RFG franchisees plead for coffee price reductions as Woolies undercuts them with own product

RETAIL Food Group has pledged to reduce costs for franchisees as it looks to rebuild the company. Here’s what the company is — and isn’t — doing to help.

RFG won’t commit to reducing coffee prices for franchisees.

RETAIL Food Group has pledged to reduce costs for franchisees as it looks to rebuild the company in the wake of a raft of problems with shareholders, dissatisfied franchisees, class actions and depressed retail conditions.

In a newsletter to franchisees last Wednesday, new Australian chief executive Richard Hinson flagged “significant” reductions to supplies including chai, syrups, proteins, seafood and cups.

He also announced changes to franchising fees, setting all-inclusive renewal fees of $20,000 for five years, $25,000 for 10 years and $50,000 for new stores.

However, franchisees say RFG, whose brands include Donut King, Gloria Jeans, Michel’s Patisserie and Brumby’s, has ignored one of their biggest expenses — the price of coffee.

The company is declining to reveal how reductions in fees and product prices will affect its already fragile bottom line, saying only that it is “material” but “insignificant compared to the benefits provided to our franchisees and their future sustainability”.

Shares in the Southport company were yesterday trading at $1.04, a fraction of its 52-week high of $5.57 in May. Three years ago shares in the company were trading above $7.30.

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Richard Hinson, Retail Food Group's new Chief Executive for Australia. Photo: Richard Gosling

In a statement to the Gold Coast Bulletin yesterday, Mr Hinson said he was “solely focused” on supporting franchisees and had worked to make big changes in a small amount of time.

“I have provided our 1200 franchisees with an opportunity to inform me personally on the things I can do to support them,” he said.

“After analysing that feedback it was clear that cutting costs was a priority inclusive of renewal fees and the cost of goods.”

One Gold Coast Gloria Jeans franchisee said renewals were currently $50,000 for six or seven years, depending on the length of the lease and that “$25,000 for 10 years is damn good”.

However, that franchisee, and two others the Bulletin spoke to yesterday, are wary of the company’s promises, saying they are short on detail and ignore their pleas to reduce coffee prices.

Franchisees were warned in December they could be in breach of their contracts if they speak to media without authorisation, so the three owners yesterday spoke on condition of anonymity.

Retail Food Group chairman Colin Archer and managing director Andre Nell.

RFG bills itself as the nation’s largest coffee roaster and has facilities on the Gold Coast and in Sydney, Auckland and Los Angeles.

The company, which in 2016 said it was processing 6 million kilograms of coffee a year, has a supply deal with Woolworths, which is currently selling Gloria Jeans coffee at significantly lower prices than Gloria Jeans franchisees are allowed.

For example, a 200g bag of Gloria Jean-branded hazelnut ground coffee was available online at Woolworths for $8.80.

“But we have to sell them for $11.40,” said another Gloria Jeans franchisee, also based on the Gold Coast. “To be honest with you, I don’t think there will be any reduction on anything.

“We’ve been fed this hogwash for the last 12 months — they’ve said outright that coffee won’t be reduced and that’s the killer cost.”

The first franchisee, who does not want their name published as the company warned franchisees against speaking to media, said RFG had not provided details of how much the reductions would be worth.

“No one knows any details,” they said.

“Reducing chai, proteins and syrup is all well and good but we’re paying $26.41/kg for coffee.

“We’ve been asking for the price to be reduced, given you can get it from Woolworths for $20/kg.”

Franchisees are worried about the costs of running their businesses.

A third local Gloria Jeans franchisee claimed they were saving $500 a week buying Woolworths Select coffee beans, selling yesterday for $12/kg, instead of the coffee supplied by RFG.

“I’m doing the same sales for a $12/kg bag as I do on a $26/kg bag,” the franchisee said.

“There are other suppliers charging almost as much as RFG but they are servicing machines and everything is supplied.”

Mr Hinson said the quality of products was an important consideration of their cost.

“RFG is committed to ensuring the quality and premium blend of product is exceptional in order to meet the expectations of our customers,” he said.

“RFG prices also include barista training and product support as part of belonging to a franchise.”

Gloria Jeans is among RFG’s brands.

RFG Australian CEO Richard Hinson’s full response to the Bulletin’s questions:

1. Mr Hinson spoke about a price reduction on supplies including chai, syrups, proteins, seafood and cups. Can you outline what benefit these price reductions will have on franchise partners?

In my new role as Chief Executive Australia I am solely focused on putting people first. Given the tough, highly competitive food retail market conditions and the pressure that places on small to medium size businesses, compounded by rising business costs, including occupancy costs (rent) it is clear RFG needs to do all it can to support our franchisees.

It is for this reason that I have introduced significant changes in a short period of time.

I have provided our 1200 franchisees with an opportunity to inform me personally on the things I can do to support them. After analysing that feedback it was clear that cutting costs was a priority inclusive of renewal fees and the cost of goods.

I have received positive feedback since this announcement. Over the coming weeks we will also announce further reductions in the cost of goods supplied through the network. We acknowledge that costs across FP’s businesses are accelerating faster than CPI. Chai, syrups, proteins, seafood and cups are products that fall within the top ten commodities that contribute to 80% of the cost of goods paid by the franchisee.

2. What is the cost of these reductions to RFG?

The cost of these reductions, although material to RFG, is insignificant compared to the benefits provided to our franchisees and their future sustainability.

3. Franchisees claim RFG’s coffee is expensive at over $26/kg. What plans, if any, does RFG have to reduce the price of coffee?

It is important when assessing the cost of goods to ensure we are comparing the same quality of product as they vary significantly. RFG is committed to ensuring the quality and premium blend of product is exceptional in order to meet the expectations of our customers. RFG prices also include barista training and product support as part of belonging to a franchise.

4. Richard’s email announces a change to the fee structure for franchises — ie 5-year renewal to $20k ex GST all inclusive, 10-year renewal $25k ex GST all inclusive and new store fee $50k ex GST all inclusive. How do these fees compare to the previous collection of fees and charges levied to franchise partners?

RFG has undertaken a comparative analysis with average fees charged across 103 franchisors in Australia in the Frandata survey and we are on par with industry norms. This announcement is a significant reduction on fees that were already comparable with the industry average. Our aim in redefining renewal fees is to ensure the current franchisees are incentivised to stay within the network as well attracting new franchisees.

5. What is the cost of these measures to RFG?

The cost of these reductions, although material to RFG, is insignificant compared to the benefits provided to our franchisees and their future sustainability.