retail food group. tony alford ceo of retail food group [donut king & bb s cafe] at the launch on the bne asx. SPECIALX 52869When a company falls more than 55 per cent in 10 days, it speaks volumes about its credibility.
In the case of Retail Food Group, the sharemarket bloodbath continued afresh on Tuesday with the shares falling 25 per cent after the franchisor of iconic brands including Donut King, Brumby’s and Gloria Jeans, slashed earnings for the first half by 34 per cent.
That the company made the shock revelation days after reaffirming first half profit guidance to shareholders, did little to instil confidence.
That it blamed everyone and everything but itself, added to investor concern.
“Consistent with recent trading updates from other retailers, particularly those retailers with shopping centre exposures, RFG domestic franchisee revenue continues to track lower than expected,” it told the market.
Besides blaming “persistent challenging domestic retail conditions” and one off costs, it pointed the finger at the recent negative media coverage of the $170 billion franchise sector – and RFG in particular.
It said the negative publicity had resulted in a noticeable decline in the momentum of new and renewing franchise sales.
“Associated revenues are now forecast to be below prior expectations and future franchise trading revenue is also likely to be impacted,” the company said in an announcement to the ASX.
What it failed to do was acknowledge its own central role in this sad and sorry tale.
Until management stops with the blame game and starts addressing the real problem, things won’t get any better.
The reality is franchisees operating under the RFG umbrella have been suffering in silence for years.
The Fairfax Media investigation uncovered a brutal business model that has sent many franchisees to the wall.
The network is littered with franchisees who have lost their homes, suffered marriage breakdowns and decimated retirement savings.
Many lament that when they tried to sell their stores there were no buyers – not at any price.
Hundreds of stores have closed in the past 12 months and there are at least 200 stores for sale on Seek and in Chinese newspapers.
This is an issue for RFG as the lifeblood of a franchisor is opening new stores and renewing franchise agreements.
The more franchisees, the more fees and revenue.
To put it into perspective, any franchise network with more than 10 per cent of stores for sale is thought be under pressure.
Fairfax Media estimates 17 per cent of Gloria Jeans stores are for sale; at least 25 per cent of Pizza Capers are for sale. Michel’s Patisserie is also another target of discontent.
Some of the problems facing the stores are linked to the well-documented problems facing shopping centres over the past few years.
But much is attributed to a squeeze on franchisees from crippling fees, rising labour costs as well as higher rent and food imposts.
At the same time franchisees claim reduced support from head office as RFG attempts to cut costs to preserve margins.
They complain of too little product innovation, too little advertising and, in the case of Michel’s, poor quality food.
Since the stories broke, hundreds of franchisees and ex-franchisees have emailed, asking for help.
One RFG franchisees said “RFG are just raping us! Thats how violated and helpless you feel.”
A key area of concern is the company’s debt and whether the banks will continue to support the corporate entity as well as franchisees.
In a statement to the Australian Securities Exchange RFG said it was continuing negotiations with bankers to roll over a $150 million three year loan facility into longer dated maturities due to expire in 12 months.
There is also the spectre of a class action, regulatory intervention and a parliamentary inquiry into the franchise industry.
Then there are the hedge funds which started attacking RFG earlier this year when it was forced to restate its accounts.
In recent years RFG has been diversifying by opening up overseas and vertically integrating the business.
In its market update, it said these areas were tracking expectations.
But when it comes to full year guidance, it was unable to give any certainty for the franchise system.
If the company wants to regain the trust of shareholders, staff and franchisees, it will need to do a lot more than it is.
RFG management owe everyone a lot more than this.
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