ACCC launches court action against Brumby’s Bakery, Donut King owner

Queensland company Retail Food Group will face court for acting ‘unconscionably’ when selling or licensing 42 loss-making corporate stores to franchisees.

Donut King and Brumby's Bakery owner Retail Food Group has been accused of “unconscionable conduct” and misleading scores of franchisees according to authorities who on Tuesday announced court action against the Queensland-based company.

The ACCC said it has commenced proceedings in the Federal Court against Retail Food Group Limited and five of its related entities for breaches of consumer law.

Retail Food Group manages and operates a number of franchises, including Michel’s Patisserie, Brumby’s Bakery, Donut King and Gloria Jean’s Coffee.

Shares in the company, last trading at about 7c, were placed in a halt on Tuesday morning pending an announcement.

Responding to the announcement, RFG executive chairman Peter George said “even if the allegations did happen, let’s put them in the past, where they belong”.

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The ACCC alleges that Retail Food Group acted unconscionably and engaged in false, misleading and deceptive conduct when it sold or licensed 42 loss-making corporate stores to incoming franchisees between 2015 and 2019.

It is alleged that Retail Food Group withheld important financial information from the incoming franchisees who were purchasing or licensing the loss-making corporate stores, and made false or misleading representations to them about the viability or profitability of the stores.

Donut King franchise

“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.

In documents issued to incoming franchisees, Retail Food Group claimed it could not estimate earnings for a particular franchise.

But the ACCC alleges the company knew the earnings of each loss-making store, and was well aware that the stores being sold or licensed had been loss-making in the current or the previous financial year.

“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,” Mr Sims said.

Responding to the action, RFG said the proceedings concerned “allegations that are historical and which occurred under various senior executives who are no longer with the company”.

Retail Food Group executive chairman Peter George said RFG would maintain its focus on improving franchisees’ current turnover and implementing new initiatives.

“In particular, the proceeding concerns the period from 2015 to 2019 and alleges contraventions of the Australian Consumer Law and the Franchising Code of Conduct in relation to the sale or licence of 42 corporate-owned stores as well as the management of marketing funds,” it said in a statement.

“RFG considers the issues the subject of the proceedings are relatively narrow in scope and focus.

“The ACCC has not pursued several of the broad and serious allegations that were raised during the course of its extensive investigation of the Company over almost three years — including in relation to implementation of the Michel’s Patisserie “Fresh to Frozen” model, the level of training and support provided to franchisees and the competitiveness of the price of goods sourced on behalf of franchisees.

“Under the leadership of Peter George, RFG has taken a forward looking approach to improve and enhance its franchise systems for the benefit its franchisee partners.

“The recent performance results during the turbulence of the COVID-19 impacted trading period is testament to the value of RFG’s financial and management support to its franchisees.”

Mr George said RFG would maintain its focus on improving franchisees’ current turnover and implementing six new initiatives including increased compliance and a new “strategic road map”.

“I firmly believe the initiatives outlined below and implemented by the new management of RFG have already proven successful in addressing the historical allegations that are the subject of the ACCC’s proceedings,” he 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.”

Australian Competition and Consumer Commission Rod Sims says it is alleged Retail Food Group knew the earnings of each loss making store, and was well aware that the stores being sold or licensed had been loss-making in the current or the previous financial year.

The ACCC’s case also involves allegations in relation to the franchise marketing funds.

All franchisees were required to pay marketing fees to Retail Food Group, to be held and administered by the franchisor, to pay for marketing and advertising activities.

The ACCC alleges that Retail Food Group used these marketing funds, to which franchisees had contributed, to pay for non-marketing expenses in breach of the Franchising Code. In some cases, this allegedly included personnel costs for executives and employees who were not in marketing roles.

In the case of the Michel’s Patisserie marketing fund, it is also alleged that Retail Food Group paid around $22 million from the marketing fund to cover a range of operational and other non-marketing expenses, which included the cost of implementing a business model changing from fresh cakes to frozen in franchise stores, and part of the losses from some 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.”

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

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