Gilt wears thin for Gold Brands franchise holders

When Gold Brands Investments, owner of the Chesa Nyama fast-food franchise, listed on AltX 11 months ago, the share price plummeted 45% to end the first day of trading at R1.12 a share. It has barely recovered since.

But this is only part of the problems making life difficult for Gold Brands, which is facing legal action from some franchisees and is itself suing a former investor.

David Roberts, a lawyer at Roberts Incorporated who represents nine Chesa Nyama franchise owners, said this week he is building a class action against Gold Brands because he believes the group has not been transparent in its business dealings.

"They have not complied with Regulation 3 of the Consumer Protection Act, which says that you need to provide prospective franchisees with a disclosure document that explains in detail what your margins are, what your working capital is going to be, what investments you will acquire and what your gross profit and what your projections are going to be," said Roberts.

He said people were "buying blindly" into existing Chesa Nyamas and putting down significant capital.

Roberts accused Gold Brands of failing to support franchisees, and of failing to disclose key financial information to new buyers. "It is apparent from my clients' dire circumstances that the Chesa Nyama brand is dying a natural death," he said.

Gold Brands now has a network of 249 Chesa Nyama outlets, compared with the target of 320 it expected to have rolled out by the end of February this year. Its other brands include 1+1 Pizza, Opa!Pitaland, Chicken Wild Wings and Blacksteer.

A Gold Brands spokeswoman said the company had, since launching Chesa Nyama four years ago, "found a direct correlation between the financial success of individual stores and the involvement of the franchisee in the store".

She said over the past year the group had adopted a stricter approach to its franchise network. "We have become more selective and are insistent on our franchisees being hands-on operators to ensure their longevity in business."

The spokeswoman denied an assertion by Roberts that the group had been closing two stores a week.

"We have bought back two additional stores since [August] but there is no hard or fast figure which can be quoted," he said.

Manny Nichas, former CEO of Ocean Basket, was appointed to oversee Gold Brands' franchising operations in September.

Gold Brands has also been losing investment favour. When it listed on the stock exchange, BEE company Circle Food Group invested an initial R20-million with an option to purchase up to R100-million worth of shares, which would have given Circle Food a 41.02% stake in Gold Brands and boosted its BEE credentials .

But Circle Food decided not to pursue the investment. Co-founder Hlumelo Biko said this week: "We chose not to follow our rights to purchase further shares as the quick-service restaurants segment does not provide the financial return profile we seek. Hence we are exiting our interest in Gold Brands Investments."

Circle Food Group's major shareholder is Circle Capital Ventures, a black-owned investment holding company. Biko is the chairman of Circle Capital and the CEO is Clive Rugara.

Circle Food's decision to dump Gold Brands sparked a legal dispute.

Gold Brands is suing Circle Food because "they dispute our right not to exercise our option and as such are trying to get penalty interest from us," Biko said.

"We dispute that claim and expect a judgment in our favour."

However, Gold Brands' spokeswoman said it was not the company pursuing legal action, but shareholders. She declined to give further details.

Trevor Hattingh, a spokesman for the National Consumer Council, said the council had received complaints against Gold Brands earlier this year from a Blacksteer franchisee.

"The council advised the consumer that it was unable to provide the sought relief in terms of the Consumer Protection Act, and that the consumer could take the matter to a court of law," said Hattingh.

The franchisee had accused Gold Brands of failing to provide full disclosure about the business.

Donovan Barnard, a Chesa Nyama franchise owner in eMalahleni who contacted Business Times at the request of Gold Brands , said he had no issues with Gold Brands.

Barnard said he had been running two outlets for more than three years and was making about R760000 a month in total.

"We've also had problems but we work through it," Barnard said. "Sometimes I struggle to pay, sometimes we order too much stock, but they [Gold Brands] are very lenient."

He said the success of a franchise operation depended on the owner's involvement.

"In my stores I'm seeing a yearly growth," Barnard said.

The Gold Brands share price closed at 75c on Friday.

tshandup@sundaytimes.co.za