Franchise lesson in restaurant chain's troubles

SIMON HENDERY finds that while franchising seems to be in good health, there are pitfalls - among them too-rapid expansion.

If Valentines were a child, it would be a teenager, scrapping with mum and dad as it struggles to define its place in the world.

Parents Geoff Macrae and Marina Grace have been left scratching their heads as their baby - the franchised buffet restaurant chain - goes through its growing pains.

The couple opened their first Valentines at Pakuranga in 1989, and the empire has grown to 18 of the pink-and-blue eateries across New Zealand, plus six in Australia.

It is a success story by any measure, but also a tale of how a concept can falter under that quirky arrangement - franchising. Five Australian Valentines have closed, one has left the franchise, and of the six remaining, some are understood to be struggling. Many of the New Zealand restaurants, which employ about 1000 staff, are also finding times tough.

A widely held view among those who know the franchise is that it expanded too quickly.

"They were pretty focused on growth and maybe couldn't see the flaws in the business itself," said one former franchisee, who asked not to be named.

"It's hard to argue against expanding when the business is doing well and you are making money. The market changed and they got it wrong, especially in Australia."

Christchurch businessman Tony Runacres learned the hard way. After successfully running a Valentines in Hamilton, he says he and a business partner lost $2 million they sank into two restaurants in Melbourne. He now plans to sue the franchising company to recover his losses.

The fallout between Mr Macrae and Mr Runacres shows how a franchise setup can implode when business gets personal.

"With best intentions on both sides, they've both tripped up," says a present franchisee, who also asked not to be named.

"They both thought that going [into Melbourne] was a good idea. Now they are both bitter and twisted and pointing the finger at each other, which is pretty futile."

Mr Runacres has hurled allegations of poor management, and worse, at the franchise company. Mr Macrae has refused to respond, fearing more bad publicity.

Feuding aside, the lesson is that growing a franchise is tough, especially when expansion includes moving into the surprisingly disparate Australian market.

The chairman of the Franchise Association, Win Robinson, says companies have to be cautious about transtasman expansion.

Fastway Couriers spent $800,000 on research and planning before moving into the Australian market, Mr Robinson says. The investment paid off and the company gained a major share of the market.

When Valentines moved across the Tasman, it expanded rapidly into Queensland, New South Wales and Victoria.

"In hindsight, it would have been better to avoid that temptation and just consolidate in one state before moving onto another one," says the company's Australian managing director, Paul Becker.

Mr Becker, a former New Zealand general manager of the Countdown supermarket chain, says that for the next two or three years, Valentines Australia will concentrate "all of our efforts" on Queensland.

A new Valentines at Toowoomba, due to open next month, will feature a new colour scheme, a bar and cafe.

"That's a whole new market for us and it means we are now tapping into this new proliferation of cafe dining."

Valentines also plans a power-swing from individual franchisees back to the company.

New restaurants will be either company-owned or joint-venture operations with existing franchisees.

"With franchising, while legally we have all the controls to ensure standards are met, the reality is that a lot of time is spent nurturing franchisees and convincing them of what they should be doing," says Mr Becker.

Some Australian companies have also found transtasman franchising difficult. Bookseller Dymocks has faced store closures and legal battles since coming here in 1994.

Most recently, the chain closed its WestCity store in Auckland but opened a new store across town at Glenfield last week and says it plans to be back at WestCity next year.

Meanwhile, a major revamp of Valentines' New Zealand image, including a new logo and new-look restaurants, is planned for February.

Its newest site, on Auckland's Dominion Rd, has already incorporated many of the changes.

Owner Keith Routledge, who opened the restaurant two months ago, has been a shareholder in the franchise company since the chain was established.

"It's like fashion - the market changes and you just have to keep up with the play," he says.

"The brand has definitely got pulling power. It's got a place in the market. If I had opened an independent restaurant on Dominion Rd we wouldn't have done the 2500 customers that we did last week."

Valentines recently appointed Murray Belcher as the new general manager for its New Zealand operations.

He replaces Graeme Crossman, who left last month to focus on running several Valentines restaurants in which he has shares.

Mr Crossman is positive about the chain's future, and says he plans to open more restaurants.

Meanwhile, Win Robinson remains enthusiastic about the future of franchising in New Zealand.

Franchised businesses turn over $6 billion a year and the concept has yet to reach its full potential, he says.

"You just have to look at the figures. After five years, more than 74 per cent of franchisees are operating at a profit; within one year, 80 per cent of new startups fail.