Col’Cacchio in royalty fee dispute as Covid-19 bites
In scene that could play out across the economy as small businesses are crushed by the Covid-19-induced lockdown, upmarket pizza chain Col’Cacchio is embroiled in a dispute with 18 franchisees over royalty fees.
The upscale restaurant group, which runs 29 restaurants across the country, is pushing back against the restaurant owners who are trying to back out of their contractual obligations because they can not generate revenue as a result of the Covid-19 lockdown.
Col’Cacchio said their force majeure request on royalty fees was an opportunistic attempt to revisit agreement terms without a legal basis and revive an old dispute in which the restaurants had demanded lower franchise fees.
The war of words, captured in legal letters obtained by Business Day and authenticated by Col’Cacchio’s MD, highlights cash flow constraints for small businesses such as restaurants as they remain closed under the nationwide lockdown to fight Covid-19.
The surge in the number of force majeure declarations, invoked when a company is unable to meet its contractual obligations due to circumstances beyond its control, has also raised concerns that some may be using the pandemic as an excuse to get out of or sidestep binding contracts.
In a letter from a law firm representing more than half of Col’Cacchio’s franchises, 18 partners argued against paying fees for the first two weeks of March, citing the stay-at-home order, which was initially due to expire at the end of this week.
President Cyril Ramaphosa has since extended the lockdown to April 27.
But Col’Cacchio rejected the force majeure because restaurants were not ordered to stop serving customers until March 27, the company’s lawyers said in one of the letters.
“We are instructed to strictly enforce the terms of the various franchise agreements signed by your respective clients, and your clients are accordingly hereby notified that payment of their royalties and marketing contributions for the period of 1-15 March 2020 are now overdue,” C&A Friedlander said in the letter, which is dated April 9 and addressed to the restaurant group’s legal team.
The unspecified fees, which the restaurant franchisees’ group said should be deferred until after the lockdown was lifted, would represent 40% of Col’Cacchio’s monthly income.
“We have a sizable staff complement at our head office ... and a 60% decline in income significantly impacts on them too,” Col’Cacchio MD Kinga Baranowska said, adding that Col’Cacchio is already lending a helping hand to franchises as its royalty fees have been suspended since March 16 until after the lockdown is lifted.
Baranowska started the business with Michael Terespolsky, who later became her husband, in 1992 with one store on the foreshore in Cape Town.
The franchisees, represented by Rufus Dercksen Attorneys in Cape Town, said in a joint statement to Business Day they could not afford to pay the fees as they earned almost no income from mid-March and took out loans to pay suppliers and staff salaries.
“We also need to face the stark reality that some of our businesses may not survive the current environment and that, should they fail as a result of the Covid-19 pandemic, we lose not only our entire investment but face further penalties from the
18 the number of franchisees that are embroiled in a battle with the upscale restaurant group
franchisor following an enforced closure,” they said.
The franchisees’ group’s additional proposals — framed as a survival strategy for the months ahead to reflect a weaker consumer spending environment after the lockdown is lifted — are to halve marketing and royalty fees, as well as to make the menu smaller and renegotiate franchise fees.
“Your clients are now using the opportunity presented by Covid-19 in an opportunistic attempt to revisit the same issues to which our client has given your clients its answers in no uncertain terms,” said C&A Friedlander in the letter.
The restaurant group first asked for lower fees in October 2019 due to lower turnover in a weak economy, whose prospects have further been undermined by the novel coronavirus and rating downgrades by Moody’s Investors Service and Fitch Ratings in recent weeks.
“Should the [restaurant] group have to continue trading upon reopening in terms of the existing franchise agreement, as is, it will no longer be viable for the group to continue to trade as a Col’Cacchio franchise,” said Rufus Dercksen Attorneys in the letter.
The restaurant group’s letter also disclosed that they have asked for turnover-based rent in the future, which would amount to zero for the duration of the lockdown and underscores a fight for survival for undercapitalised businesses cut off from their customers.
Yum! Brands, which owns KFC, and fashion retailer TFG are among companies that have cited their inability to trade as a reason to withhold rent, creating a new headache for property companies.
Pharmaceutical retailer DisChem, which has been able to trade as a provider of essential services, has been accused by landlords of embarking on a “rental slowdown”, according to the Business Times.