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Retail Food Group rejects franchisee claims of mistreatment

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Inside Franchise Business: Michel's Patisserie is one of the brands RFG operatesRetail Food Group has denied allegations that it is operating a brutal business model that’s sending many franchisees out of business, following a series of reports published by Fairfax Media over the weekend.

Franchisees operating under the Donut King, Michel’s Patisserie and Gloria Jeans brands are among the “hundreds” that Fairfax reports have been “financially devastated” by operating RFG businesses.

The reports include tales of franchisees manipulating sales to avoid paying franchise royalties due on transactions, the franchisor receiving significant rebates on franchise supplies, and desperate franchisees unable to sell their loss-making businesses.

The series of articles looking at the company’s activities, and the former CEO Tony Alford, suggests that franchisees have been financially squeezed by RFG.

As part of the investigation, Fairfax reports it “obtained confidential franchise agreements and financial accounts, disclosure documents, marketing fund reports and internal correspondence between RFG and franchisees. It trawled through court cases and court records to piece together a complete picture of RFG.”

Australia’s largest franchisor,  Retail Food Group, has a raft of household name brands in its portfolio and in its 2017 annual report cited a 14 per cent increase on net profit after tax and EBITDA of $123.5 million.

RFG has denied any assertion that it maintains a brutal business model that’s running its franchisees out of business.

“If they thrive, so do we, and we are committed to finding ways to better support them, their staff and customers,” RFG said in a statement

“What the coverage failed to acknowledge properly are the steps we have been taking over the past year under the leadership of RFG’s new MD and his executive team.”

RFG said it has “comprehensively engaged” with franchisee partners in an attempt to work with them on providing support and have implemented “numerous measures to improve store performance”.

RFG did not specifically detail any of its initiatives or engagement programs in its statement.

RFG has been undertaking a business wide review, carried out by Deloitte, to assess its franchise model - a move that Fairfax said pre-empted the publishing of its reports.

“We remain committed to helping our franchise partners succeed, despite the tough retail market they face every day. We applaud each and every one of them, and their teams, for the great service and products they strive to deliver to all Australians, and ask that you, our valued customers, continue to support them,” the statement said.

Responding to the reports, Franchise Council of Australia executive chairman Bruce Billson said while he does not condone the alleged conduct, he does not know if the allegations have substance.

"Allegations of the kind reported, if true, are likely breaches of the laws that regulate franchising in Australia, which are the most comprehensive of any country, and warrant investigation by the ACCC,” Billson said in a statement.

"There is no doubt that all small businesses are facing market pressures and that new entrants into the marketplace are challenging established brands.

"The unrelenting and escalating cost pressures from shopping centres on their retail tenants, supermarkets creating franchise-like 'stores in stores', successful brands being copied and co-located in food malls with no regard for the original tenant's interests, are just some of the other challenges facing franchisees who are looking to run profitable businesses and why successful franchisors are constantly refreshing, refining and reinvesting in their brands.”

RFG is not a member of the FCA.

RFG’s share price plummeted more than 23 per cent on Monday morning as shareholders began to weigh in on the reports.

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