For a while, on the outside at least, it seemed like Pie Face was booming. New stores opened every other week, business media pumped out reports on lucrative deals to open in a growing number of overseas territories, and its CEO delighted in quoting ever larger growth to anyone who’d listen. Then it all came crashing down. It’s now 10 years since Pie Face collapsed in spectacular fashion with enormous debts, significant unpaid staff entitlements, messy loan arrangements and the stunning revelation that the company never turned a profit. As franchisees reeled at the abrupt loss of their life savings and moneymen who’d tipped in millions were left red-faced, Pie Face co-founders Wayne Homschek and Betty Fong departed for overseas. “It was the worst time of my life,” one franchisee recalled. “I had my kids paying bills for me, paying my loans for me.” Another exposed what he considered the “flawed” business model of Pie Face, which saw him make a larger margin from a can of Coke than the food supplied by the company. In the time since, Mr Homschek, a former investment banker, and his one-time fashion designer wife Ms Fong have seamlessly moved on, living a seemingly carefree life in New York City with their children. Meanwhile, the ordinary Australians left financially devastated after trusting the couple’s assurances of business success are still trying to rebuild their lives – and to comprehend how it all went so horribly wrong. Foolproof plan to make a crust Mr Homschek and Ms Fong were dining at a posh eatery in Bondi Beach in early 2003, brainstorming ideas for a new business venture that could make them a fortune. For several years, they had owned and operated the moderately successful fashion label Paablo Nevada but yearned for more and figured food retail was a prime market. When they landed on the idea of meat pies, a friend had half-jokingly suggested calling their business Pie Face. Inspired, Ms Fong suggested they bake fun little faces into the crust, with a different expression for each flavour. And that was that. They quickly opened their first store in Waverley Mall in Bondi Junction, followed by a prime location in Kings Cross beneath the famed Coca Cola sign, but the intention was never to stop at one or two. In an eye-opening interview with BRW magazine in 2009, Mr Homschek said he envisaged from the outset having 1000 outlets across the country one day. Ambitions of that magnitude require a lot of cash. Jason Gehrke, director of the Franchise Advisory Centre, said businesses that want to expand often turn to one of three capital-raising avenues. “You can either borrow a whole bunch of money to fund the opening of new outlets, or you can raise capital through the sale of equity by offering shares in the business,” Mr Gehrke told news.com.au. “Or you can go out and franchise, where aspiring small business owners contribute cash for a ‘business in a box’ operating under the brand and using its operating systems and processes. They then pay going royalties.” Raking in other people’s cash In early interviews, Mr Homschek revealed that a franchising model was “always” the intention. But convincing everyday hopefuls to fork out a few hundred thousand dollars on an unknown brand wouldn’t be easy, so noted self-promoters Mr Homschek and Ms Fong, well-connected in Sydney’s social scene, leant on their connections and marketing savviness to build the profile of Pie Face. It worked. By late 2006, Pie Face had stores in Sydney, Melbourne and Brisbane and built a central production facility to bake and supply pies to its burgeoning network. Mr Homschek, a former Citigroup banker, turned to his networks in the finance world for capital, luring in education entrepreneur Adam Davis and wealth manager Angus Geddes, founder of Fat Prophets. Billionaire retail giant Brett Blundy, who owns part of Victoria’s Secret and is behind a long list of successful brands like Bras N Things, Honey Birdette, Livosa and Universal, joined them. And finance luminary Trevor Rowe, who was then chairman of Rothschild Australia and led Queensland Investment Corporation, also chipped in. With millions of investor dollars in the bank, Pie Face embarked on a mass expansion, not just here but right across the globe. So strong was the hype and so convincing were the co-founders about the strength of their model that Mr Homschek and the board even began exploring a float on the Australian Stock Exchange in 2010, with a company valuation of $100 million. At that point there were some 30 outlets around the country. One of them was owned by Brendan Wong. Lost life savings The sudden death of Mr Wong’s father sparked a desire to follow in his footsteps and leave corporate life for the world of small business. “I was probably a bit vulnerable,” he recalled. “I was looking after my mum, taking care of the family finances. I was newly married. I was questioning my life and thinking about what else I could do.” The franchise model appealed. He could benefit from a big brand with head office resources and a tried and tested system. “Pie Face was new, but it was pretty polished. I wanted to get in early, secure a good store location. It was exciting to be part of this new and growing brand.” At the end of 2009, Mr Wong bought a Pie Face store at Westfield Bondi Junction for $495,000. The company provided him with a detailed financial overview of another Sydney outlet, showing a net annual position of $104,000, indicating it was the kind of profit he could expect to replicate. So confident was the company of his chances it also provided a “profit protection plan”, guaranteeing compensation if he didn’t bank $100,000 in his first year. In a prospective