Gold Coast food business franchisor Retail Food Group faces court action after case lodged by ACCC alleging breaches of Australian Consumer Law

Shares in a retail giant have made up some lost ground after resuming trading this morning following the competition watchdog announcing it has taken action in the Federal Court. READ THE FULL REPORT

RETAIL Food Group saw its share price plunge more than 20 per cent following the competition watchdog announcing it has taken action in the Federal Court against the Gold Coast-based franchisor.

On Tuesday morning the Australian Competition and Consumer Commission announced it had filed proceedings in the Federal Court alleging RFG breached Australian Consumer Law by engaging in unconscionable conduct with franchisees.

Investors punished the stock sending it diving 23 per cent to 7 cents in intraday trading forcing the company to put its shares into a trading halt.

Upon resumption on Tuesday afternoon at 12.44pm Queensland time the share price had made up some ground to be 16.4 per cent lower at 7.6 cents.

The ACCC alleged that RFG engaged in false, misleading and deceptive conduct when it sold or licensed 42 loss-making corporate stores to incoming franchisees between 2015 and 2019.

RFG runs a number of franchise systems including Donut King, Brumby’s Bakery and Michel’s Patisserie.

In a statement RFG said the allegations were “historical and which occurred under various senior executives who are no longer with the Company”.

“RFG will maintain its focus on improving franchisees’ current turnover. It is real-world operational improvements that provide franchisees with a platform to successfully operate their business” chairman Peter George said.

“Even if the allegations did happen, let’s put them in the past, where they belong.

“Our franchisees continue to suffer from this drawn-out saga. By punishing RFG, you are punishing them. Remember we are dealing with small business people, many of whom have mortgaged their houses to operate their franchises.”

The ACCC alleges RFG withheld important financial information from incoming franchisees “purchasing or licensing the loss-making corporate stores and made false or misleaading representations to them about the viability or profitability of the stores”.

“We allege that Retail Food Group withheld critical profit and loss information about these corporate stores from incoming franchisees, and falsely represented that these loss making stores were viable or profitable,” ACCC chair Rod Sims said.

The ACCC is seeking declarations, injunctions, pecuniary penalties, disclosure and adverse publicity orders, a compliance program order, redress orders and costs.

The ACCC says RFG issued documents to incoming franchisees where it claimed it could not estimate earnings for a particular franchisee.

However, the ACCC alleges RFG in fact knew of the earnings of each store and was “well aware” that the stores had been loss-making in the current or previous financial year.

The competition watchdog’s case also includes allegations of misuse of franchisee marketing funds, which it alleges were used to pay for non-marketing expenses such as personnel costs for executives and employees in non-marketing roles.

It alleges RFG paid “around $22 million” from the Michel’s Patisserie marketing fund to cover operational and non-marketing expenses.

They are alleged to have covered a move from fresh cakes to frozen in franchise stores and part of the losses from corporate stores.

“The Franchising Code makes it clear that marketing funds can only be used to cover legitimate marketing and advertising expenses, administration costs, expenses disclosed to franchisees or those agreed to by a majority of franchisees,” Mr Sims said.

“We allege that Retail Food Group acted in breach of the Code, and in some cases unconsionably, by making improper undisclosed payments from the marketing funds for its own benefit, to the detriment of franchisees.”

The court action includes RFG, which is listed on the ASX, and five of its related entities.

The ACCC court case follows a joint parliamentary inquiry into the franchising sector that handed down its findings in March last year.

The inquiry’s report, which also examined franchise systems other than ones RFG owns, mentioned RFG 333 times and recommended a three-party investigation by the ACCC, Australian Taxation Office and Australian Securities and Investments Commission into RFG and its current and former executives and companies and trusts they own.

Earlier this year ASIC dropped its investigation in June after deciding not to take any enforcement action.

EARLIER:

GOLD Coast food business franchisor Retail Food Group has announced an agreement to sell off its two cheese-processing facilities to dairy giant Fonterra for $19.23 million.

