Nightmare for RFG franchisees and shareholders is just getting started

Adele Ferguson
3 March, 2018

If there was any doubt that the $170 billion franchise industry is facing a crisis in confidence, take a look at Retail Food Group, which reported an $88 million loss for six months, suspended dividends and flagged it will close up to 200 stores.

It comes days after Caltex announced it was getting out of the franchise game. And pizza giant Domino’s has been battered by investors as it battles a wage fraud scandal and a questionable business model across its franchise network.

But for RFG, the nightmare for franchisees and shareholders is just getting started.

When the company that holds brands including Donut King, Gloria Jean’s, Michel’s Patisserie, Brumby’s Crust and Pizza Capers resumes trading on the ASX on Monday, it will be a bloodbath.

A downturn at Michel’s Patisserie is partly to blame for Retail Food Group’s profit warning.

The problems it is facing are far deeper than tough trading conditions and high rents, which is the spin it is trying to use.

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RFG has presided over a deeply flawed business model in an industry that has lost its way, thanks to soft regulation and a franchise code that clearly isn’t working.

For years it has been able to paper over the problem by buying new franchise brands as older brands crumble due to neglect. Pitching itself as a franchise amalgamator enabled it to hide a multiple of sins, but it eventually got caught out.

In a nutshell, RFG has put profits before franchisees and it is now paying the price. The quality of food it sells to franchisees who then sell to customers has deteriorated and the prices have gone up, causing customers to flee and revenues to fall.

Compounding the problem is franchisees being forced to walk away from stores in the hundreds because they can’t find a buyer to step in. It is hard to see how this can be arrested.

It is a desperate situation. Almost 300 franchisees have signed up for a class action with Bannister law firm, which speaks volumes about the anger and frustration among franchisees, current and former.

Fairfax Media put the spotlight on Retail Food Group and its umbrella of brands and found hundreds of franchisees have been financially destroyed after signing up to one of the brands.

Gouged every way

Instead of fulfilling a dream to own their own business, they were gouged every way they turned. Franchisee fees, royalties, training, marketing fund fees and paying top dollar to RFG for supplies left them with little or no money to pay themselves or their workers.

One woman put a Donut King for sale at $1, which is less than a cost of a donut.

Many went to the Australian Competition & Consumer Commission for help but didn’t get an adequate response.

Perhaps now, they will.

So desperate is the situation, one franchisee has put a Donut King store up for sale for $1 – less than the price of a donut.

Perhaps now the Turnbull government will launch a much-needed parliamentary inquiry into a sector that is in dire need of reform. It should have done it three years ago when convenience store leviathan 7-Eleven became embroiled in a wage fraud scandal and was forced to overhaul its business model and make the profit split between franchisees and the franchisor less one-sided.

Thousands of franchisees around the country are in a world of pain. RFG is currently the most public. It has posted a loss but can’t give full-year guidance, which is a worry.

It has suspended paying a dividend and its banks are breathing down its neck, effectively calling the shots. It now has to take its begging bowl to the banks and landlords, which won’t easy.

In the meantime, RFG’s directors should hang their heads in shame.