'Particularly unjust': Retail Food Group to face blowtorch

Embattled Retail Food Group and its current and former directors and executives are set to face the regulatory blowtorch after a powerful parliamentary inquiry called for an investigation into potential insider trading, tax avoidance, directors’ duties and market disclosure.

The franchise group, which operates brands including Michel’s Patisserie, Brumby’s, Gloria Jeans and Donut King, was singled out for special mention in a damning report into the $170 billion franchising sector that calls for new laws, greater enforcement powers and penalties and a suite of changes to the franchising code.

The committee has called on regulators to investigate RFG. Credit: Jessica Shapiro

The report, released on Thursday, said it considered the RFG business model “high risk”, relying on buying new brands, stripping out costs, “exploitative fee gouging” of franchisees and slashing services.

“This is a strategic system-wide approach to business whereby RFG's success relied on extracting profits from its franchise systems with hugely deleterious results for franchisees,” the report said.

It questioned why the regulators hadn’t conducted “forensic” investigations into RFG, which was the subject of more submissions to the inquiry than any other company.

“The committee is surprised that none of the relevant regulators appear to have undertaken any investigation that has led to court action, or, at the very least, public acknowledgement of misconduct,” the report said.

RFG’s troubles were first exposed in a media investigation by The Age and Sydney Morning Herald in December 2017, which outlined a crushing business model that was pushing franchisees to the wall. At the time, the share price was $4.40. Its latest share price is 20¢.

The report described former RFG chief executive Tony Alford as “evasive, inconsistent and generally uncooperative” in his testimony to the committee. “The committee did not find Mr Alford to be a reliable or credible witness,” the report said.

The report called on the Australian Competition and Consumer Commission (ACCC), the Australian Securities and Investments Commission (ASIC) and the Australian Tax Office to investigate RFG and its former and current directors and executives in regard to possible insider trading, short selling, market disclosure, directors' duties, and compliance with consumer law.

RFG and its current and former executive had done nothing "to instil any confidence ... that all their actions are above board and would withstand thorough scrutiny by the regulators", the committee said.

At the same time, the committee said it was possible RFG acted within the bounds of the Franchising Code of Conduct and other relevant law, which was a "highly troubling proposition".

It also lambasted the company for repeatedly refusing to provide the committee with certain data that related to allegations of “churning and burning” franchising sites for profit. Churning is when a franchisor repeatedly sells the site of a failed franchise to new owners, and burning is when a franchisor continually opens new outlets, even if some are unlikely to be viable, so it can earn upfront fees from the store's owner.

The committee said the refusal to supply the data was either due to board and management incompetence or because the data substantiated the allegations.

“If this is the case, then RFG may not only have engaged in unethical business practices, but may also have misled parliament,” it warned.

It appears that RFG has operated a particularly unjust business model.

Franchising sector report

In response to the report, RFG said it had "an established history of cooperation with regulators" and that it took its legal obligations "extremely seriously".

RFG's executive chairman Peter George said the company was taking steps to help franchisees "grow and prosper", and understood that “RFG’s future success is directly linked to the profitability of its franchisees".

The ACCC is currently investigating the company and an ASIC spokeswoman said it would consider the recommendation that it take action.

Illustration: Matt GoldingCredit:

The report recommended the ACCC be given new powers to stop franchising companies from selling new brand licences if they had a record of churning and burning sites.

The committee found that RFG highlighted the risks associated with franchising companies being listed on the stock exchange or owned by private equity firms, in that investor returns could come at a cost to franchisees through excessive supplier rebates, high fees and lower services.

"It appears that RFG has operated a particularly unjust business model in which shareholders and senior executives have profited at the expense of franchisees," the report said.