The group behind Australia’s biggest franchise brands, including Brumby’s Bakery, Michel’s Patisserie, Gloria Jean’s, Donut King and Crust Gourmet Pizza, has hosed down concerns it is in financial strife and could soon be forced to appoint administrators.
But regulators, including Australia’s corporate cop, the Australian Securities and Investments Commission (ASIC), have vowed to look into the issues identified in a parliamentary inquiry report that was scathing of the Retail Food Group (RFG) and called for an inter-agency investigation into the company and its financial viability.
The parliamentary inquiry into the franchising sector handed down its report on Thursday, recommending RFG and its directors be investigated over allegations of insider trading, tax avoidance, breaches of consumer law and other market disclosure failings.
RFG directors and senior executives – both former and current – will now likely face more intense probing by regulators, including ASIC, the Australian Competition and Consumer Commission (ACCC) and the Australian Taxation Office (ATO).
The company has been closing stores and struggling financially, with a recent auditor report highlighting the company’s negative working capital and that it was only surviving due to the support of its bankers.
“The group’s ability to continue as a going concern is dependent on the group having a continued appropriate level of funding from its existing lenders and/or other sources for at least the next 12 months from the date of this report,” said the audit report by PwC, contained in the RFG’s latest annual report.
“Material uncertainty exists that may cast significant doubt on the group’s ability to continue as a going concern,” it added.
RFG ‘in dialogue’ with its lenders
But the company has defended its financial position, with a spokeswoman saying RFG was in conversation with its lenders.
“RFG continues to work closely with its lenders and remains in constant dialogue with them,” she told ABC News.
“Our lenders understand the complexities surrounding our business and we remain confident that we will continue to have their support.
“On an underlying basis, the company remains profitable and there remains strong support for our brands.”
The report from the Parliamentary Joint Committee on Corporations and Financial Services devoted an entire chapter to the company’s failings as an example of how the franchise model had gone wrong.
“RFG’s business model remains a high risk because it appears to rely on acquiring previously successful brands, opening new outlets, stripping out costs, exploitative fee gouging and increased costs to franchisees, and cutting services to franchisees,” the committee’s report said.
The company reported a $306.7 million full-year loss in the fiscal year 2017/18 and had a net current liability position of $231.3 million.
RFG closed 93 of its stores in the first half of the 2019 financial year and said it planned to close more as it revealed a loss of $111 million.
The company’s share price plunged on Thursday, closing down more than 5 per cent at 18 cents.
Churn and burn allegations
The committee raised specific concerns about high numbers of outlet closures, churn through transfers (the repeated sale at a single site of a failed franchise to a new franchisee), and outlets being taken back by RFG and operated as corporate outlets.
Over a seven-year period from 2011 to 2018, over 1,000 new outlets were opened and over 1,100 outlets were closed.
“With a peak outlet population of around 2,500 outlets in 2015/16, the closure of 1,100 outlets raises questions about the viability of the business model,” the report said.
The company has also been accused of “burning”, whereby it continually opened new outlets — some of which were unlikely to be viable — to profit from upfront fees, while leaving existing outlets to struggle and close.
The report also said the “lack of cooperation by both current and former RFG officers is striking, and indicative of a poor corporate culture at the company”.
It pointed to the continuous refusal of former RFG executives — including Tony Alford, Alicia Atkinson, and Andre Nell — to come forward and give evidence at public hearings, until they were eventually forced to.
“The evasive conduct of RFG and its current and former executives has done nothing to instil any confidence in the committee that all their actions are above board and would withstand thorough scrutiny by the regulators,” it said.
It said if RFG was seeking to avoid providing data that would substantiate the allegation that RFG churned sites across its networks, the company may not only have engaged in “unethical business practices”, but may also have misled Parliament.
The report noted that it took 18 months and action from the ACCC to prompt RFG to address unfair contract terms in new and renewed franchise agreements that RFG should have removed from its contracts earlier.
“This conduct adds weight to the ACCC argument for unfair contract terms to be illegal and for penalties to apply to corporations that fail to comply with unfair contract terms laws,” it said.
Regulators told to lift their game
RFG’s so-called success relied on “extracting profits from its franchise systems with hugely deleterious results for franchisees”, the report said.
It said that there had been a “lack of comprehensive, systemic and forensic investigations by the regulators”.
None of the relevant regulators had undertaken any investigation leading to court action, or, at the very least, provided public acknowledgement of misconduct, it said.
The ACCC told the committee its was investigating RFG’s conduct in relation to the Australian Consumer Law and Franchising Code of Conduct.
The committee also proposed the ACCC should be given powers to intervene to prevent franchisors from marketing and selling such franchises during an investigation.
“These powers could be similar in nature to the proposed product intervention powers that would allow ASIC to intervene to prevent financial products from being marketed and sold to unsophisticated investors,” it said.
A spokesman for ASIC told ABC News the regulator would look closely at the committee’s report and report back soon.
An ATO spokesperson said the recommendations made by the Committee are still being considered, and standard procedure was for the Government to respond within three months.