Owner of Michel’s Patisserie, Gloria Jeans to pay $10m to franchisees

The owner of a Michel’s Patisserie and Gloria Jeans will fork out $10 million to its franchisees for alleged improper use of marketing funds and for failing to disclose that the stores being sold to some franchisees were loss-making.

Retail Food Group said on Friday it would make $8.04 million in payments to its franchisees and waive debts of franchisees totalling $1.82 million to settle a civil penalty action brought against it by the Australian Competition and Consumer Commission (ACCC) in late 2020.

Retail Food Group owns a large number of franchise food businesses including Gloria Jeans.Credit: Jessica Shapiro

The payments will include a $5 million refund to the group’s Michel’s Patisserie franchisees for fees they paid into a marketing fund for the group.

The ACCC case was sparked by an investigation by this masthead in December 2017 that revealed the company and its agents had been using a crushing business model that was driving some of its franchisees to the wall.

The investigation also revealed that in some instances, franchisees had been given incorrect, out-of-date or incomplete information about the financial performance of the store they were buying off the group as part of the franchise arrangement. The media investigation sparked a rout in RFG’s share price, which was trading at $4.40 before the reports. RFG shares are now worth around 7c.

The ACCC’s case had alleged that between 2015 and 2018, RFG sold or licensed a number of corporate stores to franchisees. The ACCC had alleged RFG knew these stores had been operating at a loss but did not disclose this before the sale to the franchisees buying or licensing the stores.

The regulator had also alleged certain payments were made from the Michel Patisserie’s marketing fund for expenses that were not legitimate marketing expenses and had not been adequately disclosed to franchisees nor agreed to by a majority of franchisees.

RFG, which also owns the Pizza Capers, Crust, Brumby’s and Donut King brands, said it had made no admission as to the ACCC’s allegations in the civil penalty proceeding and would pay no penalty as part of the settlement. The franchisor has agreed to pay some of the regulator’s legal fees.

“RFG considered that the resolution of historical matters the subject of the ACCC’s proceeding on these terms will allow it — under the recently announced extended leadership of Peter George — to maintain its forward-looking focus,” RFG said in a statement.

As part of the settlement, RFG has entered into an enforceable undertaking with the watchdog that will require the ASX-listed group to regularly report on the progress of the remediation program.

ACCC chair Gina Cass-Gottlieb said the regulator was pleased RFG had agreed to make payments to certain franchisees.

“This settlement, which consists of payments to franchisees and waivers of debt totalling approximately $10 million, provides a more certain and beneficial outcome for affected franchisees than would likely result from the continuation of the ACCC’s long-running legal proceedings,” Cass-Gottlieb said.

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