. It's not one of those brands - you've got to be working in it."

He says the Nando's product offering is "a winner".

"If you cook it properly and sell it properly it's great. It's got a point of difference and there's no other product like it on the market."

The first step: Get advice


Unfulfilled turnover expectations and claims of a lack of support from franchisors are common causes of conflict in franchise businesses, a university expert says.

There are more than 440 franchise brands in New Zealand, almost 90 per cent of which are homegrown, and it is estimated that they contribute up to $21 billion to the economy annually, according to Massey University's Franchising NZ Report 2012.

The report also found that 20 per cent of franchise businesses were not profitable.

Susan Flint-Hartle, of Massey's School of Economics and Finance, says that while conflicts do occur, they aren't particularly widespread.

Prospective franchisees need to carry out rigorous due diligence and get professional advice before signing a franchise agreement, she says.

"They need to make sure that their rights are fully protected and that the franchise contract is not tilted too much in favour of the franchisor - that there is a kind of equity."

New Zealand Retailers Association spokesman Russell Sinclair says franchises attract entrepreneurs who "want to be in charge of their own destiny".

"But in a franchise you have to be a person who accepts and understands the disciplines and can work within those confines," he says. "I think in terms of a franchisor selecting their franchisees, they have to go through quite a process of making sure that they are getting the right person, or people, who are prepared to work within that system and follow those disciplines."

He says conflicts can occur when franchisors fail to give franchisees "a voice".

"If the wrong people are being taken on as franchisees that can sometimes lead to problems but I must say - generally speaking - we don't hear of many issues within franchises, particularly the more recognised and professional ones."

There are 22,400 franchisee businesses operating in New Zealand, employing more than 100,000 people, according to the Massey report.

- NZ Herald

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