Profits still flow despite Mad Butcher troubles

Some of Mad Butcher franchise owners are having trouble turning a profit.

Mad Butcher owner Veritas Investments will continue earning decent profits from the butchery chain, even if some independent store operators are struggling, an analyst says.

Several former franchisees, who spoke on the condition of anonymity, told the Business Herald that a recent spate of store liquidations - eight since October 2012 - is the tip of the iceberg, a claim firmly denied by the franchisor.

Mark Devcich, head of research at Auckland investment manager Pie Funds, said the Mad Butcher had been a "consistent earner" for Veritas, whose other businesses include upmarket grocery retailer Nosh Food Market and pub operator the Better Bar Company.

"The franchisor [Veritas] doesn't see the same kind of fluctuations as the stores do," Devcich said. "Even if the stores are at break-even level, the franchisor can still earn a decent profit."

He said the Mad Butcher had been a "pretty stable" business.

"Pain at the franchisee level doesn't necessarily translate to the franchisor level," Devcich said.

Veritas, which purchased the Mad Butcher in 2013, said last month that it expected underlying profit for the group to rise by up to 28 per cent - to as much as $5.5 million - in the year to June 30, 2016.

The company expects to generate revenue of between $32 million and $34 million from the Mad Butcher in the same period.

However, on May 29 Veritas downgraded guidance for its last financial year, which ended on June 30, for underlying net profit of $4.3 million, down from a previous forecast of $5.3 million.

Veritas shares, which have fallen 50 per cent since hitting this year's high point on February 3, recently traded down 1c at 66c.

Devcich said it was difficult to get a picture, from the figures Veritas reports, of performance at the individual Mad Butcher store level. But he said it was common in franchise systems for up to a third of franchisees to be struggling.

"I think the big potential [with Veritas] is Nosh," he said.

Mad Butcher chief executive Michael Morton at the Mt Roskill store. File photo / Richard Robinson.

Mad Butcher chief executive Michael Morton said claims of up to 12 stores being in financial distress were "just ridiculous" and stores that were struggling were not facing difficulties because of the size of the rebate collected from meat suppliers.

"If you're not making money, go and have a look in the mirror and you might find the problem," Morton said. "But nobody wants to admit that. They want to blame somebody else."

Meanwhile, a franchise expert said franchise disputes are relatively uncommon in New Zealand.

Franchise Association of New Zealand executive director Graham Billings said a survey conducted by Massey University two years ago had found only 1 to 2 per cent of franchises had been involved in disputes that had reached "a legal level".

If you're not making money, go and have a look in the mirror and you might find the problem. But nobody wants to admit that. They want to blame somebody else.

Mad Butcher chief executive Michael Morton

"Roughly 50 per cent of disputes are in fact triggered by the franchisor taking action against the franchisee for failure to comply with the requirements of the franchise," Billings said.

He said the association's complaints panel had dealt with three disputes so far this year, following one last year and eight in 2013.

The Massey University research suggested a similar level of disputes took place in Australia, which has much stricter franchise regulations than this country, Billings said.
He said some franchisees did not do enough due diligence before signing franchise agreements.

"Unfortunately a number of the complaints I've had from non [association] members are result of the fact they did not do due diligence in the first place."