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last updated 20/12/2017

Listed Australian franchise under fire

last updated 20/12/2017

19 December 2017 - A series of articles overseas has accused one of Australia’s largest franchisors of causing multiple franchisee failures through increased charges and a challenged business model.

Shares in multi-brand listed franchisor Retail Food Group (RFG) have dropped more than a third in value in just one week after a series of articles in Fairfax media from the same team that investigated the 7-Eleven wages frauds. The series has prompted calls for yet another Senate inquiry into franchising in Australia – already one of the most heavily-regulated markets in the world.

RFG is a publicly-listed company in Australia which controls more than 2,500 mostly-franchised outlets across multiple brands, including:

bb’s café
Brumby’s Bakery
Caffe Coffee
Crust Gourmet Pizza
Donut King,
Esquires Coffee
Gloria Jeans
Michel’s Patisserie
Pizza Capers
The Coffee Guy

Many of these names will be familiar in New Zealand, where they operate under different master licence agreements, although RFG did recently take back control of Gloria Jeans here after the master franchisee went into liquidation. The Fairfax articles have made no mention of RFG’s New Zealand or other overseas operations.

The reports have made serious allegations about the way that the company operates in Australia. These include raising costs of goods for franchisees in an already–difficult market to the point where franchisees are making losses or walking away from their businesses, while increasing returns for the company and its shareholders through supplier rebates which are not adequately passed on to franchisees. The articles also suggest that under-payment of wages has become rife owing to the problems franchisees face in maintaining profitability under the existing business model ­– a similar claim to that made in the 7-Eleven franchise two years ago.

The reports also examine the background of past RFG managing director Tony Alford, who stepped down as managing director in 2016, although he remained on the board until July this year.

Managing director Andre Nell has denied the allegations that ‘hundreds of franchisees have been driven to the wall.’  RFG maintains that the coverage does not accurately reflect its current business, its proactive efforts to better assure employee entitlement compliance and the levels of support it provides to franchisees. It has appointed Deloitte to undertake an external review of its Employee Entitlement Monitoring and Compliance Framework.

According to Jason Gehrke of the Australian Franchise Advisory Centre, at its recent annual general meeting, RFG asked its shareholders to stop lending their shares to short-sellers who were betting on a further collapse of the company’s share price after it had already declined 37% by that point since January, and become the sixth most-shorted stock on the Australian Securities Exchange (ASX). The recent allegations will have increased potential returns for the short sellers considerably.

RFG has expanded over the years primarily through acquisitions rather than outlet growth, including buying the New Zealand and Australian rights to Esquires Coffee in 2011 and New Zealand’s own The Coffee Guy in 2012. Both brands are now operated in New Zealand under master franchise agreements by Café Coffee & Bakery Systems (NZ) Ltd, along with bb’s café, Brumby’s Bakeries and Cafe2U.  

Two former managing directors of brands now operated by RFG have been outspoken critics of RFG in the Fairfax reports. Brumby’s founder Michael Sherlock was quoted as saying that the brand is now ‘run for shareholders, not franchisees. The model is to cut out all the overheads, get rebates, charge lots of fees and keep shareholders happy.’

Meanwhile, Murray d'Almeida, who founded Retail Food Group with Donut King and bb's café, says he is shattered but not surprised at what has been uncovered. ‘When RFG started, families worked hard but it was so they could build the business and then get others to manage it, or buy other stores, not what's going on now.’

RFG is not a member of the Franchise Council of Australia or the Franchise Association of New Zealand. While the articles are certain to put franchising back in the spotlight again, it is notable that, once again, it is a publicly-listed company that is bearing the brunt of the allegations. As one expert commented privately, ‘Listed franchisors typically care more about their shareholders than their franchisees.’

According to the 2016 Franchising Australia survey, there are some 1,120 franchise brands in the country and 79,000 franchised units. This compares with 631 brands and 37,000 units in New Zealand. According to the Franchising New Zealand survey 2017 conducted by Massey University, ‘The New Zealand franchise sector has grown and performed strongly in the robust economic environment that has prevailed over the past five years.’

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