Villa & Hut’s tipping point

Today on Lunch With an Entrepreneur, Franz Madlener, 42, tells Amanda Gome why he sold his business Villa & Hut and the challenges he faced taking it from a small to medium sized business.

Amanda Gome: You had been growing fast with revenue of $11 million last year on top of 25% growth between 06/07 and 07/08. How will revenue go this year?  

Franz Madlener: Total group sales including franchise outlets is around $20 million.

AG: So you went to $8.5 million to $11 million to $20 million in three years?

FM: Just under $20 million.

AG: The business is 10 years old and you’ve just sold to listed company Allied Brands which owns and operates Baskin Robbins, Cookie Man and Kenny’s Cardiology. Why are you selling now?

FM: The opportunity to partner with a major player in retail franchising in Australia only comes along every so often and when it does, you’d be absolutely crazy not to take it. Particularly with the overwhelming demand that we’ve had in the last 18 months, 12 months even more so, on franchise outlets.

AG: It’s very hard for businesses once they reach that middle level playground to get quickly into the big league. Is that one of the big issues you had?

FM: I think it’s a case of being able to recognise at what point your ambitions get in the way of your ability and that the infrastructure and resources that you have available to you are never going to be able to meet the expectations that are placed on you once get over a tipping point with a certain number of franchisees.

AG: And what is the tipping point?

FM: What’s the tipping point? When you no longer can see how you can actually handle the day-to-day running of the business with what you’ve got sitting around you.

AG: That’s very stressful.

FM: Yes, it’s a good stress.

AG: When did that kick in for you? What was that point? A year ago or when revenue was around $11 million? Did it happen this year?

FM: I don’t think you actually wake up one day and say this is the day but it’s something that you’re conscious of for a long period of time. There’s no particular day that I woke up and noticed it. It was something that accumulated over the last, probably two years. Particularly since Delaware North Limited, who’s the largest food catering company in the world, took the Villa & Hut brand as their preferred coffee brand nationally through all of their concession sites, managing that and their growth expectations of that.

AG: Tell us how the business has changed. When you started, did you always aim to keep it small? What was the niche you saw and what were your plans for it back in 1999?

FM: When I started the business it was always to build a brand not a business. I’d come out of Westfield, six or seven years with Westfield, and prior to that I had my own clothing/surf wear chain and the mistake I’d made there was I’d built a business not a brand.

And in selling it, the only thing that people were really interested in buying was the stock fixtures and fittings, that they never saw any value in anything else. So from the very beginning, the very onset with Villa & Hut, I really wanted to make sure that it held a market segment that would be difficult for other people to easily emulate or copy with a leader in the way that it put itself together and that at every opportunity it marketed itself as a brand not as a supplier of product.

AG: So how did you do that? What was the brand strategy you put in place?

FM: People don’t buy what it is or what it does. People buy what it does for them. Along the whole process we always tried to position the business as offering something more than product and price. If you have a look back over our 10 years of advertising per say, we did very, very little paid advertising. It was very much driven by PR and PR opportunities. From even when we had one or two stores we had a PR agency handling that side of the business and we’ve always gone over and chased the opportunities of who we are and what we do and how we differentiate to the competition rather than “here’s a specific product for a specific price”.

AG: And part of that was your emphasis on kind of green and ethical retailing, wasn’t it?

FM: Well yes transparency of the supply chain I think and the fact that even to this day, and you look the size of the business that we are now, there’s not a single homeware item that we sell, piece of furniture that we sell, if challenged, I couldn’t tell you where the materials came from, where the timber came from, who made the item, when it was made, how it was made, how much we paid them for their craft, the village that they came from. So to still be able to do that today is a real point of difference. I don’t think you could walk into Freedom and ask the same sort of questions.

AG: What have been the biggest barriers you’ve had to growth?

FM: Banks. When the sun’s shining they give you an umbrella and when it’s raining, they want it back again.

AG: Allied Brands has paid $1 million for the chain and has assumed $1.8 million debt. Were you having trouble with that?

FM: The issues that we face or we faced are no different to thousands of other stories out there for small to medium businesses so I’m not Robinson Caruso.

AG: Could you not get that loan rolled over?

FM: Look it’s something that we were under pressure and I’m not trying to avoid answering the question but we were under a lot of pressure. As so many other people in businesses in our industry were, I don’t know what the answer to that question is. I’d like to think that we would have but it’s also nice to be six months down the track and find out the commercial reality of it.

AG: If you’re talking two years ago, would you have been confident that you could have had good dealings with the banks?

FM: Absolutely. Two years ago Westpac themselves put me forward as their state nomination for the Ernst & Young Entrepreneur Of The Year program which I went through and won. And there was a wonderful history and association with Westpac. And from the very, very first day Westpac has been our bank and funded our growth and expansion and enabled all the opportunities that were available to us to be met and to be fulfilled by supporting us. So there was a really, really good solid strong year for many, many, many years there with Westpac but unfortunately, everybody over the last six to twelve month period has been under an enormous amount of pressure from their lenders.