franchisee questionnaire issued by Pie Face and completed by Mr Wong, a section asked whether he relied on any promises by the company in making his decision. He answered that the “profit protection plan of $100K in the first year [offered] by Bob Ozdenir” had sealed the deal. Mr Ozdenir was Pie Face’s franchise recruiter for almost five years from July 2009. He now runs advisory firm Oz Franchise. He did not respond to an interview request. Within a few months, an increasingly alarmed Mr Wong realised those financial figures were far removed from his reality. “I asked them – these original figures you gave me … they were so off. “It was clear the business model just didn’t work. The cost of the food product was way too high, and people will only pay so much for a pie. So, the profit just wasn’t there. About 40 cents on a pie. “The margin on a can of Coke was better than the pies and sausage rolls.” As he bled money and failed to make a profit, let alone break even, Mr Wong was forced to let staff go and work in the business around the clock, from open to close, seven days a week. Pie Face had taken out a lease on his behalf for the small kiosk at a staggering cost of $165,000 per year, with a built-in annual rent increase of 2.6 per cent plus CPI. That elevated price coupled with the cost of Pie Face products and an overly soft turnover pushed Mr Wong to the brink. After a year of financial hell, he called in the profit guarantee. In hindsight, he concedes he hadn’t read the document closely and was shocked to discover it wasn’t what he thought. “It turned out the compensation was extra food at cost price. That was it. That was no help to me.” “I persisted as long as I could, but it was taking a huge mental toll. I was there seven days a week. I wasn’t paying myself. It didn’t matter how hard I worked. “After 18 months, I got out. It was self-preservation, like, ‘I need to get rid of this store’. So, I sold it and got just under half of the purchase price back. It was a heavy loss.” When Mr Wong spoke out in a news story, he was met with an upsetting response by Pie Face chief marketing officer Ben Macpherson, the brother of supermodel Elle. “Obviously he’s going to be upset over not achieving what he hoped to achieve,” Mr Macpherson told Smart Startup. “The guy just wasn’t suitable for running a retail business and we feel for him … “It’s a shame but, at the end of the day, not everyone is cut out for running a business.” Mr Macpherson declined a request for an interview. ‘$500 a week for 14-hour days’ The heartbreaking experience of Pie Face franchisee Marion Messih was revealed during her powerful testimony at the Banking Royal Commission in mid-2018. Six years earlier, she and her sister-in-law went into business together, paying $360,000 for an existing store at a shopping centre in Melbourne’s southwestern suburbs. Like Mr Wong, the company provided the pair with a rundown of another store’s profit and loss position, as an indication of what they might make. It also gave them the previous franchisee’s financials indicating the shop’s profit and loss position. “It was quickly apparent to us that the shop was not trading as well as the profit and loss statement of the previous owner had indicated that it would,” Ms Messih told the Royal Commission. “If we earned $500 in a week, it was a miracle. It was pretty woeful, to be quite honest. We were working 14 hours a day running a business, and sales were not even $500. It was just ludicrous.” In their first year, Ms Messih worked tirelessly to improve the shop’s position and had some success in growing revenue, although it was still far from profitable. When the shopping centre underwent major renovations, with all carparks “bar one” closed, foot traffic evaporated. By early 2014, the business was struggling to meet its monthly loan repayments – against which she’d guaranteed her family home and an investment property – Ms Messih was forced to enter into a payment plan. But even that became too much and a few months later, she was in arrears. Her lender, Westpac, began sending letters of demand. “It was overwhelming and just stressful. It’s the worst time of my life. I don’t want to ever go through that again. “It’s not a nice feeling when I’ve always paid all my debts upfront. Bills were always paid. And to continually get phone calls from institutions about where’s your payment – when are you going to make the payment – is just something that I’m not used to. And it was really hard. “I had my kids paying my bills for me – paying my loans for me. That’s not what a mother does. That’s not what I do. That’s not what I’ve done all my life. “I worked hard to get where I was. It’s gone. All of it’s gone. I still owe money, when I should be retired by now. But I still owe money.” Expansion at breakneck speed Mr Homschek and Ms Fong were determined to make Pie Face one of Australia’s biggest retail food brands, speaking openly to a long list of media outlets about their staggering goals. And the more they talked, the bigger those forecasts got. For example, in early 2010, Mr Homschek announced plans to more than triple the number of domestic stores to 200 by 2011. A short time later, his vision had grown tor 500 Australian stores. By early 2012, there were some 70 stores across Australia and the brand went international, opening a flagship outlet in New York City. “We’re going to have over 50 stores in Manhattan alone,” Mr Homschek told New York Daily News. Pie Face forged on with plans to list on the ASX and appointed Brian Bickmore, co-founder of the Austereo radio network, as its chairman. Among Mr Homschek’s many projections were that Pie Face would have a $1 billion