The facilities at Campbellfield and Tullamarine in Victoria operate under the Dairy Country brand producing mozzarella and parmesan cheese for the food services sector.

The Tullamarine facility closed earlier this year after three staff tested positive to COVID-19 but reopened six days later following deep cleaning of the factory and COVID testing for all staff.

Fonterra, which is dual-listed in Australia and New Zealand, is Dairy Country’s largest customer.

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The sale is part of RFG executive chairman Peter George’s turnaround plan, which involves selling off non-core parts of the business and focusing on the franchisees and coffee roasting.

“The sale is part of our strategic decision to dedicate resources to increase our franchisees profitability and sales,” Mr George said.

“In addition, we are providing additional financial and management support to our franchisee

community, especially throughout COVID-19, in readiness of the economic turnaround that will ultimately occur.

“Each of RFG’s brands are now better able to be resilient during depressed economic conditions and the new ‘COVID normal’.”

RFG has a number of brands including Donut King and Pizza Capers.

Mr George said $13.7 million of the sale proceeds will go to paying off Dairy Country’s working capital facility with the balance used to pay down debt.

“This will free-up cash short-to-medium term and provide RFG further capacity to respond to the challenges of COVID-19.”

A majority of Dairy Country’s permanent employees will transfer to Fonterra.

Fonterra Australia managing director René Dedoncker said the purchase is a logical choice that will create efficiencies and add value to the company.

“It further supports our strategy to be customer and consumer-led while ensuring we keep pace with the fast-growing cheese category in Australia,” he said.

“Dairy Country has two well-equipped secondary processing sites with capability across grating, shredding and block, as well as an experienced workforce.

“For some time, we have been looking to bring more of our secondary cheese processing in-house to gain greater end-to-end control over a range of different cheese products and further strengthen our integrated supply chain.”

Shares in RFG have risen close to 8 per cent in intraday trading to 6.9¢.

EARLIER: AUGUST 29

RETAIL Food Group executive chairman Peter George is touting a transformed company as an investigation by the corporate regulator into alleged mistreatment of franchisees continues to loom large and stifle growth.

The Robina-based company on Friday reported a net loss for the 12 months to June 30 of $4 million, a marked improvement on FY19 when it was $142.5 million.

The result followed a successful recapitalisation of the company and restructure, which involved making up to 200 senior management positions redundant and offloading non-core businesses including Hudson Pacific.

In 2017 RFG was the subject of numerous allegations that it had mistreated franchisees, some of whom had lost their homes, assets and livelihoods.

The allegations were part of a joint parliamentary inquiry in March last year that recommended a wide-ranging and significant overhaul of the franchise sector to address systematic abuses of the system.

The inquiry recommended a three-party investigation by the ACCC, Australian Taxation Office and Australian Securities and Investments Commission into RFG and its current and former executives and companies and trusts they own.

The ACCC confirmed in March last year it had an investigation into RFG underway prior to the inquiry handing down its report.

In June it said it was getting close to a firm decision on how to proceed with its investigation.

However, months later and the investigations findings have still to be handed down.

In the meantime ASIC dropped its investigation in June after deciding not to take any enforcement action.

Mr George, a turnaround specialist appointed executive chairman in September, 2018, said the ACCC investigation continues to be a focus for RFG.

“It is a very important focus because the company is going to have difficulty growing until it removes that reputational taint that the ACCC investigation gives it,” he said.

“The ACCC as you know, promised that they would have direction by June.

“I think they are having difficulty with covid in getting things together like witness statements. So they have undertaken that once they finalise their position they will give us an opportunity to respond.”

Mr George said the company is continuing to co-operate with the ACCC.

However, he said the events that the ACCC is examining happened in the “distant past” under a different management team.

He said the vast majority of management at the company in 2017 had now left with the exception of CFO Peter McGettigan and company secretary Anthony Connors.

“Virtually the entire management team apart from those two are gone,” he said.

