AAP Finance

Franchise inquiry slams Retail Food Group

By AAP Newswire

Gloria Jeans and Donut King operator Retail Food Group has been slammed by a parliamentary inquiry over its treatment of franchisees, with management accused of being either "unethical" or "incompetent".

The inquiry into franchising's final report said Retail Food Group should be investigated by the competition regulator, the corporate regulator and the Australian Taxation Office over a raft of possible infractions by the troubled company, whose share price has crashed 98 per cent over three years amid allegations it mistreated franchisees.

"RFG has damaged the reputation of franchising more broadly within Australia," the bipartisan parliamentary financial services report released on Thursday said.

The report recommended that regulators look into Retail Food Group and its former and current executives in relation to possible legal breaches, insider trading, short selling, market disclosure obligations, compliance with directors' duties, audit quality, valuation of assets, and tax avoidance.

The inquiry found that Retail Food Group opened, closed and transferred about 200 outlets on an annual basis across three years, suggesting it knowingly engaged in "churning and burning" franchisees.

Churning refers to the repeated sale at a site of a failed franchise to a new franchisee, while burning is continually opening new outlets irrespective of their viability or impact on existing sites in order to profit from upfront fees.

Retail Food Group repeatedly refused inquiry requests for documents that could have shown whether it knowingly sold failed franchises and opened others knowing they would severely hit nearby outlets.

"One possibility is that RFG is seeking to avoid providing data that would in fact substantiate the allegation that RFG churned sites ... (and) if this is the case, then RFG may not only have engaged in unethical business practices, but may also have misled parliament," the report said.

"The other possibility is that RFG, its board and management were incompetent."

The inquiry was troubled by the effect a stock market listing could have on a franchise-based business, noting that maximising shareholder value can conflict with franchisees' best interests.

The report said RFG acquired 10 franchise brands over seven years after listing on the ASX in June 2006 and that evidence suggested rapid growth at the expense of existing franchisees.

That meant expecting franchisees to work copious hours as a means of free labour, while charging increased fees for reduced services.

"Franchisors have spoken of the harsh realities of the current retail environment, and the particular difficulties involved in operating in shopping centres," the report said.

"Nevertheless, it appears that RFG has operated a particularly unjust business model."

The inquiry recommended the ACCC be given the power to prevent the marketing and sales of franchises if a company is shown to churn and burn.

Retail Food Group, which will close 250 stores by the end of the current financial year, said it supported any changes that would benefit franchised businesses and that it took its legal obligations extremely seriously.

"The current management team and board completely understand that RFG's future success is directly linked to the profitability of its franchisees," executive chairman Peter George said.

RFG shares dropped as much as 7.7 per cent, touching the all-time low 18 cents first reached on Tuesday.