'Greedy and unethical': Franchisees welcome ACCC action on RFG

Former franchisees and executives at Retail Food Group have slammed the company as being "unethical and greedy", as the food retailer faces its first regulatory action over its poor treatment of store owners.

The Australian Competition and Consumer Commission has commenced proceedings against the owner of the Michel's Patisserie, Donut King and Gloria Jeans chains alleging it misled franchisees into believing the stores they bought were viable businesses.

“I don’t want anyone to go through the same thing that I did," Robert Verni says.Credit: Eddie Jim

The action comes three years after The Age and The Sydney Morning Herald first revealed RFG was running a business model that was squeezing franchisees and pushing some of them to the wall.

Former Michel’s Patisserie store owner Robert Verni said the ACCC’s legal action marked the beginning of the road to justice for him and hundreds of franchisees.

"There was the media investigation, then a parliamentary inquiry and now this legal action, which will dig even deeper into what went on and show everyone what we have gone through," he said.

Mr Verni and his family lost more than $1 million, including his home. His family was forced to close their store after it became insolvent in 2017. Mr Verni assisted the ACCC's investigation. "They were the only ones who could see what everyone has been through," he said.

The ACCC also alleges the company misused $22 million of marketing funds which were paid by Michel's Patisserie franchisees for advertising of specific brands within the RFG network that also includes the Brumby's Bakery chain, Crust Pizza and Pizza Capers. This alleged misuse includes using the marketing funds to pay for executive salary and other head office costs.

Michael Sherlock, the founder and former chief executive of Brumby’s, said the ACCC’s legal action picked up on a key bugbear of his: the company’s use of the marketing fund.

Mr Sherlock sold the Brumby’s franchise network to RFG in 2007 and stayed on with seven stores. He said under the new RFG business model his stores went from profit earners to big loss-makers and so he got out.

"The RFG business model was unethical and greedy," he said.

The regulator alleges RFG claimed to incoming franchisees in company documents that it could not estimate earnings for a particular franchise, when it knew stores being sold were loss-making and the exact extent of those losses for each store.

"The prospective franchisees simply had no way of knowing the true financial performance of the stores, and we allege that Retail Food Group took advantage of this when selling or licensing the stores,” ACCC chairman Rod Sims said.

Wing Chan is another former franchisee who spent his retirement savings of $600,000 on two Michel’s Patisserie stores in Cessnock and Newcastle. He bought Cessnock from RFG for $250,000 without seeing the full financial statements or letters from the local council warning that the store wasn’t fit for purpose. He spent a fortune fixing it up but RFG refused to compensate him.

"The finances were misleading and the store wasn’t fit for purpose. I worked day and night and I’m in a situation where I’ve lost everything," Mr Chan said.

RFG could face fines stretching into the tens of millions of dollars if found to have breached both the Consumer and Franchise Codes.

RFG executive chairman Peter George, who joined the board of the group in October 2018, said the franchisor did not think it had broken the law, would be defending the action and was open to discussions with franchisees about compensation.

"We've said this to the ACCC; whether rather than spending a fortune on a lengthy legal case if there is a way of providing direct compensation to the people that have been injured in any way by the previous regime's actions."

"The process took on a bit of a life of it's own at the end. We'll be approaching them again in the new year. Certainly, it wouldn't be wise to be looking at a compensation scheme separate to the ACCC [action]," he said.

Mr Sims said the regulator held one meeting with RFG where the listed entity discussed a deal with compensation. However, Mr Sims said the ACCC didn’t deem it a realistic offer because RFG wouldn't admit any fault and said it would only pay compensation if the ACCC could prove a direct link to the franchisee's loss. "A company can’t behave badly then if it is found out make an offer of compensation without admitting fault; there’s no deterrence message in that. It’s saying you can breach the law and do what you like and there are no other consequences than paying compensation," he said.

In September, Labor Senator Deborah O'Neill, who sat on the senate committee which issued the damning report on the sector and RFG, introduced a private members bill to improve the rights of franchisees and to increase penalties the ACCC can issue franchisors to $10 million per breach.

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