valuation by 2018, making it “what JB Hi-Fi is to electronics and Flight Centre is to travel”, as he told Smart Company. Investors scrambled to carve out a piece of the pie, with fund manager Caledonia tipping in $5 million. Business news outlets published a flood of reports about global expansion deals in India, Thailand, the Philippines, Japan, the United Arab Emirates, Indonesia, Canada, Singapore and Malaysia. “Am I worried about that sort of growth? The answer’s yes and no,” Mr Homschek told The Australian Financial Review. “There are issues about rapid growth but I’m just as worried about not growing.” Mr Gehrke said company like Pie Face should’ve been able to fund its own growth from franchisee royalties alone, and the fact it didn’t should’ve served as a red flag. “What we saw is that it took a bunch of equity investors on board as well, which clearly meant their franchising growth wasn’t sufficient to fuel their capital needs,” he said. “You have to ask yourself why. Why did the business need so much capital? In my view, the expectations around the business model and its success in the market were overly ambitious.” In February 2014, Mr Homschek quietly sought the advice of an administrator after a key lender flagged concerns about Pie Face’s finances. In August, he hired Mr Waite as managing director, who within weeks felt something was very wrong with the company. That hunch was confirmed when he didn’t receive a superannuation contribution with his first pay cheque “I called the CFO into my office on the Monday morning to see the full financials of the business,” Mr Waite told news.com.au. “The alarm bells were ringing. Very loudly.” The situation was “an unholy mess” and an emergency board meeting was called, where directors – many of them investors on the hook for millions – learnt just how bad things were. “It was not pretty. It took the shareholders by surprise, and I’m saying that lightly. They were incredibly incensed by what they were seeing. They had no idea how bad it was.” The end of a fairytale In November 2014, Pie Face collapsed into voluntary administration with debts of $15 million and intercompany loans of $33 million. Twenty company stores were immediately shuttered. Some franchisees, like the struggling Ms Messih, closed their doors and walked away. It soon emerged the company was trading while insolvent for “at least 12 months” and had never turned a profit in its 10 years of operation, according to a creditors’ report filed with the corporate regulator. That scathing assessment put Pie Face’s failure down to having too many underperforming stores, the company holding duds that had been handed back by franchisees, huge debt, mammoth tax liabilities, a lack of sustainable revenue, and an alarming number of above-market leases. Several wealthy investors who’d collectively poured in a reported $50 million were left red-faced. Many franchisees were financially ruined. “This is probably a classic case of fast growth meeting fast collapse,” Mr Gehrke said. “The root causes of the business’ failure were excessive growth, overly ambitious growth, signing excessively expensive retail leases, and high costs without scale to support it. “There’s a human tragedy to it. For those who have lost money in a franchise or any other business investment that didn’t work out, the opportunity to recover financially is obviously going to be limited.” Ten years on After its collapse, Mr Waite was appointed chief executive and tasked with rescuing the company and worked tirelessly to raise the sunken ship. He was largely successful. Mr Waite led the company out of administration with a month, and 18 months later had settled two of three deeds of company administration, all while keeping the lights on so remaining franchisees could stay open. But his almost three years with the business took a hefty toll. “I’m not a martyr at all, but this was an altogether unpleasant experience,” Mr Waite said. “It was incredibly stressful. Many times I thought, f*** this, I’m out of here. But when I looked at the staff in the factory, our people in head office, the franchisees who were so hurt … I couldn’t walk away. “It took me a while to get over it. It’s a massive shame. It’s a massive waste. It had potential. “The essence of this story is that it’s happened many, many times, and it’ll probably happen many times again in the future.” Petrol chain United Petroleum bought the Pie Face brand in early 2017 and now boasts some 250 outlets located within its vast network of service stations. Mr Homschek and Ms Fong live in New York with their children. He is the managing director of a financial advisory working on mergers and acquisitions and describes himself as a “strong business development professional”. She is a marketing strategist and self-described “award-winning businesswoman” who excels at “leading early stage companies through challenging periods of growth”. Neither responded to repeated requests for an interview. In a statement, the Franchise Council of Australia said the Pie Face saga was “definitely the exception, not the rule” and that data showed franchising was a resilient model. “Franchising is a cornerstone of the Australian economy,” the industry group said. “It’s a $173 billion sector that supports over 500,000 jobs and 90,000 small businesses across the country. “With more than 1200 franchise networks operating nationally — spanning industries such as restaurants, accommodation, services, retail, healthcare, wellness, transport and logistics — franchising plays a vital role in Australia’s business landscape.” It added that Australia has the most “rigorously regulated franchising sector in the world”.