Retail Food Group faces more existential threats

The Retail Food Group (RFG) continues to defy gravity despite making little headway in reducing its debt levels. The multi-brand franchisor has not provided any market update on its financial position since April, when it reported the collapse of asset sale negotiations and debt relief from its bankers.

RFG’s bankers provided support to the company through to October 31, easing covenants on debt as the company pursued a sale of its Donut King and QSR brands.

Negotiations on the sale ended in April when the company told investors it had been unable to reach satisfactory terms with a prospective purchaser.

The company’s bankers have continued to monitor trading results, legal challenges and other initiatives to reduce debt levels, including asset sales to other parties.

RFG’s market value has fallen to $29.24 million with shares trading at around 16¢ this week, down from a 52-week high of 73¢, let alone its $7.15 price back in January 2017.

RFG has been unable to generate franchise sales across its brands due to the reputational damage suffered in last year’s Senate inquiry into the franchise sector and the resultant media coverage.

Class action in the works

The prospect of rebuilding the company’s franchise brands under its current ownership is now further compromised by an announcement by law form Corrs Chambers Westgarth that it is close to launching a class action on behalf of former and current Michel’s Patisserie franchisees.

The class action is one of a series of legal disputes, which include potential actions by regulators for breaches of competition laws and provisions in the franchising code of conduct following revelations in the Senate inquiry.

Expected to be funded by a British litigation funder, Augusta, the Corrs Chambers Westgarth action is based primarily on breaches of the Consumer Law Act which have resulted in losses to franchisees.

While the litigation is based on the experience of former and existing Michel’s Patisserie franchisees, it could be extended to franchisees in other brands, such as Gloria Jean’s, Brumby’s, Pizza Capers, Crust and Donut King.

The Michel’s Patisserie chain was the first crack in the previously celebrated RFG, with writedowns on accounts announced in late 2017, along with a review to address problems in that brand.

RFG unravelled in 2018 and has been fortunate to retain the patience of its bankers, who accepted a six-point recovery plan developed by a restructured board of directors and new executive team.

The plan included refocusing the group on its core retail food franchise and coffee-supply operations and divesting or discontinuing non-core underperforming business units. It also aimed to right-size shared services resourcing and consolidate supply chains for a more agile and efficient business.

The plan also sought to improve the health of the struggling domestic franchise network through a significant increase in product category extensions and new product campaigns delivered to drive traffic and revenue over the next 12 months

RFG recognised the imperative to strengthen the company’s balance sheet to improve financial stability, in part, through asset sales or potentially through the recruitment of new capital.

Leveraging off the competencies of Di Bella Coffee was seen as an opportunity, along with driving growth through new store sales and increased renewals, as well as capitalising on existing international opportunities, particularly in the US market.

The Di Bella connection generated negative media, which questioned its value to RFG compared to the benefits to the supplier, a sore point with franchisees who noted an alleged management sweetheart deal for the subsidised operation and sale of outlets surrendered by franchisees.

The supply chain consolidation initiatives also became embroiled in controversy when it was revealed by a franchisee that RFG had told Michel’s Patisserie store owners to alter use-by dates on some product lines.

New store openings have been hampered by a lack of applicants for franchises as a result of the negative media coverage of the group and wary landlords concerned with the viability of the company and the ramifications of any ownership changes.

RFG is expected to report a loss for the 2019 financial year ended June 30 after booking a half-year loss of $111 million, further testing the resolve of its bankers.

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