“It is a completely new team.”

Mr George said the culture has changed too with the focus now on ‘franchisee first’.
“Now the primary qualification for getting recruited to RFG and keeping your job if you are there is you have to sign onto this franchisee first culture.

“So, that sounds trite and texbookey but it drives everything we do.”

EARLIER:

GOLD Coast food business franchisor Retail Food Group has managed to shrink its full-year loss by 97 per cent following a restructuring of the business and successful recapitalisation.

The Robina-based company, led by executive chairman Peter George, said this morning its net loss for the 12 months to June 30 was $4 million, a marked improvement on FY19 when it was $142.5 million.

Revenue fell 24.4 per cent to $264 million from $349 million in the previous period, although this includes discontinued operations including the Hudson Pacific business sold to its previous owners in November.

The improved result came despite COVID-19 dealing a blow to its operations as it was forced to temporarily shutter outlets and transition cafes and restaurants to takeaway only.

Underlying earnings – which strips out one-off items – came in at $35.5 million, which was flagged in June.

The performance of its divisions, including bakery/cafe, coffee retail and QSR shows a mixed picture with some impacted more than others.

For example underlying earnings at its bakery/cafe division, which includes Donut King and Michel’s Patisserie, fell 34.2 per cent to $12.8 million but at its coffee retail division the decline was 14.5 per cent to $5.7 million.

RFG said this was because the above brands were mostly located in shopping centres which were particularly hard hit by COVID-19 restrictions.

In contrast its Gloria Jean’s drive thru stores, part of the coffee retail division, were the standout performer with 20 per cent average weighted sales growth post-COVID-19.

Mr George noted said the company’s FY20 performance reflected “a story of two clear parts” with momentum in the first nine months overshadowed by COVID-19.

“During FY20 RFG made significant progress in connection with the various turnaround initiatives implemented to stabilise business performance and establish a firm platform for a return to future profitability and growth,” he said.

“The subsequent emergence of COVID-19 caused significant disruption, influencing performance in all aspects of Group operations. This was particularly the case among those Brand Systems with high shopping centre exposure, where customer count declined by c. 50% at one stage, driving the temporary closure of c. 100 domestic outlets.”

The vast majority of those outlets had since reopened.

RFG said it has an ongoing focus on improving the performance of its domestic franchisees through recruiting a new leadership team with industry expertise and redefining its retail division as ‘Iconic Co’ to reflect its ‘franchisee first’ culture.

During the first half RFG recapitalised the company through a placement of 1.7 billion shares at 10¢ a share to raise $170 million from institutional and sophisticated investors.

RFG used $118.5 million of the proceeds to pay back its main lenders Westpac and NAB, which had also agreed to wipe off $71.8 million of debt and provide a new $75.5 million facility through to November 2022 to refinance the remaining debt.

RFG also announced a share purchase plan for retail investors to raise an additional $20 million.

Mr George said RFG now has a solid platform upon which to achieve profit and growth when economic conditions improve.

“Whilst we are cognisant of the extremely challenging conditions in which the Group’s businesses operate, we are buoyed by the significant progress made in RFG’s turnaround journey to date, are steadfastly committed to driving positive outcomes for all stakeholders, and approach the future with confidence”, he said.

EARLIER:

GOLD Coast-based Pizza Capers owner Retail Food Group has been forced to temporarily close its Melbourne dairy factory after three workers tested positive for COVID-19.

RFG said in a statement the entire staff at the Dairy Country facility at Tullamarine would be tested as a precaution.

Executive chairman Peter George said the factory, which makes mozzarella and parmesan cheese for the food services sector under the Holy Cow brand, would reopen once it had been deep cleaned and pending availability of staff.

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Mr George said the company was working with Victoria’s Department of Health and Human Services and had previously taken additional safety measures to protect staff including temperature checks and work-from-home arrangements “where feasible”.

He said RFG did not believe the closure would have a material impact on its operations.