It's a model that seems to collapse over and over, often ruining first time business owners. So is it a good idea to buy a franchise?

EXCLUSIVE

Nando’s restaurants are flying the coop, with more than one in five of the peri-peri chain’s Australian restaurants shutting its doors.

Out of 250 Nando’s locations listed on the company’s website, 55 are no longer operating. They include two out of three of its ACT locations, two in Western Australia, 14 in Queensland, 16 in NSW and 21 in Victoria.

“Sorry, this restaurant has flown the coop,” a message reads instead.

According to a Nando’s disclosure document dated last month, 22 franchises ceased operating in the 12 months to March 2019, up from 13 in the previous year and nine in the year before that.

Nearly all of those appear to have closed as a result of the franchise agreement not being extended. It comes after a number of franchisees slammed the company for demanding they fork out up to $1 million for costly renovations or face not having their licenses renewed.

Jay Warnakula told Fairfax in 2017 he spent almost $400,000 to buy the Nando’s at Victoria’s Greensborough Plaza in January 2014, but the company refused to renew his three-year licence because he would not pay $800,000 to $1.2 million on the store renovation.

“I asked the question — how do I recover that money? How many years would it take?” he told Fairfax. “I trusted them. They said always we’re run as a family and they’ll look after me. But they never did.”

The disclosure document says there are 76 franchised and 122 company-owned stores operating for a total of 198, compared with 195 on the website. There were more than 270 locations as of 2014, meaning about a third of Nando’s stores have closed in the past five years.

The document notes than in addition to initial design and fit-out costs of $700,000 to $1 million, the franchisee “may from time to time be required to refurbish and upgrade the premises” at a cost of between $150,000 and $500,000.

Nando’s, founded in Johannesburg in 1987 by South African billionaire Dick Enthoven, escaped largely unscathed from parliament’s franchising inquiry.

The sole submission from a Nando’s franchisee, Perth man Sasanka Kolli, described how he and his partner were brought to the brink of bankruptcy after six years with the company.

“We came into the Nando’s system as a young ambitious couple and raised the investment as per the investment range in the disclosure document,” Mr Kolli wrote.

“We kept aside 20 per cent more than the investment range to allow for any discrepancies. We raised $570,000 as per disclosure document figures and the final cost was $810,000. We were left begging money from family to help raise this significant variance in investment cost at the last minute.”

Mr Kolli said Nando’s gave them a franchise term of 10 years but after the “significant amount of money to build the store” it took them three to four years to recoup their investment.

“When we actually start making money for our efforts into the store, we are forced to renovate for a significant amount again at five years of the term,” he wrote.

“Ideally, all we do is recover our money through the term of the franchise agreement and (are) never given an opportunity to earn any money for the investment and our hard work. The franchise renewal process is very harshly controlled by the franchisor at the expense of losing the term if not adhered with unreasonable refurbishment costs.”

He also accused Nando’s of taking away their exclusive territory without their consent, and of blocking them from accessing online ordering apps such as Deliveroo and UberEats.

“We put all our life savings and borrowed significant amount of money from family, left our high-paying jobs to get into the Nando’s franchise system,” he wrote.

“The franchisor’s activities in recent years has caused and are causing us extreme financial deficit position and mental/family distress. The constant negative pressure from the franchisor has caused us to be in a position of considering bankruptcy at one stage. Our family has sold their life savings to help us sustain this difficult time.”

According to IBISWorld senior industry analyst James Caldwell, chains with the Nando’s model of “somewhere between fast-food and a traditional restaurant aren’t doing too well at the moment”.

“Generally with low wage growth, lower-income people are forgoing eating out or if they do they’re looking for cheaper locations, whereas higher-income people are really embracing the foodie culture and opting for more premium brands or independent restaurants,” he said.

Nando’s doesn’t “present itself as a premium brand” despite being similarly priced to “premium burger” chain Grill’d. “I think they probably have to increase their premium offering or at least market themselves (in that way), or sort of go down the other route and cut their prices,” he said. “They’re in an awkward position at the moment.”

Mr Caldwell added the UberEats effect was “really hurting” brands such as Nando’s. “The rise of delivery services like UberEats has really made quality restaurants more convenient,” he said. “With rising health-consciousness among Australians, people are choosing proper restaurants rather than fast-food chains.”

In a statement, a Nando’s spokeswoman said there had “been a mix of both company and franchise restaurant closures over last few years”.

“Nearly half of the franchise closures have been due to factors such as landlord redevelopment, landlords imposing unrealistic rents, the opportunity to relocate to more suitable premises or franchisees choosing not to renew their agreement,” she said.

“Nando’s has deliberately reconfigured its national footprint including an extensive refurbishment program, new restaurant openings and relocations as well as closures across both the company owned and franchise network. Our total network sales are the highest they have ever been and continue to grow.”

A Supreme Court case brought by franchisees from across the country over whether Nando’s could compel them to renovate their stores “has been resolved to the satisfaction of all parties”, she said.

The spokeswoman said Nando’s was “very comfortable for franchisees to make submissions” to the franchising inquiry.

“One franchisee took the opportunity to share their feedback as part of the process and following his submission we offered him the opportunity to discuss his concerns in a mediated environment,” she said.

“Subsequently we have extended his franchise agreement and he continues to trade as a franchisee and valuable part of our brand.”

NAN-DON’TS: ‘FLOWN THE COOP’

ACT — Belconnen Westfield, Tuggeranong

WA — Hay St, Morley Centro

NSW — Ashfield, Bondi Beach, Castle Hill S/C, Charlestown Square S/C, Cronulla, Drummoyne, Greenwood Plaza, Manly, Market City S/C, Neutral Bay, Pacific Square Maroubra, Parramatta North, Sydney Airport, Tuggerah Westfield, World Square S/C

QLD — Cairns, Chermside, Coolangatta, Coorparoo, Myer Centre, New Farm, Newstead, Palmer St, Robina Town Centre, St Lucia, Sunnybank, Toowoomba Plaza, West End, Woolloongabba

VIC — Altona Gate, Ascot Vale, Brunswick, Fawkner, Ferntree Gully, Geelong West, Glen Waverley, Hughesdale, Karingal, Kelvin Grove, Knox Westfield (Wantirna South), Melbourne Airport — Tullamarine, Mordialloc, Noble Park, Port Melbourne, Preston, Richmond, Sanctuary Lakes S/C, South Yarra, St Kilda, Swanston Walk

frank.chung@news.com.au