The chief executive of beleaguered franchisor Retail Food Group insists the company’s Australian franchise network will be sustainable over the long term, after it announced it will shut as many as 200 stores.
RFG chief executive Andre Neil said a six-month review of the store network in Australia by accounting firm Deloitte had revealed between 160 and 200 stores were not sustainable, even if they received further support.
About a third of these stores are owned by the company and RFG, which owns the Brumbies, Donut King, Gloria Jeans and Michel’s Patisseries chains, has set aside $37.5 million to get out of the leases on the outlets.
Shares in RFG have plunged from $5.64 to $2.04 over the past 12 months after a Fairfax Media investigation revealed many franchisees were struggling to keep their businesses afloat due to rising costs.
Mr Neil said RFG’s structure had become too complex after a string of acquisitions and pledged to make the business simpler and more agile.
Shopping centre owners slammed
But he laid the blame for the store closures at the feet of landlords, saying the stores were dealing with unsustainable rents or were in poorly performing shopping centres. He also slammed shopping centre owners for replacing failing non-food retailers with food outlets.
“What that does for the other food retailers is it obviously adds more competition,” Mr Nell told AFR Weekend.
While he said franchisees were battling under the weight of high rents, rising labour costs and higher utilities costs, further store closures would not be necessary.
“[The review by Deloitte] absolutely has future proofed our business. This is not about the rental environment today, it is about the shopping centre environment in five years time.”
Shares in RFG were suspended on Wednesday after its auditors were unable to sign off on its accounts for the December half. PwC partner Steven Bosiljevac signed the accounts on Friday.
They showed a loss for the half of $87.8 million, compared with a profit of $32.7 million in the first half of the 2017 financial year.
Support for struggling franchisees
Non-cash impairments of $138 million weighed on the results; RFG wrote $84 million off the value of its brand, and took a $35.7 million charge from its store closure program.
RFG will boost support to struggling franchisees as part of a sweeping restructure of its business that will also have it slash head office costs by $10 million.
Spending on field support for franchisees will rise by $1.5 million, and there will be one support staff member to every 16 franchisees.
Mr Nell also said RFG rejected suggestions that charges to franchises were too high compared with the broader sector, but acknowledged it needed to cut the costs of big-ticket items such as store refurbishments.
Bank life support
Ben McGarry of Totus Capital, which is short RFG, said the business appeared to be on “bank life support” after RFG was forced to renegotiate the covenants attached to its lending facilities.
“It looks like an agreement with banks short term, but there’s a bigger issue if franchises aren’t making any money and have been spooked,” Mr McGarry said. “That’s a bigger problem with the business model, as RFG is in the business of selling franchises, not in the business of selling pizza, coffee and doughnuts.”
In another blow to investors, RFG said on Friday that it was suspending dividend payments until further notice.
Mr Neil said he hoped investors would see the restructure as a necessary step to putting the company on a more sustainable footing.
“The real message to them is that we are making the hard decisions about changing the model, which ultimately translates into long-term sustainability for our domestic franchises.
“It’s very important that we reset the business model now for the future.”
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